Embassy Publications

U.S.-Korea Business Climate Roundtable

Co-sponsored by the U.S. Embassy and Ministry of Finance and Economy

Ministry of Foreign Affairs and Trade

Seoul, Korea
February 1, 2005

On February 1, 2005, the governments of the United States and Korea organized a day-long consultative meeting on business climate issues, with a particular focus on issues relevant to foreign investors considering investment in Korea. The agenda consisted of two main elements: 1) a discussion of issues related to labor flexibility, and 2) a discussion of issues related to corporate governance. In each case, government and public sector participants made informational presentations to lead off discussion.

U.S. Ambassador Christopher R. Hill and Deputy Trade Minister Hong Jong-ki made opening remarks. In addition to the two governments, representatives from the Korean Tripartite Commission, Korea Labor Institute, Korea Corporate Governance Service, American Chamber of Commerce in Korea, and the U.S.-Korea Business Council participated in the talks. The meeting was co-chaired by Ambassador Lauren Moriarty, the U.S. Senior Official for Asia-Pacific Economic Cooperation, and Ministry of Finance and Economy Director-General for Economic Cooperation Ahn Ho-young.

Both the U.S. and Korea participants found the talks to be highly useful, resulting in a detailed and fruitful dialogue covering such important labor-related issues as pension mobility, flexibility in labor-management relations, and social safety net issues. Under the topic of corporate governance, the two sides also focused on shareholders rights, the use of outside auditors and board directors, and the important role of accounting standards and the auditing process.

Keynote Speakers Stress Importance of Structural Dialogue

Korea's Deputy Minister for Trade Hong Jong-ki and Ambassador Christopher R. Hill provided clear statements on the timelessness and importance of a bilateral discussion on structural issues between major trading partners. Deputy Minister Hong noted that the United States has been Korea's largest economic and trade partner, and emphasized and that Korea has taken, and will continue to take, important steps to promote reform in Korean finance, corporate governance and labor relations. The Korean government has made progress in restoring investor confidence, and is pleased that foreign direct investment into Korea doubled in 2004 from 2003. Still, Deputy Minister Hong observed that improvements need to be made in corporate governance and the labor sector. He concluded that the Business Climate Roundtable would "provide a valuable opportunity to review what Korea has achieved up to now, and to help discover ways to make the current system work better" to the mutual advantage of both countries.

Ambassador Hill noted that the United States is proud to be the leading foreign investor in Korea, and is continually looking for ways to build on and deepen that relationship. He congratulated Korea for its courage and determination in taking steps to make sure the Korean economy is organized in a way that will allow it to keep moving forward in a competitive and complex international marketplace. The Ambassador applauded Korea's efforts to improve corporate governance and to diminish the international perception that foreign investors should exact a "Korea Discount" when dealing with Korean companies or making investment decisions. He also praised Korean efforts to decrease the level of labor-management volatility and increase labor mobility and flexibility, noting U.S. appreciation that Korean policymakers have identified key related problems and are mapping out solutions in the Korea Tripartite Commission and elsewhere. Ambassador Hill touched upon the importance of maintaining forward momentum in corporate governance reform and finding creative ways to improve labor-management relations that are acceptable to both labor and management. He concluded that examining these issues in a collegial and friendly way should deepen the already profound U.S.-Korea economic partnership.

Session I: Labor Mobility and Flexibility

Director-General Ahn chaired the presentations and discussion on labor mobility and flexibility, which included a special emphasis on pension mobility, flexibility in labor-management relations and social safety net issues.

Research Fellow Dr. Kim Sung-teak of the Korea Labor Institute presented a paper on labor market flexibility and Korea's social safety net. Dr. Kim noted that while domestic debate continues over the exact degree of flexibility in the Korean labor market, outside observers, including the OECD, do not give Korea very high marks. The growing number of irregular (temporary, daily and subcontract) workers seen after the 1997-98 financial crisis, particularly in small and medium-sized enterprises, has increased measured labor flexibility, but has also introduced an unusually high degree of segmentation in the Korean labor market. Hiring data indicates that Korea's younger generation is particularly at risk of being trapped in relatively low-wage, insecure jobs. The social safety net for Korea's unemployed, meanwhile, which includes social insurance, public assistance and other special programs, has significant gaps, even for those who qualify. In addition, many Korean workers do not qualify for the national Employment Insurance scheme, and benefit duration periods are relatively short.

The Korea Tripartite Commission (KTC) was established in 1998 to provide a policy forum where labor representatives, employers and government officials could discuss labor-related socioeconomic policies and plan steps to improve industrial relations. KTC Director Si Min-Seok provided highlights of past KTC successes in reforming Korean labor markets, and commented on challenges for the future. On the achievements side, Director Si introduced the 1998 "Social Compact," which expanded Korea's social security system, improved some basic labor rights, and encouraged labor market flexibility including the expansion of the irregular worker program. He also described the new "Social Pact for Job Creation" reached among KTC members in 2004. Legislation to better protect irregular workers, thrashed out in the KTC, was submitted to the National Assembly in 2004, but is still pending. The National Assembly did pass the improved Retirement Pension Scheme recommended by the KTC in 2004. Now, the Tripartite Commission is striving to achieve consensus on additional changes to Korea's labor laws that would advance labor flexibility, enhance collective bargaining and improve labor standards, and hopes key differences can be worked out in 2005. It is also debating how to improve social programs including vocational training, public childcare, and job referral services. Director Si acknowledged the constraints imposed by the fact that only one of Korea's two major labor federations participates in the KTC.

GM Daewoo Vice President Robert Leggat, presenting on behalf of the American Chamber of Commerce in Korea, said that Korea has seen an improving labor situation in spite of increasing labor and material costs, a stronger won and competition from China. Leggat noted a growing trend for Korean business, government and labor to work together to resolve the significant problems that remain, but explained that international perceptions continue to focus on labor strife in Korea, threatening the country's goal of becoming a regional economic hub. Top corporate executives need to be fully engaged on workplace issues and be more open with their union counterparts. Labor leaders, on the other hand, should consider strikes an absolute last option, and rule out violence entirely. Leggat advocated the use of multi-year contracts, explaining that this could reduce labor tensions, save precious time for management and labor, and take much of the heat out of annual labor militancy. Currently, due to labor uncertainty and inflexible labor laws, Leggat explained that many companies are unwilling to take on permanent employees, meaning that the high proportion of temporary workers continues to grow. Current regulations make hiring, firing, and retaining employees difficult. This means that companies must often resort to "early retirement programs" or the hiring of temporary workers to attain a certain degree of labor flexibility, although both of these options are sub-optimal for both labor and management given current regulations. Leggat noted that a move toward defined contribution retirement plans, or more portable retirement and severance programs, would help improve labor mobility, adding that the "retirement grants system" could usefully be eliminated in favor of a defined contribution corporate pension system.

Making a presentation prepared with assistance from the U.S. Department of Labor, U.S. Embassy Minister-Counselor for Economic Affairs Kurt Tong stated that the United States is working hard to keep its own social safety net healthy despite actuarial challenges similar to those that Korea faces in the future. In the United States, the decreasing worker-to-beneficiary ratio could outpace our ability to keep pace with social safety net costs, so Congress is now debating establishing defined contribution pension plans within the Social Security system. The advantages of defined contribution plans have been clearly demonstrated in the U.S. private sector already, particularly following the creation of 401(k) tax-deferred defined contribution plans for employees and self-employed persons in 1981. These pension plans have contributed to greater labor mobility, lower cost and risk to corporations, a stronger sense of control over benefits by employees and the creation of a new and important pool of investment capital for the private sector. Turning to labor-management relations, Tong noted the prevailing views among foreign observers of Korea that the country's labor sector is increasingly characterized by two sets of extremes -- at one end are highly-paid and highly-secure union workers, while at the other end the number of poorly-paid and insecure temporary workers is growing rapidly -- with no middle ground. Other countries like Spain that have faced such dilemmas revised their labor laws to create new kinds of labor contracts to fill the middle ground. Tong suggested that Korea might want to explore amending current regulations to allow for more flexible collective bargaining agreements (CBA's), which could result in a wider range of outcomes in terms of not only salaries but also fringe benefits and criteria for promotions and layoffs.

Ministry of Labor (MOL) Employment Policy Division Director Jung Tai Myun presented an overview of Korea's current labor market policies, and acknowledged the need for less rigidity in its labor laws and practices while maintaining the proper balance between flexibility and job security. Dubbing this combination "flexi-curity," Director Jung indicated that the Ministry of Labor seeks to increase labor flexibility further, while improving labor conditions, wages and working hours, and upgrading the skills of Korea's workers. Jung said the Ministry's "Roadmap" to accomplish these goals included efforts to minimize the social costs caused by conflict between labor and management; efforts to boost the flexibility and stability of the labor sector; and efforts to strengthen social protection for disadvantaged workers. Director Jung stated that up to 50% of Korea's work force consists of irregular workers, leading to an undesirable form of "flexibility" in the labor sector, concentrated among irregular workers. This type of undesirable flexibility no doubt partially explains the results of an OECD study that ranked Korea 12th in the flexibility of its labor system, out of 28 OECD economies, but the Korean governments efforts to improve labor related laws and institutions have also made a big contribution to that ranking. Concerning labor-management relations, while acknowledging continued problems Director Jung cited a positive December 2004 International Monetary Fund evaluation stating that "strikes, though still numerous, are being settled relatively quickly, with little disruption to the overall economy." Korea's unionization rate is only 11%, and although the number of strikes increased in 2004, the number of working days lost to such actions has declined over the past few years. On the pension side, Director Jung noted that Korea's Retirement Benefit Program, under which private sector employers are supposed to fund pension benefits, becomes a great burden on employers while providing little help to employees. Companies that have gone bankrupt have lacked funds to cover pensions, and the whole program has lagged behind social and economic changes. The Ministry is working on a replacement for this program, as well as on a plan to upgrade Korea's employment placement services and vocational development systems.

Session II: Corporate Governance

Ambassador Lauren Moriarty chaired the presentations and discussion of this second topic, which highlighted key corporate governance issues including shareholder rights, outside auditors and directors, accounting standards and the auditing process and class action lawsuits.

Ministry of Finance and Economy (MOFE) Securities Policy Division Director Choi Sang-Mok outlined recent developments in Korean corporate governance. MOFE is working to improve the board of directors system, stressing director accountability to shareholders and adding independent directors to corporate boards. The concept of audit committees is also being introduced, with requirements that at least one financial expert should be included on each audit committee, and at least two-thirds of members must be independent directors. MOFE is also easing requirements for exercising minority shareholder rights and reducing the ownership threshold for cumulative voting in large firms from 3 percent to 1 percent. Regarding mergers and acquisitions (M&A), Director Choi said that "Korea has adopted a U.S.-style system to provide a more level playing field for all players in the M&A market." Measures taken to enhance accounting standards and external auditing systems include consolidated financial statements, required quarterly reports by large firms, and requiring CEO's and CFO's to personally certify the completeness and accuracy of annual and quarterly reports. On January 1, 2005, Korea became the second country worldwide to adopt a mechanism for class action lawsuits, which it hopes will further enhance corporate governance transparency. The new rules apply to companies with assets of 2 trillion won ($2 billion) or more in 2005, and will apply to all listed companies in 2007. Going forward, Director Choi indicated that the Korean government intends to further strengthen the independent director and audit committee system, upgrade accounting standards and strengthen the role of institutional investors.

Representing the U.S-Korea Business Council, Citigroup Korea Corporate Bank Country Head Michael Zink said that the key to successful corporate governance in the United States has been allow corporate governance functions to become independent, robustly-managed parts of each company. Investors will pay a premium for companies with good corporate governance. Noting the continued debate over the Sarbanes-Oxley Act in the United States, Zink encouraged Korean policymakers to strike the right balance between regulatory strictures and measures to encourage industry to improve corporate governance and transparency on its own. Zink said that members of a company's board of directors should recognize that good corporate governance means protecting the rights of all shareholders, particularly minority shareholders. As Korea decides what criteria to use to assess the quality of board members, it should put strong emphasis on accounting, finance and management expertise as key factors, in addition to independence. Concerning possible corporate governance improvements for Korea, Zink suggested that Korea pick an international accounting standard and require all companies to meet it. He also suggested that the Korean government establish qualification standards for independent board members, as well as a conflict of interest standard for all board members.

Senior Researcher Sohn Pyung-Sik of the Korea Corporate Governance Service (KCGS) noted that his independent and non-profit organization was founded in 2002 under the joint sponsorship of Korea's stock exchanges and related organizations, with the aim of further promoting corporate governance in Korea. Using the rubric of Korea's Code of Best Practices for Corporate Governance, the KCGS established a corporate governance rating system in 2003. This rating system is designed to provide a benchmark to help companies measure their corporate governance voluntarily and continuously, using publicly disclosed information. In 2004, a majority of businesses listed on the Korean Stock Exchange (KOSPI) received "weak" or "moderate" corporate governance ratings but no companies scored "excellent" marks. With this less-than-ideal result in hand, the KCGS intends to encourage companies to voluntarily improve their corporate governance systems, and will continue to hold seminars on credit analysis, auditing and fund management, and hold international symposiums to further expose Korea companies to international "best practices." The KCGS also intends to introduce a "comply or explain" principle for all listed Korean firms.

Conclusion: An Interactive Dialogue

Throughout the day, including during a closed government-to-government session, participants asked thought-provoking and probing questions of the presenters and one another, in a spirit of candor and collegiality. U.S. participants left the session with a much better understanding of where Korea stands on corporate governance and labor issues, and what actions have been taken and are being planned. The depth and breath of Korea's concern over these issues, and the practical realities and concerns Korean policymakers face on these issues, was also brought into better focus.

In discussing policy options for Korea, U.S. participants stressed the usefulness of exploring defined contribution corporate pension schemes, both as a way of promoting labor mobility and as a way to deepen the link between ordinary citizens and equity markets, thereby creating strong demand for good corporate governance. They also suggested considering more flexible rules governing collective bargaining agreements as one way to try to bridge the gap between Korea's regular and irregular workers in ways that would be acceptable to both labor and management. Concerning corporate governance, U.S. participants underscored the importance of maintaining forward momentum; when making adjustments to experimental new policies such as shareholder lawsuits Korea should avoid sending signals that it is backing off its noticeably aggressive stance on corporate governance. The U.S. participants expressed special interest in the KCGS idea of adopting a mandatory "comply or explain" system for the Corporate Governance Code of Best Practices, for listed firms.

Korean interlocutors indicated that the discussion on both labor and corporate governance issues was very timely, as they grapple with these issues and how they affect Korea's investment climate. They noted that U.S. and international "best practices" in the areas of labor flexibility and corporate governance will be studied closely as the Korean government mulls possible changes and enhancements to its legislative and regulatory systems, with an eye toward invigorating the Korean economy and creating a better business climate for local and non-Korean investors alike.