Companies hoard cash after breach-of-trust indictments, business lobby says, urging legal reform

Companies disclosed as facing breach-of-trust indictments raised their cash holdings by 5.4 percentage points in the quarters that followed, according to a new report, which argues that the current application of breach-of-trust law is stifling corporate innovation and investment and that legal reform is urgently needed.

The Korea Enterprise Federation commissioned the report — titled "The Impact of Breach-of-Trust Charges on Corporate Risk Aversion" — from Ji In-yeop, a professor of economics at Dongguk University.

Analyzing 119 listed companies that disclosed breach-of-trust indictments between 2016 and 2026, the report found that cash holdings rose an estimated 5.4 percentage points within seven quarters of the disclosure. That increase amounts to roughly 45 percent of the average cash-holding ratio of 12.0 percent recorded across the sample firms over the eight quarters before and after the disclosure.

The report attributed the rise in cash holdings to stronger risk-averse behavior, suggesting that companies had fundamentally shifted their financial policies toward a more conservative stance.

Business circles have long complained that the elements and application standards of breach-of-trust regulations are vague. The acquittal rate at the first-trial level for breach-of-trust and embezzlement cases averaged 6.2 percent from 2015 to 2024 — more than double the 3.0 percent average across all criminal offenses under the criminal code.

Critics also argue that penalties are excessive compared with those in major advanced economies. The United States and the United Kingdom have no separate breach-of-trust statute, handling related conduct through fraud, embezzlement or civil liability.

Germany and Japan, both civil-law jurisdictions, apply the business judgment rule broadly, limiting liability for executives who acted without intent to cause harm.

South Korea, by contrast, goes further than any other major economy: beyond the general and occupational breach-of-trust offenses in the criminal code, the Act on the Aggravated Punishment of Specific Economic Crimes allows sentences of up to life imprisonment when the financial gain involved reaches 5 billion won ($3.62 million) or more — a sentencing enhancement provision found in no other comparable jurisdiction.

The report concluded that the current breach-of-trust regulations risk chilling legitimate business activity undertaken for innovation, going well beyond the law's original purpose of sanctioning executives who deliberately pursue private gain at the company's expense.

"This research empirically confirms that a breach-of-trust indictment can dampen corporate innovation and investment regardless of the eventual verdict," said Lee Sang-ho, head of the Korea Enterprise Federation's economic affairs division. "It is urgent to clarify the legal elements of breach-of-trust offenses and to codify the business judgment rule in statute, so that managerial predictability is improved and sound decision-making is not suppressed."