The second-phase revision of the Commercial Act, which expands the separate election of audit committee members and mandates cumulative voting for large listed companies with assets of at least 2 trillion won ($1.49 billion), took effect Thursday. Industry watchers say the changes offer shareholders limited benefit while adding to corporate confusion.
The changes are expected to collide head-on at next year's regular shareholder meetings. Listed companies are focusing on reducing the number of director seats to be filled beforehand. Institutional investors and minority shareholders, meanwhile, plan to nominate as many director candidates as possible in response to the new rules. That is expected to trigger a clash as early as the shareholder proposal stage.
A quick look: What are separate audit committee elections and cumulative voting?
Separate election of audit committee members allows the director who will serve on the audit committee to be voted on as a separate agenda item from other directors. The voting rights of the largest shareholder and related parties are capped at 3 percent, meaning that even if the largest shareholder holds a 40 percent stake, only up to 3 percent of that stake can be exercised in the vote for audit committee members. This raises the chance that minority shareholders and institutional investors, by pooling their votes, could elect a candidate who runs counter to the largest shareholder's wishes.
Cumulative voting applies when two or more directors are elected at once. It gives each shareholder voting rights equal to the number of shares held multiplied by the number of directors to be elected, allowing shareholders to concentrate all those votes on a single candidate. Assuming all voting rights are exercised, a shareholder holding more than 25 percent of shares could secure one seat when three directors are being elected. The fewer directors being elected, the higher the threshold becomes for minority shareholders to enter the board through cumulative voting.
According to the financial investment industry, companies' top priority is to reduce the number of director seats to be filled in advance. The smaller the board, the narrower the opening for shareholder-backed candidates to win a seat through cumulative voting.
Shareholders counter that companies and controlling shareholders are trying to neutralize a system designed to protect minority shareholders by adjusting the number and terms of directors. Ultimately, how many director candidates are put forward in shareholder proposals is expected to become the first flashpoint at next year's shareholder meetings.
On this front, listed companies are split largely into those whose articles of incorporation cap the number of directors and those that do not. Companies without such a cap have no legal basis to limit the number of candidates and face immediate practical difficulties.
The shift is already visible in the numbers. Leaders Index, a corporate analytics institute, analyzed 332 listed companies among the top 500 firms for which 2025 and 2026 data were comparable. It found that the number of registered executives stood at 2,328 as of the end of August, down 46, or 1.9 percent, from 2,374 a year earlier. The number of independent directors rose only slightly, from 1,256 to 1,258, but their share of total registered executives climbed 1.1 percentage points, from 52.9 percent to 54.0 percent.
An even bigger source of confusion on the ground is the interpretive gap created by the simultaneous implementation of the two systems. Cumulative voting applies when two or more directors are elected together. With the number of separately elected audit committee members rising to two, a new question has emerged over whether cumulative voting must apply when both are elected together.
This has left some companies wondering whether increasing the number of separately elected audit committee members would actually shrink the scope for cumulative voting. Others are considering whether structuring the process to let the company choose between the two systems would make compliance easier. At the same time, an opposite uncertainty persists. Since two or more audit committee members are now subject to separate election, cumulative voting could still apply in that case as well.
Conflicts between requirements also remain unresolved. A company could find itself unable to simultaneously satisfy the limit on the number of directors along with the required numbers of independent directors, audit committee members and financial experts. In such cases, there is no clear answer on whether directors already elected would have to be invalidated and re-elected. That is why legal disputes are expected to continue for a considerable period after elections are held.
The Ministry of Justice's authoritative interpretations also have clear limits. If the ministry issues a hasty interpretation on an issue where legal clarity has not been established and courts later rule differently, confusion would only deepen. Because the bill was drafted as lawmaker-sponsored legislation rather than a government bill, it did not undergo sufficient advance review of how the two systems would interact. That lack of review is cited as another factor complicating interpretation.
Listed companies also repeatedly point to the unusual nature of the systems themselves. Separate election of audit committee members is a system with few, if any, precedents overseas. South Korea is the only country that combines it with a 3 percent cap on shareholder voting rights. Cumulative voting, meanwhile, is left to corporate discretion elsewhere. The United States applies it only on an opt-in basis when specified in a company's articles of incorporation, and Japan allows companies to opt out through their articles. The United Kingdom, France and Germany have not adopted it at all. In effect, no country mandates both systems at once.
It remains uncertain how much benefit shareholders will actually gain from the revision. Eom Su-jin, a researcher at Hanwha Investment, said, "The second-phase revision of the Commercial Act can raise the odds of electing the audit committee members and directors that shareholders want, or increase their numbers, but it is not, in itself, a system that fundamentally blocks specific company actions or lets shareholders receive immediate compensation."
Kim Choon, director general at the Korea Listed Companies Association, said, "Companies will respond with the primary goal of narrowing in advance the number of directors to be elected. Companies that have not capped the number of directors in their articles of incorporation could immediately face practical difficulties from demands to elect a large number of directors." He added, "We can only wait and see how the issues that were flagged even before the system took effect will play out in reality," and said, "We expect legal disputes to continue for now even after directors are elected."
th5@heraldcorp.com
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