'I didn't know' is no defense: Samil PwC urges boards to document decisions, run real internal controls

Interest in directors' legal liability and risk management has surged following amendments to the Commercial Act that expanded directors' duty of loyalty to cover shareholders as well as the company itself. Experts are now urging directors to document decisions made on the basis of sufficient information and to actively oversee the operation of internal control systems.

Samil PwC's Governance Center said Monday it had published Governance Focus No. 39, a report offering expert recommendations for corporate boards. The issue features a contribution by Jeong Jun-hyeok, a professor at Seoul National University School of Law, on the topic of "Directors' Legal Liability: Know It and Prepare."

In his contribution, Jeong identified the Business Judgment Rule as the key principle directors must keep in mind when reviewing and deciding on agenda items. To receive legal protection under the rule, he said, directors must satisfy three conditions: gathering, examining and reviewing all reasonably available information; acting in good faith with a reasonable belief that the decision serves the company's best interests; and ensuring the decision falls within the range of choices a reasonable director could make.

However, Jeong said the Business Judgment Rule does not apply to acts that violate laws or regulations. If a company suffers losses from illegal conduct such as price-fixing, a director cannot escape liability simply by claiming the conduct was believed to be in the company's interest.

Directors must also personally verify that any dissenting vote on a board agenda item is accurately recorded in the minutes, Jeong said. Under Article 399, Paragraph 3 of the Commercial Act, a director is deemed to have voted in favor of a resolution if no objection appears in the minutes. "Even if you voiced opposition during the actual meeting, you may still face liability if it was not recorded in the minutes," he said.

The contribution also addressed directors' duty of oversight and the importance of establishing and operating internal control systems. A director's obligations extend beyond casting votes on agenda items to supervising management's overall execution of business. Jeong said a defense along the lines of "employees were illegally profiting but never reported it to me, so I had no idea" would not hold up, adding that directors cannot claim immunity simply because they were not directly involved in or aware of a breach of duty.

Jeong said formal measures alone — such as adopting a code of ethics, conducting compliance training or appointing a compliance officer — are not enough. Companies must operate systems that can actually collect and report information when misconduct is suspected or confirmed, maintain functioning whistleblower channels, and build a track record of independent investigations and disciplinary action. "If illegal conduct was repeated over a long period and the company failed to detect or control it, there is a significant risk that will itself be seen as evidence that the internal control system was not functioning properly," he said.

The contribution also examined the risk of civil and criminal liability under the amended Commercial Act. With the expansion of directors' duty of loyalty to shareholders increasing the likelihood of derivative lawsuits, Jeong advised that directors must review and document the impact of their decisions on all shareholders and any potential conflicts of interest among shareholders.

Shin Wang-geon, head of Samil PwC's Governance Center, said a director's faithful discharge of duties cannot be achieved through individual effort alone. "The right systems and resources must be in place to actively support independent directors in making decisions based on sufficient information," he said.

Meanwhile, Samil PwC, whose fiscal year ends in June, posted sales of 1.11 trillion won ($821 million) and operating profit of 25.4 billion won for fiscal year 2025, which ran from July 2024 to June 2025.