Journal of Korean Law Vol. 8, No. 1, December 2008 doc

Information About the Journal of Korean LawAdvisory Board / Editorial Board Articles The 2007 Revision of the Korean Criminal Procedure Code Kuk Cho Changes in Korean Corporate Governanc

Journal of Korean Law

Vol 8, No 1, December 2008

Law Research Institute & BK 21 LawSeoul National University

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ISSN 1598 -1681

EDITORIAL BOARD

Information About the Journal of Korean Law

Advisory Board / Editorial Board

Articles

The 2007 Revision of the Korean Criminal Procedure Code

Kuk Cho

Changes in Korean Corporate Governance: A Response to Crisis

E Han Kim and Woochan Kim

Symposium: The Role of Culture and Tradition in Family Law Reforms

Religious Resistance to Family Law Reform in the US

Martha Albertson Fineman

A Journey of Family Law Reform in Korea:

Tradition, Equality, and Social Change

Hyunah Yang

Matrimonial Property System of Past, Present and Future in Korea:

Focused on the Role of Tradition and Culture in Family Law Reform

Whasook Lee

Boys, Masculinities and Juvenile Justice

Nancy E Dowd

Individualism and Early Childhood in the U.S.: How Culture and

Tradition Have Impeded Evidence-Based Reforms

Barbara Bennett Woodhouse

“The Personal is the Political”: Women’s Surname Change in Japan

Ki-young Shin

Special Contributions

IP Management – Key Skills in a Knowledge Economy

Alexander J Wurzer and Stephan Hundertmark

International Corporate Governance: A Select Bibliography

Hwa-Jin Kim

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135 161

181 201

CONTENTS

The 2007 Revision of the Korean Criminal Procedure Code*

Kuk Cho**

Abstract

The Judicial Reform Committee [JRC] was organized under the Supreme Court on October

28, 2003, which submitted final recommendations for the revision of the Criminal Procedure Code [CPC] on the last day of 2004 On December 15, 2004, the Presidential Committee on Judicial Reform was established to implement the 2004 recommendations of the JRC, and submitted a bill for the revision of the CPC after a period of heated discussions and debates On December 21, 2007, the bill passed in the National Assembly The 2007 revision of the CPC was made as a comprehensive solution for the task The introduction of the jury trial by the 2007 Act for Civil Participation in Criminal Trials in 2007 was also a drastic change to the Korean criminal justice It was a result of both the rapid growth of political democracy and the distrust of judicial integrity It will strengthen the democratic legitimacy of the justice system, enhance its transparency, and bring about people’s trust in and respect to the system This twenty year old reform after the 1987 Constitution may be called the Korean “criminal procedure revolution.”

I Introduction

The new 1987 Constitution, which followed the nationwide June Struggle

of 1987 which toppled the authoritarian regime, brought a significant change

* Regarding the legal provisions and judicial decisions before the 2007 revision of the

Korean Criminal Procedure Code, see the Author’s two previous articles, Unfinished “Criminal

Procedure Revolution” of Post-Democratization South Korea, D ENVER J OURNAL OF I NTERNATIONAL L AW AND P OLICY, Vol 30, Issue 3 (2002 Spring); The Ongoing Reconstruction of Korean Criminal Justice

System, S ANTA C LARA J OURNAL OF I NTERNATIONAL L AW , Vol 5, Issue 1 (2006).

** The Author is an Associate Professor of Law, Seoul National University College of Law and Commissioner of the National Human Rights Commission of Korea He received an LL.B.

in 1986 and an LL.M in 1989 from Seoul National University College of Law; an LL.M in 1995 and a J.S.D in 1997 from the University of California at Berkeley School of Law; was a Visiting Scholar, University of Leeds Centre for Criminal Justice Studies, U.K (1998); a Visiting Research Fellow; University of Oxford Centre for Socio-Legal Studies, U.K (1998), and a Visiting Scholar, Harvard-Yenching Institute (2005-2006).

in the theory and practice of Korean criminal procedure Explicitly expressingthe idea of due process in criminal procedure,1)the Bill of Rights in theConstitution has become a living document.2)The 1988, 1995 and 2007revisions to the Criminal Procedure Code3)[hereinafter “CPC”] have alsostrengthened the procedural rights of criminal suspects and defendants andhave reconstructed the entirety of criminal procedure Further, the newlyestablished Constitutional Court and the Supreme Court have madeimportant decisions.

Following the constitutional request, the CPC was revised in 1988 and

1995 Many more calls for guaranteeing procedural rights and enhancingefficiency in criminal procedure have been made since the Roh Moo-Hyungovernment was established on February 25, 2003 Following an agreementbetween the President and the Chief Justice on the issue of judicial reform, the

Judicial Reform Committee [Sabeopkaehyeok wiweonhoe hereinafter JRC] was

organized under the Supreme Court on October 28, 2003,4)which submittedfinal recommendations for the revision of the CPC on the last day of 2004 OnDecember 15, 2004, the Presidential Committee on Judicial Reform

[Sabeopchedokaehyeok chujinwiweonhoe, hereinafter PCJR]5)was established toimplement the 2004 recommendations of the JRC, and submitted a bill for therevision of the CPC after a period of heated discussions and debates OnDecember 21, 2007, the bill passed in the National Assembly The purpose ofthis paper is to briefly review the main points of the revised Korean criminalprocedure system

1) See THE C ONSTITUTION OF THE R EPUBLIC OF K OREA[heonbeop] art 12(1), (3).

2) See Kyong Whan Ahn, The Influence of American Constitutionalism on South Korea, 22 S ILL

U L.J 71, 73-75 (1997).

3) See generally The Korean Criminal Procedure Code [hyeongsa sosongbeop] (Law No 341,

Sept 23, 1954, last revised Dec 21, 2007 as Law No 8730) [hereinafter “CPC”].

4) Judicial Reform Committee Home Page, http://www.scourt.go.kr/information/ jud_rfrm_comm/mtng_status/index.html.

5) Presidential Committee on Judicial Reform Home Page, http://www.pcjr.go.kr (last visited Apr 15, 2006).

II Arrest and Detention

1 Reshaped Judicial Warrant System for Custody

The CPC provides for two types of warrants that authorize the custody ofpersons: arrest warrants and detention warrants A “detention warrant” forsuspects is a conventional warrant, which has stricter requirements and longerperiods of validity than an arrest warrant Upon prosecutors’ request,6)judgeswill issue a detention warrant if the suspect or defendant has no domicile or ifthere is “probable cause” to believe that the suspect or defendant may destroyevidence or attempt to escape.7)

The “arrest warrant” was introduced by the 1995 revision of the CPC Ifthere is “probable cause” to believe that a suspect has committed a crime andwill not cooperate with the investigative authorities’ request to come to thepolice station, the authorities can arrest the suspect with a warrant issued by ajudge.8)Three exceptions to the warrant requirement are: (i) emergency arrestsexceptions,9)(ii) flagrant offenders exceptions,10)and (iii) semi-flagrantoffenders exceptions.11)

The 2007 revision of the CPC includes a new provision to prevent the

6) CPC, supra note 3, arts 202, 203 (providing that, as with arrest warrants, only the public

prosecutor may request the issuance of a detention warrant).

7) Id arts 70, 201(3).

8) CPC, supra note 3, art 200-2(1) (providing that only the prosecutor may request the

issuance of a warrant, and that police officers can only submit a request for the issuance of a detention warrant to the prosecutor and not directly to a judge) If suspects have been arrested without a warrant, “without delay” a prosecutor should request the issuance of a detention warrant to a judge and a police officer should submit the request of the issuance of the warrant

to a prosecutor CPC, supra note 3, art 200-4(1) A detention warrant should be filed within forty-eight hours, and if it is not, the suspect must be released immediately Id.

9) K OREAN C ONST., supra note 1, art 12(3); CPC, supra note 3, art 200-3(1) This exception is

available if there is “probable cause” to believe that the suspect may destroy evidence or attempt to escape.

10) K OREAN C ONST., supra note 1, art 12(3); CPC, supra note 3, art 212.

11) CPC, supra note 3, art 211(2), which covers:

(i) persons being pursued as an offender with hue and cry; (ii) persons carrying criminally acquired goods, weapons, or other objects which apparently appear to have been used for the offense; (iii) persons who bearing on their bodies or clothing conspicuous traces of the offense; and (iv) persons who flee when challenged.

abuse of emergency arrests Before the revision, the CPC required that thedetention warrant, but not the arrest warrant, be filed with the court In thecase of an emergency arrest, therefore, a warrantless arrest without anyjudicial control was legitimized for forty-eight hours

The 2007 revision set new rules Now, if prosecutors, without requestingthe issuance of a detention warrant, have released a suspect who was arrestedwithout an arrest warrant, they must report the identity of the suspect, thedate and place of the arrest and the reason for the arrest to the court.12)

Similarly, if police officers, without requesting of the issuance of a detentionwarrant to a prosecutor, have released a suspect who was arrested without anarrest warrant, they must report this release to a prosecutor.13)

2 Mandatory Judicial Hearing before Issuing a Detention Warrant

Before the 2007 revision, the preliminary hearing system for issuing adetention warrant operated only upon the request of a suspect or his/herlawyer.14)This system was criticized as violating Article 9(3) of theInternational Covenant on Civil and Political Rights,15)which the Koreangovernment ratified in April 1990 Article 9(3) requires a mandatory andimmediate preliminary hearing, stipulating that “anyone arrested or detained

on a criminal charge shall be brought promptly before a judge.”16)

The 2007 revision of CPC makes this judicial hearing mandatory.17)Ajudge who has received prosecutor’s request for the issuance of a detentionwarrant should initiate the hearing without delay,18)and then decide whether

or not to grant the request Prosecutors and defense counsels are entitled topresent their opinions during the hearing.19)

12) Id art 200-4(4).

13) Id art 200-4(6).

14) CPC, supra note 3, art 201-2(1).

15) See generally G.A Res 2200, U.N GAOR, 21st Sess., Supp No 16, U.N Doc A/6316

(1966) The Korean government made a reservation of Articles 14-5, 14-7, 22.

16) Id.

17) CPC, supra note 3, art 201-2(1).

18) Id.

19) Id art 201-2(4).

3 Strengthened Habeas Corpus

Before the 2007 revision of the CPC, Article 214-2 of the CPC provided that

habeas corpus is available for arrested or detained suspects with a warrant, while Article 12 (6) of the Constitution provides that “everyone has a right to

request judicial hearing when arrested or detained.”20)In a decision made onAugust 27, 1997, however, the Supreme Court held that a suspect arrested

without a warrant also has a right to request a judicial hearing to review the

appropriateness of the arrest.21)The Court stated that, considering Article 12(6) of the Constitution, Article 214-2 of the CPC must not be interpreted in away that it deprives the suspect arrested without a warrant of the right to

habeas corpus

Following this decision, the 2007 revision removed the terms “with awarrant”22)from Article 214-2 Now, all arrested or detained persons, with or

without a warrant, have a right to habeas corpus If the arrested or detained

suspect believes that the arrest or detention was illegal or inappropriate, orthat there has been a significant change in circumstances, he or she mayrequest the court to examine the legality or appropriateness of the arrest ordetention Within forty eight hours of receiving the request, the court mustexamine the suspect and make a decision regarding whether to release thesuspect.23)

The habeas corpus outlined in the CPC applies to persons arrested or detained by investigative authorities Previously, habeas corpus had not been

available to persons under custody of medical facilities, social welfare facilities

by administrative authorities or private persons In 2007, however, the

National Assembly passed the Habeas Corpus Act to expand habeas corpus to

such persons.24)This represented a long-awaited resurrection of Article 10(5)

of the 1962 Constitution,25)which stipulated the right of habeas corpus in cases

20) K OREAN C ONST , art 12 (6); CPC, art 214-2 (emphasis added).

21) See Decision of Aug 27, 1997, 97 Mo 21 [Korean Supreme Court]

22) CPC, supra note 3, art 214-2(1).

23) CPC, supra note 3, art 214-2(4).

24) The Habeas Corpus Act [insinbohobeop] (Law No 8724, Dec 21, 2007).

25) T HE C ONSTITUTION OF THE R EPUBLIC OF K OREA[heonbeop] (Dec 26, 1962, Constitutional Law

No 6), art 10(5)

where liberty was violated by private persons but which was soon omitted inthe 1969 revision of the Constitution.

II Interrogation

1 Bolstered Rights to Silence and Counsel

In a series of landmark decisions, the Korean Supreme Court has bolsteredthe rights to silence and counsel since democratization First, in 1992, theSupreme Court excluded a criminal defendant’s confession by adopting the

rationale of the U.S Miranda rule26)and applying it to statements elicitedwithout informing of the right to silence in interrogation.27)Notably, the CPCdid not have an explicit provision about such exclusion at the time In twoNational Security Act violation cases in the 1990s,28)the Supreme Court heldthat the defendants’ self-incriminating statements were illegally obtained sincethey violated their right to counsel and, thus, were excluded Third, in adecision on November 11, 2003 involving a purported National Security Actviolation by Professor Song Doo Yul, an allegedly pro-North, left-wingKorean-German dissident who was arrested and detained when he visited

Seoul, the Supreme Court recognized the right to have counsel during

interrogation as a constitutional right of suspects,29)even though neither theConstitution nor the CPC had an explicit provision for the right to have alawyer present during interrogation at the time Reviewing the infringement

of a non-detained suspect’s right to counsel in a Public Office Election Actviolation case, a 6-to-3 majority of the Constitutional Court on September 23,

2004 also confirmed that the right to have counsel present duringinterrogation is a constitutional right of the suspect.30)

The 2007 revision of the CPC codifies all the aforementioned decisions

26) Miranda v Arizona, 384 U.S 436 (1966).

27) See Decision of Jun 23, 1992, 92 Do 682 [Korean Supreme Court]

28) See Decision of Aug 24, 1990, 90 Do 1285 [Korean Supreme Court] This case is

popularly called the “Legislator Seo Kyeong-Weon Case”; Decision of Sept 25, 1990, 90 Do 1586 [Korean Supreme Court] This case is popularly called the “Artist Hong Seong-Dam Case.”

29) See Decision of Nov 11, 2003, 2003 Mo 402 [Korean Supreme Court]

30) See Decision of Sep 23, 2004, 2000 Heon Ma 138 [Korean Constitutional Court].

Article 244-3 of the CPC provides the Miranda rule.31)Prior to interrogation,investigative authorities should inform a suspect that (i) a suspect can choosenot to make any statements or refuse to respond to specific questions; (ii) nodisadvantage shall be given to a suspect even if he or she chooses not to make

a statement; (iii) anything a suspect says after waiving the right to silence may

be used as incriminatory evidence against the suspect in court; (iv) a suspecthas a right to counsel including a right to have the counsel present duringinterrogation Article 243-2 of the CPC provides the right to counsel duringinterrogation,32)but it may be restricted when there is “justifiable cause.”33)

The extent of “justifiable cause” will be decided based on the 2003 SupremeCourt decision in the Professor Song Doo Yul case.34)

2 Newly Introduced Tape Recording of Interrogation

Before the 2007 revision of the CPC, it contained no provision about theevidentiary power of videotapes recorded during interrogation Formerly,such videotapes were rarely used in practice by investigative authorities Things have changed as nowadays videotaping is recognized by lawenforcement authorities to be quite useful in preventing disputes over theadmissibility and accuracy of defendants’ statements during interrogation.Prosecutors were encouraged by the mandatory videotaping experiments insome countries,35)And they came to consider videotaping of interrogations asthe best method of restoring public confidence in them Further, suchvideotapes were seen as ways of avoiding potentially damaging cross-examination targeted at police officers or prosecutors regarding what exactly

31) See CPC, supra note 3, art 244-3(1).

32) Id., art 243-2(1).

33) Id.

34) See supra text accompanying note 29.

35) 725 Ill Comp Stat Ann 5/103-2.1(b) (LexisNexis 2005); D.C Code Ann §5-133.20 (2005); Me Rev Stat Ann tit 25, §2803-B(1)(K) (West 2005); Tex Code Crim Proc Ann art 38.22 (Vernon 2005); The Code of Practice for the Detention, Treatment and Questioning of Persons by Police Officers, para 11.5 (a) (1984) (U.K.); Crimes Act of 1914, art 23V (Austl.); Crimes Act of 1900, art 424A (N.S.W Inc Acts); Police Administration Act of 1978, art 139-43 (N Terr Austl Laws); Summary Offenses Act of 1953, art 74C-G (S Austl Acts); Crimes Act of

1958, art 464H-J (Vict Acts); Jurisdiction and Criminal Procedure Act of 1992, ch LXA (W Austl Stat.).

occurred in an interrogation room and as a means to back up the evidentiarypower of prosecutor-made interrogation dossiers However, defense attorneyshave expressed concern that videotaping may simply provide legitimacy tointerrogations.

Prosecutors’ request to insert into the CPC a provision regarding theevidentiary power of videotapes recorded during interrogation was accepted

by the PCJR The original draft of the PCJR gave the videotapes secondaryevidentiary power.36)However, concerned that such videotapes mightprovide juries and judges with prejudice that would work to heightenincrimination of defendants, the National Assembly rejected the draft,providing instead that videotapes may be used only “when it is necessary torefresh the memory of a suspect or a witness” in a trial or a preparatoryprocedure for a trial.37)The videotapes are not allowed to be watched by ajudge but only by a suspect or a witness

The original draft of the PCJR required a suspect’s or his counsel’s consentfor such videotape recording, but the requirement was ultimately removed bythe National Assembly.38)Therefore, even if a suspect objects, the investigativeauthorities may record an interrogation, so there are concerns that this practicemay violate the right to silence

3 Recording of Investigation Process

The 2007 revision of the CPC also mandates investigative authorities torecord the arrival time of a suspect, the time an investigation began andended, and other matters necessary to supervise the investigation process.39)

These other matters may include specific times of recess, the time a suspect ate

36) Presidential Committee on the Judicial Reform, Bill for the Revision of the Criminal Procedure Code, art 312-2 (1) The draft set a requirement for the admissibility of videotapes as follows: (i) the defendant denies during trial what they stated during interrogation to prosecutors or police officers, and (ii) other pieces of evidence, such as the statements of prosecutors, police officers, or other participants in a preliminary hearing or a trial, are difficult

to prove or not probative of the truth.

37) CPC, supra note 3, art 318-2(2).

38) Unlike the tape recording of an interrogation of a suspect, the tape recording of the

statements of non-suspects requires their consent See CPC, supra note 3, art 221(1)

39) CPC, supra note 3, arts 244-4(1), 244(2).

a meal, and the time a suspect made a document by his or her own writing.The investigative authorities are required to orally read such records for thesuspect or have the suspect read them.40)This new system is designed to makethe investigation process more transparent.

III Widened Appeal to the Court against Non-Prosecution

The CPC provides a system to appeal to the High Court against prosecution Before the 2007 revision, the scope in which the appeal wasavailable was limited to three crimes by governmental officers: the crime ofabuse of power, the crime of illegal arrest and detention, and the crime ofbattery and cruel treatment.41)

non-The 2007 revision expands the scope of this system to make such appealsavailable to all crimes The complainants who do not agree with non-prosecution may request that the High Court review the appropriateness ofthe non-prosecution.42)Before making such a request to the court, thecomplainants should request that the Prosecutors’ Office review the non-prosecution.43)If the High Court finds inappropriateness in non-prosecution,prosecutors must initiate prosecution.44)

IV Pre-trial Procedure

1 Expanded Pre-trial Discovery

Article 35 of the CPC states that “defense counsel may review and copythe relevant documents or evidence after the prosecution is filed.” Even beforethe 2007 revision of the CPC, two Constitutional Court decisions made strides

40) Id art 244-4(2).

41) See The Criminal Procedure Code [hyeongsa sosongbeop] (Law No 341, Sept 23, 1954,

revised July 19, 2006 as Law No 7965), art 260.

42) CPC, supra note 3, art 260(1).

43) Id art 260(2).

44) Id art 262(6).

toward adopting a “pre-trial discovery” system.

In a decision on November, 27, 1997, the 7-to-2 majority of theConstitutional Court held in a National Security Act violation case that it isunconstitutional for prosecutors to prevent defendants and their attorneysfrom accessing the investigative records kept by prosecutors before a trial isopen and after prosecution is filed.45)The Court also stated that counsel’s right

to access the investigative records may be limited only when “there existconcerns of leaking national secrets, eliminating evidence, threateningwitnesses, violating privacy or causing conspicuous obstacles toinvestigation.”

Following the 1997 decision, the 2007 revision provides for a pre-trialdiscovery system Defendants or their attorneys may request that prosecutorsallow them to review or copy the documents or materials that prosecutors

have kept after filing prosecution,46)which include the documents thatprosecutors will submit as evidence to the court, the documents that includethe names and out-of-court statements by planned witnesses for theprosecution, and exculpatory documents for the defense

Prosecutors may deny or limit such discovery when there exist concreteconcerns regarding potential endangerment of national security, elimination

of evidence, threatening of witnesses, or creation of obstacles toinvestigation.47)If the request is denied, or the scope of review and copy islimited by the prosecutor, defendants or their attorneys may appeal to thecourt to review the prosecutor’s decision.48)If the request is accepted by thecourt, the court may order prosecutors to provide the documents to thedefendants or their attorneys.49)

It is necessary to note that this new pre-trial discovery is not available for

documents or materials that investigative authorities have kept before

prosecution is filed So defendants or their attorneys may not review or copythe documents or materials made by the investigative authorities beforeprosecution is filed

45) See Decision of Nov 27, 1997, 94 Heon Ma 60 [Korean Constitutional Court].

46) CPC, supra note 3, art 266-3(1).

47) Id art 266-3(2).

48) Id art 266-4(1).

49) Id art 266-4(2).

In a March 27, 2003 decision, however, a 5-to-4 majority of theConstitutional Court extended the above 1997 decision to a fraud case in

which a judicial habeas corpus hearing for the suspect was to be held before

prosecution was filed,50)even though Article 35 of the CPC applies only afterprosecution has been initiated The majority stated that despite the text of theArticle, if the defense attorneys were not allowed to access to the investigative

records, they could not sufficiently defend their client in the habeas corpus

hearing

Prosecutors may make use of pre-trial discovery only when the defendants

or their attorneys have presented an argument that the defendant was not inthe crime scene or he/she is insane in a court proceeding or preparatoryprocedure for a trial.51)The scope of the discovery available to prosecutors isnarrower than that available to the defense

2 Newly Established Pre-trial Preparatory Conference

The 2007 revision established a new pre-trial preparatory conference forexpeditious and effective trials Presiding judges may open this procedure attheir discretion.52)Once opened, prosecutors, defendants, and defenseattorneys have a duty to cooperate throughout the procedure.53)Each partymay submit a summary of its factual or legal argument as well as its plan forproving its arguments to the court, and a presiding judge may order eachparty to submit the summary and the plan.54)The court should send thedocuments that a party has submitted to the court to the other parties to thecase.55)

In the pre-trial preparatory conference the court may take one of thefollowing actions: clarify the accused criminal fact and the applied legalprovisions, allow alterations or amendments to the facts and provisions,arrange the issues of the case, allow the request of evidence, clarify the

50) See Decision of Mar 27, 2003, 2000 Heon Ma 474 [Korean Constitutional Court] 51) CPC, supra note 3, art 266-11(1).

52) Id art 266-5(1).

53) Id art 266-5(3).

54) Id art 266-6(1), (2).

55) Id art 266-6(3).

contents of the argument regarding the requested evidence, decide whether toadmit evidence, and decide the appropriateness of a request to review or copydocuments and so forth.56)

V Trial

1 Newly Arranged Trial Process

The 2007 revision changes the anatomy of a courtroom Before therevision, the prosecutor and defense attorney sat facing each other, while thedefendant was separated from his or her counsel and located in front of thebench facing the judges This setup implied that the defendant was not anadversarial party equal to prosecutor and that the defendant was no morethan the object of the trial It also prevented the defendant from consultingwith his or her counsel The 2007 revision moves defendant’s seat next to that

of his or her defense attorney.57)

The 2007 revision stipulates two leading principles for trial process Thefirst is “the principle of concentrated trial” to prevent the delay of trial.58)According to the principle, except in the case of unavoidable circumstances atrial should be consecutively open everyday if more than two days arenecessary for the trial.59)The second is “the principle of oral pleadings.”60)Thisprinciple is meant to overcome the phenomenon of “trial by dossiers” inwhich truth-finding depends heavily on the dossiers submitted by partiesrather than on cross-examinations by the parties in the courtroom

The 2007 revision mandates that the prosecutor make an oral statement ofthe criminally accused fact and applied legal provisions at the beginning of atrial;61)before the revision, such a reading was not mandatory The revisionalso mandates that the defendant make a statement regarding whether he or

she admits the accused facts after the prosecutor makes his or her openingstatement.62)The defendant does not have to make such a statement if he orshe wishes to exercise the right to silence.63) If the defendant admits theaccused crime, the case goes through a brief investigation of evidence andmoves to the sentencing process.

The 2007 revision makes the questioning of a defendant available onlyafter the investigation of evidence.64)Before the revision the questioning of adefendant was initiated by the prosecutor and defense attorney consecutivelybefore the investigation of evidence This procedure was criticized for makingthe focus of trials mainly the statements of defendants rather than evidence.Article 296-2 of the CPC, thus, moves such questioning after the investigation

of evidence So the statements of a witness or a victim or the results ofscientific investigations, for example, will be examined before the defendant isquestioned If a presiding judge permits it, however, the question may begiven to the defendant even before the investigation of evidence.65)

The 2007 revision adopts a sanction system to ensure the attendance of awitness during a trial Article 150-2 imposes “a duty of reasonable efforts tomake a witness attend in a trial” on the party who has requested thewitness.66)Article 151 provides much heavier sanctions on witnesses who donot attend for no justifiable reason Such a witness must pay the trial costsresulting from his or her non-attendance, and a fine of up to 5,000,000 Won(currently equivalent to about U.S $3,600) may be imposed on him or her.67) Ifthe witness does not attend for no justifiable reason despite these sanctions, he

or she may be put into jail for up to seven days.68)

The 2007 revision also changes Article 316 to allow investigators’ witnesses

to testify regarding statements made by a defendant during interrogationwhen such statements were made under especially reliable circumstances.69)

The scope and admissibility of the witness of investigators, however, is notspecified These will be provided in the future by courts’ decisionsinterpreting this change.

There exists a tension between Article 316 and current judicial decisions.The Supreme Court has held that a police officer’s testimony that a suspecthad confessed during interrogation is not admissible if the suspect denied his

or her statement during interrogation.70)Article 312(3) of the CPC hasprovided that the dossiers made by police officers shall not be used asevidence if defendants or their attorneys contest the contents of71)the dossiers

as not matching what the defendants stated during interrogation.72)

Recognizing the coercive nature of police practices in interrogation rooms, theSupreme Court was, at the time of the aforementioned decision, trying toprevent investigative authorities from circumventing Article 312(3) of theCPC

2 Newly Introduced Jury Trial for Serious Felony Cases

In June 1, 2007, the Act for Civil Participation in Criminal Trials waslegislated in the National Assembly, and it became effective as of January 1,

2008.73)It adopted a jury system that Koreans have never experiencedthroughout their history

The scope of felonies that the new trial system applies to is mainly limited

to murder, manslaughter, rape, robbery, bribery, kidnapping and narcoticcrimes.74)The defendants are given the option of waiving a trial with layparticipation,75)and courts are to check if defendants wish to waive it.76)

Professional judges have the discretion to exclude lay participation, in

70) See, e.g Decision of May 8, 1979, 79 Do 493 (Korean Supreme Court); Decision of Aug.

28, 2002, 2002 Do 2112 (Korean Supreme Court).

71) For more detailed discussion regarding the jury trial, see the Author’s another article

that will be published in 2009 Kuk Cho, The Newly Introduced Criminal Jury Trial in Korea: A

Historic Step Toward “Justice By People,”A USTRALIAN J OURNAL OF A SIAN L AW , Vol 10, Issue 2 (2009).

72) See CPC, supra note 3, art 312(3)

73) The Act for Civil Participation in Criminal Trials [kukmin eui hyeongsachaepan chamyeo e

kwanhan beopryul] (Law No 8295, June 1, 2007).

74) Id art 5(1).

75) Id art 5(2).

76) Id art 8.

particular when jurors, juror candidates, or their families or relatives maypossibly face danger to life, liberty or property; when an accomplice of thedefendant refuses to be tried by jurors.77)Judges’ decisions to exclude layparticipation are subject to appeal.78)

The number of jurors used varies according to the case The number isnine in cases where capital punishment or life imprisonment may be given tothe defendant; five in cases in which the defendants admit to being guilty; andseven in all other cases.79)Judges can conduct voir dire to check theentitlement and capability of the juror candidates Prosecutors, defendants, ordefense counsels can ask judges to conduct voir dire, and judges can choose toallow prosecutors or defense counsels to conduct voir dire themselves.80)Both

“challenge for cause” and “peremptory challenge” are available toprosecutors and defense counsels.81)

Different from bench trial cases,82)the pre-trial preparatory conferenceintroduced by the 2007 amendment of the Criminal Procedure Code should

be held in cases involving a jury trial.83)

The verdict process combines the U.S and German systems to reduce thepossibility of a “hung jury.” At first, the verdict process starts similar to that inthe U.S.: without the participation of the judge, jurors discuss the guilt of thedefendant and make a verdict by unanimous opinion.84)If half of the jurorsagree, the jurors can choose to hear the judge’s opinion.85)If the jurors cannotreach the verdict, they should hear the judge’s opinion Then the judge andthe jurors discuss the guilt of the defendant together and the jurors render averdict according to a majority opinion of the jurors without the presence ofthe judge.86)In that the judge’s opinion can work as an important factor in theverdict process, the verdict process shares similarities to that in Germany In

82) See CPC, supra note 3, 266-5(1) See supra text accompanying notes 52-56.

83) The Act for Civil Participation in Criminal Trials, art 36(1).

84) Id art 46(2).

85) Id.

86) Id art 46(3).

these two phases where the judge’s opinion can be presented, the judgeshould not make his statement of guilty or not guilty.87)There is neither guiltyplea nor arraignment system in Korea Thus the defendants who confess mayhave a jury trial and the verdict process is not waived in that case

Another German-influenced trait involves when jurors discuss thesentence together with the judge and submit their opinion to the judge if thedefendant is found guilty.88)The 2007 Act requests the presiding judge toexplain to the jurors the scope of punishment and the conditions forsentencing before the discussion regarding sentence.89)However, it is silent onthe issue of how to decide the sentence Jurors may vote and submit theirmajority opinion to the judge or each juror may express his/her opinionwithout vote

The jurors’ opinion concerning guilt and sentencing does not bind the

judge’s ultimate decisions regarding guilt and senteninge.90)Despite therecommendatory effect of the jurors’ opinion, however, it can reasonably beanticipated that judges will not disregard it easily The Administration Bureau

of the Supreme Court strongly recommends that judges respect jurors’opinions, if and whenever possible.91)It is noteworthy that the verdict can beappealed by either party,92)so unlike the U.S jury system, the prosecutor canappeal a not-guilty verdict entered by the jury

VI Evidence Law

1 Adoption of Discretionary Exclusionary Rule in Search-and-Seizure

— Korean Version of Mapp

Before the 2007 revision of CPC, neither the Constitution nor the CPC

87) The Rules for Civil Participation in Criminal Trials [kukmineui hyeongsachaepanchamyeo e

kwanhan kyuchik] (The Supreme Court Rules No 2107, October 29, 2007), art 41(5).

88) The Act for Civil Participation in Criminal Trials, art 46(4).

89) Id

90) Id., art 46(5).

91) Beopweonhaengcheongcheo [The Administration Bureau of the Supreme Court],

K UKMINCHAMYEOCHAEPAN E UI I HAE[U NDERSTANDING OF T RIALS WITH C IVIL P ARTICIPATION ] 142(2007) 92) CPC, arts 226, 401.

contained a provision regarding the exclusion of illegally obtained physical

evidence Although the Supreme Court adopted Miranda and Massiah,93)theCourt had consistently declined to exclude the physical evidence obtained byillegal search-and-seizure procedures, providing the following rationale,

“[e]ven though the procedure of seizure was illegal, the value as evidencedoes not change because the procedure did not affect the quality and shape ofthe substance itself.”94)The Court clearly rejected the U.S Fourth Amendment

Mappexclusionary rule.95)

Academics and defense attorneys argued that unless illegally-obtainedevidence is excluded, the constitutional requirement for the search-and-seizure warrant is left without any teeth There are no other effective remediesfor illegal police misconduct in Korea Criminal or civil liability and internaldiscipline have not proven effective in deterring the police misconduct inKorea

Responding to these criticisms, the 2007 revision included Article 308-2,which provides that “evidence obtained not through due process shall not beadmissible.”96)Before the 2007 revision of CPC, on November 15, 2007 theSupreme Court also made a decision to exclude illegally obtained physicalevidence.97)The Court held that the illegally obtained evidence should not beautomatically excluded but could be excluded considering all thecircumstances regarding the illegality of the investigation The Court, thus,

adopted a discretionary exclusionary rule rather than a mandatory one The

majority opinion of the Court also provided a standard to determine whether

to exclude such a evidence: Illegally obtained evidence should be excluded inprinciple, but it may, it exceptional circumstances, be admissible when theviolation made by investigative authorities does not infringe upon the

“substantial contents of the due process.” This standard itself is still abstract.The degree of the illegality and the intent of the investigative officer may beconsidered in applying the standard in a case

93) See supra text accompanying notes 48-51.

94) See Decision of Sept 17, 1968, 68 Do 932 (Korean Supreme Court); Decision of June 23,

1987, 87 Do 705 (Korean Supreme Court); Decision of Feb 8, 1994, 93 Do 3318 (Korean Supreme Court).

95) Mapp v Ohio, 367 U.S 643 (1961).

96) CPC, supra note 3, art 308-2

97) See Decision of Nov 15, 2007, 2007 Do 3061 [Korean Supreme Court].

It is also noteworthy that the majority opinion explicitly states thatsecondary evidence derived from the first evidence obtained illegally should

be excluded Here the Court explicitly adopts the U.S principle of “the fruit ofpoisonous tree.”98)

2 Intact Strong Evidentiary Power of Prosecutor-made Dossiers

Article 312 (1) of the CPC has given exceptionally strong evidentiarypower to the prosecutor-made dossiers even if they are hearsay.99)Before the

2007 revision, it provided that interrogation dossiers, which can includedefendants’ statements or confessions, may be admissible at trial (i) if theycontain a defendant’s signature and were made by prosecutors, and (ii) “if

there exist special circumstances which make the dossiers reliable,” without

cross-examination of the interrogators even if the defendants contend that the

contents of the dossiers do not match what they stated duringinterrogation.100)Assuming that interrogation by prosecutors itself may fulfillthe requirement of “special circumstances which make the dossiers reliable,”the Supreme Court recognized the legitimacy of Article 312 (1).101)Thus,prosecutors enjoyed a significant evidentiary advantage

However, Article 312 (1) was strongly criticized because it made itextremely difficult for defendants to escape guilty verdicts at trial once theymade self-incriminating statements in front of prosecutors The disadvantage

to defendants was especially serious considering that, until the Professor Songcause of 2004,102)they had not been allowed to have a lawyer duringinterrogation A number of scholars and defense attorneys strongly criticized

the Article as making the prosecutor a de facto judge, and as making

98) Silverthrone Lumber v United States, 251 U.S 385(1920); Nardone v United States, 308 U.S 338 (1939)

99) CPC, supra note 3, art 312(1) To contrast, the CPC provides different status to the

dossiers made by police officers The dossiers made by police officers shall not be used as evidence if the defendants or their attorneys contend that the contents of the dossiers do not

match what the defendants stated during interrogation See Id art 312(3).

100) The Criminal Procedure Code [hyeongsa sosongbeop] (Law No 341, Sept 23, 1954,

revised July 19, 2006 as Law No 7965), art 312(1)

101) See Decision of Mar 8, 1983, 82 Do 3248 [Korean Supreme Court]; Decision of Jun 26,

1984, 84 Do 748 [Korean Supreme Court].

102) See supra text accompanying note 29.

defendants’ statement in front of prosecutors in an interrogation room de facto

testimonies in a trial

The JRC under the Supreme Court in its final recommendations onDecember 31, 2004 stated that Article 312 (1) is so dossiers-oriented that itinfringes upon defendants’ right to cross-examination, thus calling for itsrevision On April 15, 2005, responding to the above criticism of Article 312 (1)and following the recommendations of the JRC, the PCJR submitted its firstdraft to revise the Article to prohibit prosecutors’ interrogation dossiers from

being admissible at trial unless the defendants agree to the use of them At the

same time, the draft allows police officers or prosecutors who interrogatedefendants to testify against the defendants when the defendants deny what

is recorded in the dossiers The intention of the PCJR was to abolish thephenomenon of “trial by dossiers” wherein truth-finding was made heavilydependent on the dossiers made by prosecutors rather than on the cross-examinations by the parties in front of judges in a courtroom This intentioncame from the idea that the status of prosecutors as “semi-judges” should bedismantled and prosecutors should be an adversarial party in every sense.However, the draft caused strong objections from prosecutors even while

it attracted praise from defense attorneys and academics Prosecutorscriticized that the draft allowed defendants to easily invalidate theirconfession or statement in the interrogation room later in a trial, thusincapacitating prosecutors in their fight against crime They were veryuncomfortable that they might be called as a witness to testify regardingdefendants’ statements and to be cross-examined by defense attorneys Theywere also unsatisfied with the draft because it seemed to undermine theirstatus as “semi-judge” and made them no more than an adversarial party.103)

While the debate was still ongoing, the Constitutional Court, in a decision

on May 26, 2005, reviewed the constitutionality of Article 312 (1).104)The 5-to-4opinion of the Court held the requirement of “special circumstances whichmake the dossiers reliable” to be constitutional However, 6 out of the 9Justices recommended that the vagueness of the requirement be removed Inparticular, four Justices in their dissenting opinion stated that such a special

103) See CHOSUN I LBO , Jan 16, 2005; D ONG - A I LBO , Jan 16, 2005; H ANKYOREH S HINMUN , Jan 16, 2005.

104) See Decision of May 26, 2005, 2003 Heon Ka 7 [Korean Constitutional Court].

evidentiary power given to the prosecutor-made dossiers may be allowed

only when “procedural transparency of the interrogation by prosecutors is

reinforced and the defense attorney’s participation in the interrogation isguaranteed.”

The hot debate over Article 312 (1) ended in a compromised way The firstdraft did not get strong support either from judges, who were afraid that itcould make trials much more complex and lengthy, or from the public, whowere afraid that it could free criminals who have changed their minds afteralready confessing in front of prosecutors

Then the PCJR submitted a new draft on July 18, 2005 which kept theevidentiary power of the prosecutor-made interrogation dossiers alive butimposed stricter requirements.105)The National Assembly revised the newdraft to make the 2007 revision, which provides for two tracks to achieveadmissibility of the prosecutor-made interrogation dossiers First, in caseswhere the defendants admit in a preliminary hearing or a trial that thedossiers are recorded as the defendants have stated, the dossiers areadmissible (i) if they are made by legal process and method, and (ii) if it isproven that they are made under especially reliable circumstances.106)Second,

in cases where the defendants do not admit in a preliminary hearing or a trialthat the dossiers are recorded as the defendants have stated, the dossiers areadmissible (i) if they are made by legal process and method, (ii) if it is proven

by objective method, such as audio recording, that the dossiers are recorded asthe defendants have stated, and (iii) if it is proven that they are made underespecially reliable circumstances.107)

It is not clear what the meaning of “especially reliable circumstances” ishere Although the PCJP explicitly specified the “presence of their attorneyduring interrogation” as an example of “especially reliable circumstances” inits draft, this was ultimately omitted in the final version.108)Prosecutors willkeep making efforts to include self-incriminating statements of defendants in

105) Presidential Committee on the Judicial Reform, Bill for the Revision of the Criminal Procedure Code, art 312(1)

106) See CPC, supra note 3, art 312(1)

107) Id art 312(2)

108) Presidential Committee on the Judicial Reform, Bill for the Revision of the Criminal Procedure Code, art 312(1)

prosecutor-made interrogation dossiers and will argue that the dossiersshould be admissible without cross-examination in court even if they havebeen made without the presence of defense attorney.

VII Victim Protection

Expanding protective systems for sexual violence victims in the Act for thePunishment of Sexual Assault Crimes and Protection Victims of 1993,109)the

2007 revision of the CPC provides that a court may allow “a person who has areliable relationship with a crime victim” to sit with the victim during trial incases where it may cause the victim significant anxiety or tension to bequestioned as a witness.110)The Court should have “a person who has areliable relationship with the victim” sit with the victim in cases where thevictim is under thirteen years old or has physical or mental disability.111)Theseprotective systems also apply to the investigation procedures employed byinvestigative authorities to question such victims.112)

The 2007 revision also establishes a video transforming system to protectvulnerable crime victims When examining underage victims about sexualviolence crimes, the court may use video or closed-circuit television facilities

to ensure that they do not have to face their offender during the examination.113)

Questioning by the use of video or closed-circuit television facilities may also

be available for victims of non-sexual violent crimes where they havesignificant difficulties confronting the offender due to the nature of the crime

or the age, psychological or physical status of the victim.114)

The 2007 revision strengthen the victim’s right to make a statement during

a trial In the previous system, only the victim had such a right Now the right

is also given to the victim’s agents including his or her spouse, relatives,

109) The Act for the Punishment of Sexual Violence Crimes and Protection of Victims

[Seongpokryok beomjoe eui cheobeol mit pihaeja boho deung e kwanhan beopryul], Law No 8059 of

2006, Law revised on October 27th, 2006, as Law No.8059.

110) CPC, supra note 3, art 163-2(1).

111) Id art 163-2(2).

112) Id art 163-2(2).

113) Id art 165-2.

114) Id art 165-2

brothers and sisters.115)When a court questions the victim or his or her agents,

it should give them a chance to speak his or her opinion about the degree andconsequences of damage caused by the crime as well as the punishment of thedefendant.116)Victims’ statements as witnesses at trial may not be disclosed bythe court to protect his or her privacy or safety.117)The 2007 revision alsoprovides victims’ right to review or copy court documents.118)

VIII Conclusion

The 1987 Constitution has provided a new perspective for theconstitutionalization of criminal procedure The main point of issue and mostcompelling task of reforming criminal justice after democratization was tovitalize the procedural rights in criminal process, deter police misconduct,effectuate the trial process, and protect victims’ privacy The 2007 revision ofthe CPC was made as a comprehensive solution for the task The introduction

of the jury trial by the 2007 Act for Civil Participation in Criminal Trials in

2007 was also a drastic change to the Korean criminal justice It was a result ofboth the rapid growth of political democracy and the distrust of judicialintegrity It will strengthen the democratic legitimacy of the justice system,enhance its transparency, and bring about people’s trust in and respect to thesystem This twenty year old reform after the 1987 Constitution may be calledthe Korean “criminal procedure revolution.”119)

115) Id art 294-2(1).

116) Id art 294-2(2).

117) Id art 294-3(1).

118) Id art 294-4(1).

119) See Stephen J Schulhofer, The Constitution and the Police: Individual Rights and Law

Enforcement, 66 W ASH U L.Q 11, 16-18 (1988) (stating that there were three themes in the U.S.

“criminal procedure revolution” led by the Warren Court: (i) pursuit of equality, which is the effort to stamp out not only racial discrimination but also to insure fair treatment for rich and poor alike, (ii) concern with the dangers of unchecked executive power and reinforcement of adversarial procedure and (iii) a preoccupation with practical implementation beyond declaring new rights).

Changes in Korean Corporate Governance:

groups known as chaebol Before the crisis, these business groups routinely

pursued growth and market share at the expense of profitability andshareholder value For some of the chaebol, size added to their politicalinfluence, which could be used to tilt the playing field in their favor Beingbigger also meant better access to external financing and lower borrowingcosts, thanks in part to the “too big to fail” legacy But another importantfactor driving this value-destroying growth was the so-called “privatebenefits” of controlling a larger corporate empire to the controllingshareholders, typically referred to in Korea as the “owners.” In addition to theconsumption of perks, the chaebols’ “owners” commonly used “tunneling”and “asset-grabbing” schemes to transfer corporate value from their minorityshareholders

As we discuss in more detail below, one important factor motivating andenabling the chaebol to expropriate their minority shareholders has been thesubstantial gap between their “cash flow rights”—that is, their percentageclaim on dividends and earnings—and their voting, or “control,” rights While

* This Article previously appeared in Vol 20, No 1 of J OURNAL OF A PPLIED C ORPORATE

F INANCE 47-58 (Winter 2008), a Morgan Stanley publication.

** E Han Kim is Fred M Taylor Professor of Business Administration and Director of Mitsui Life Financial Research Center at the University of Michigan’s Ross School of Business Woochan Kim is Associate Professor of Finance at the KDI School of Public Policy and Management in Seoul, Korea

the cash flow rights of the controlling chaebol families have often beenrelatively small—about 20%, on average—their control rights have been nearabsolute thanks to a web of complex cross holdings among affiliated firms.Such disproportionate control rights, together with various legal and socio-political impediments to shareholder activism, have also made the chaebolimmune to the threat of hostile takeovers Thus, as we argue in the pages thatfollow, the chaebol have largely avoided the disciplining forces of capital andcorporate control markets, even as their distorted incentives have resulted inunprofitable growth, diversification, and massive destruction of value

In a study (involving one of the present writers) that was commissioned

by the Korea Stock Exchange prior to the 1997 financial crisis, the authorscalculated the economic value added (EVA) produced by 570 non-financialKorea Stock Exchange companies in each year from 1992 through 1996.1)

After adding up the annual EVAs for each company over this five-yearperiod, the authors concluded that only about 27% of the companies created

or maintained shareholder value In other words, nearly three-quarters ofKorean companies did not generate sufficient operating profits to cover theircapital costs over the five-year period preceding the crisis

While this unchecked value destruction was reducing shareholder wealthand shrinking the value of its economy, Korea should have experiencedsubstantial depreciation of its currency during the run-up to the crisis.However, the government maintained the value of the won at artificially highlevels until it ran out of foreign reserves in November 1997 When lack ofreserves forced the government to let the exchange rate float freely, thecurrency’s value immediately plummeted The won-dollar exchange ratemore than doubled, rising from 964.4 to 1964.8, during the two months fromthe beginning of November through December 24

The currency crisis coincided with a presidential election, and the rulingparty was swept from office The new administration proposed a number ofreform measures, targeting primarily chaebol ownership and its governancestructure But, at this point, the crash in currency value was followed by a

1) EVA is calculated as net operating profits after taxes minus a charge for the cost of capital equal to WACC multiplied by total capital See E Han Kim, Myeong Kyun Kim & Jaekyung Yi,

Economic Value Added (EVA) of the Listed Companies, 98-01 T HE K OREA S TOCK E XCHANGE R EPORT

(February 1998) (in Korean).

sharp increase in interest rates resulting from the tight monetary policyprescribed by the International Monetary Fund (IMF) The immediate resultwas that unemployment skyrocketed and GDP dropped sharply.

The crash of its currency was more than a financial blow to Koreancitizens The loss of Korean economic independence to foreign powersrepresented by the IMF was a public humiliation, an assault on the nationalpsyche Citizens lost faith in their leaders, questioning their authority andcredibility And in response to this national crisis of confidence, Koreasuddenly exhibited the political will to make major governance reforms, anuncommon event in democracies.2)

The reform measures announced by the new administration were a mix ofmarket-based solutions and government interventions The government-engineered, large-scale swaps of business units among the largest chaebol—the so-called “big deals” that were designed to force each chaebol to specialize

in its core business—failed miserably, with serious unwanted side effects Thiswas not surprising since the new government played the role of corporatematch-maker rather than allowing market forces to restructure the corporateportfolios And as this experience demonstrated once again, politicians andgovernment bureaucrats have neither the incentive nor the expertise toallocate resources to their highest-valued uses and users

At the same time, however, new laws and regulations designed to increasecorporate transparency, oversight, and accountability were put in place Andthe effects of these laws and regulations on the quality of governance ofKorean corporations have been unmistakably positive Among this package ofreforms, one major contributor to improved governance has been thelowering of barriers to foreign ownership of Korean companies By the end of

2006, foreign ownership of listed Korean companies amounted to about 37%,

up from just 13% in 1996 And in addition to the growing pressure for bettergovernance from foreign investors, strong grass-roots reform movementshave sprung up Several newly formed non-governmental organizations(NGOs) have pressed for increased corporate transparency and

2) For a more detailed description of the causes of the financial crisis and the type of

restructuring measures undertaken by the new administration, see E Han Kim, Globalization of

Capital Markets and the Asian Financial Crisis, 11 J OURNAL OF A PPLIED C ORPORATE F INANCE 30-39 (Fall 1998).

accountability, particularly in the largest chaebol After witnessing thecollapse of large chaebol once believed to be too big to fail, the Koreanbusiness community has shown a heightened awareness of the importance ofincreasing shareholder value as a strategy for national competitiveness andlong-term corporate survival And in recent years, such awareness has led to anumber of voluntary as well as mandated reforms in Korean corporategovernance.

In this article, we describe these reforms while assessing the current state

of corporate governance in Korea In so doing, we divide the subject ofcorporate governance into three broad categories—ownership structure,internal governance mechanisms, and external monitors—and discuss each inturn

II The Chaebol and “Emperor-like” Management

How well a company is governed is largely determined by variousimplicit and explicit contracts among the stakeholders of the firm—management, employees, investors, directors, and so forth—and theeffectiveness with which the contracts are enforced Such contracts differamong companies in terms of the degree of alignment between managerialand shareholder interests, the priority given to shareholder value by the board

of directors, and the level of voluntary disclosure for external financing Theability of corporate stakeholders to monitor and enforce such contractsdepends on laws and regulations governing timely and accurate disclosure,managerial and board accountability, board independence, and protection ofminority shareholders It also depends on the extent of social and politicalacceptance of the concept of shareholder value maximization

Before the crisis of 1997, neither the chaebol ownership structure norKorean legal institutions encouraged effective corporate governance In 1996,the controlling shareholders of the large chaebol owned an average of 23% ofthe outstanding shares, but effectively controlled 68% of the votes throughvarious forms of cross and circular holdings in subsidiaries and related firms.3)

3) In classifying chaebol as “large,” we used the designation of the Korea Fair Trade

Such disproportionate control gave the chaebol owners the power to appointthe top managements and boards of their affiliated firms Also important werethe financing practices of chaebol affiliates, which have typically relied on the

“internal capital markets” created by the conglomeration of numerousaffiliated and related firms Given this supply of internal funding, chaebol-affiliated firms have been able to avoid the disclosure necessary to obtainexternal financing, as well as the discipline—including the possibility oftakeover—that comes with relying on outside equity capital

Before the crisis, Korean laws and regulations were largely ineffective inprotecting minority shareholders, ensuring timely and accurate disclosures,and preventing insider trading Even the media, which are expected to exposecorporate scandals and bad governance practices, were often captives of thechaebol, either through their direct ownership or their power to withholdadvertising expenditures For example, Samsung Group, Korea’s largest

chaebol, owned ChoongAng Daily, one of the two most widely subscribed

newspapers The Federation of Korean Industries, the lobbying organization

for the chaebol and other large corporations, owns the Korea Economic Daily,

one of the leading business newspapers in Korea Other possible externalsources of shareholder protection, such as institutional investors or activistblock holders seeking value-increasing changes or encouraging takeover bids,were virtually non-existent

In sum, before the crisis, the chaebol owners encountered few obstacles to

practicing what Koreans call hwangje kyungyoung, or “emperor-like

management.”

III An Overview of the Changes

Much has changed in Korean corporate governance during the ten yearsthat have passed since the crisis In a 2005 working paper, a group of four

Commission The numbers are equally-weighted averages of individual firm-level cash flow rights and control rights Group-level disparity, which is computed by size-weighted averages

of firm-level numbers within the same group, is smaller because larger firms tend to have smaller disparities The controlling shareholder’s cash flow rights and control rights at the group level are 16% and 34%, respectively We include non-listed firms in our calculation.

academics (including one of the present writers) developed a Korea CorporateGovernance Index (KCGI) that is based on evaluation of five attributes ofcorporate governance: shareholder rights; board structure; board procedures;disclosure; and ownership parity.4)Changes in the KCGI, together with theperformance of the Korean stock market and a wealth of “anecdotalevidence,” suggest a dramatic increase in the quality of Korean corporategovernance during the post-crisis period Between 1998 and 2004, the last yearthese data have been compiled, the KCGI for large listed Korean corporations(those with book asset values greater than about $2 billion) jumped from 30.78

to 69.64 (out of a possible 100).5)

One important contributor to the increase in Korea’s governance index hasbeen the emergence of large (non-chaebol) industrial corporations that havebeen recently privatized, including POSCO, now the world’s third largeststeel producer; KT, Korea’s largest telecom provider; and KT&G, Korea’slargest tobacco company The other major group showing notableimprovements in the quality of governance is Korean banks that havereceived large infusions of foreign capital, including Hana, Kookmin, andShinhan In most of these groups of companies, a majority of the outstandingshares are held by foreign investors.6)All are run by professional—that is,non-family—managers under a great deal of public scrutiny And since allthese companies are listed on foreign stock exchanges that require financialstatements prepared in conformity with either U.S GAAP or IFRS, theyprovide far more disclosure than typical chaebol-affiliated firms.7)

4) The KCGI was compiled and presented by Bernard S Black, Woochan Kim, Hasung

Jang, and Kyung-Suh Park in their working paper, Does Corporate Governance Affect Firms’

Market Value? Times Series Evidence from Korea(European Corporate Governance Institute Finance Working Paper No 103, 2005) The numbers reported above represent updates of the indices presented in the original version

5) For smaller listed firms with book value of assets less than 2 trillion won (about $2 billion), the increase in KCGI was less dramatic, increasing from 22.96 in 1998 to 38.58 in 2003 These companies are subject to looser regulatory requirements concerning disclosure, inter- corporate investment, cross holdings, and board composition.

6) As of December 10, 2007, foreign ownership of POSCO shares was 49%, while foreign ownership of KT, which is subject to an upper ceiling of 50%, was 46% The foreign ownership for the remaining four firms was well over 50%.

7) POSCO, KT, Kookmin, and Shinhan are listed on the New York Stock Exchange, Hana

on the London Stock Exchange, and KT&G on the Luxemburg Stock Exchange.

To illustrate the kind of changes that have taken place in the past decade,let’s take a closer look at the governance system of POSCO, which is thesecond largest Korean corporation in terms of market capitalization (in the $50

to $60 billion range during the second half of 2007) We chose POSCO for anumber of reasons One, it was the first Korean company to list on the NewYork Stock Exchange, a step the firm took in 1994 Second, and perhaps evenmore telling, Warren Buffett had accumulated a 4% stake in the firm by theend of 2006, citing the firm’s strong governance system Third and last, one ofthe authors of this article has served as an independent director of POSCOsince 2002, and is currently the firm’s non-executive chairman

Given POSCO’s position as the first Korean firm to list on the NYSE, thelist we provide below of the most important features of its governance systemreflects NYSE listing requirements as well as the requirements of SarbanesOxley:

• The company is governed by a board of 15 people, including sixexecutive “insiders” and nine independent outside directors

• The CEO does not chair the board

• The audit committee consists entirely of outside independentdirectors, two of whom are financial experts

• The current public auditing firm was chosen through an openbidding process

• The company complies fully with the internal control systemrequired by the U.S Sarbanes-Oxley Act

• The bylaws allow cumulative voting, greatly increasing the ability ofminority shareholders to elect their own representatives to the board

• The company has no explicit anti-takeover devices in place and nogolden parachutes for its executives.8)

Together, these features not only surpass global standard requirements, theyalso represent advances over most major American companies, where poison

8) POSCO does, however, have mutual shareholdings with a number of other companies (e.g., Nippon Steel Corporation and Hyundai Heavy Industries) Although these inter-firm share investments represent strategic alliances, they could be used to thwart hostile takeover attempts if the strategic partners decided to vote with POSCO management.

pills are common and the majority of CEOs continue to serve as their boardchairmen

POSCO’s system appears to be working for its non-investor stakeholders

as well as its shareholders Its stock price more than quadrupled during thepast five years, and its leadership in corporate responsibility is widely

recognized As just one example, a recent issue of Business Week Japan

(November 7, 2007) recognized POSCO as one of the 30 most sociallyresponsible, “sustainable” companies in the world

Of course, POSCO is not the only company in Korea with goodgovernance In addition to the banks and newly-privatized firms mentionedearlier, at least a dozen other companies (including SK Telecom, LG Telecom,and KTF) are widely regarded as effectively managed, well-governedcompanies—indeed, on a par with the best-governed U.S companies But, assuggested, these companies present a striking contrast to the majority ofKorean firms affiliated with the chaebol, where the quality of governancesystems is highly variable and the propensity to reform unclear

IV Back to the Chaebol Problem: Ownership Structure

The core of the chaebol’s governance problem lies in its ownershipstructure It is typically a web of complex cross-shareholdings, often involving

a number of circular shareholdings with no clear holding company InDecember 2004, the Korea Fair Trade Commission (KFTC) began to disclosethe intra-group ownership structures of the chaebol on its website,9)making iteasier to trace the actual share ownership and control rights belonging to thechaebols’ owners

Our analysis of this data shows that during the period 1997-2005, theaverage percentage of shares owned by the controlling shareholder (family)was only 22%, while effectively exercising control over 69% of the votingrights through cross and circular holdings.10)In other words, the average gapbetween cash flow rights and control rights for chaebol-affiliated firms was

9) http://groupopni.ftc.go.kr

10) These numbers are based at the individual firm level

Figure 1-A.Size-Weighted

Dongbu Doosan Kumho-Asiana

Hyundai Heavy Industries

Hanwha Hanjin SK Hyundai Motors

Hyundai Heavy Industries

Hanwha Hanjin SK Hyundai Motors

close to 50%! (Figure 1 shows the difference between the cash flow and controlrights for the ten largest chaebol in Korea as of April 2004.)

A large disparity between cash flow rights and control rights is a warningsignal, an indication of the strength of the controlling shareholders’ incentives

to transfer wealth from their minority shareholders When a controllingshareholder owns 22% of the outstanding shares, for example, diverting $100worth of corporate assets for private uses provides the shareholder with a netgain of $78 And a large disparity makes it easier to divert assets In 2006 thePeople’s Solidarity for Participatory Democracy (PSPD), the leadingshareholder activist group in Korea, documented 70 cases of “tunneling”—that is, the transfer of public corporate assets at below-market prices to other,often private, family-owned entities—by chaebol owners during the period1995-2005.11)Of the 70 cases, 30 were classified as appropriating valuablecorporate opportunities; 20 as illegal securities transactions, such as sellingsecurities to family members at a discounted price; and the remaining 20 asillegal related-party transactions.12)What’s more, a 2007 report by anotherNGO, Solidarity for Economic Reform (SER), identified informationtechnology subsidiaries established within chaebol as a favorite tunnelingtool, shifting wealth from public companies to privately owned familyfirms.13)

An alternative to the typical chaebol ownership structure is a holdingcompany format, a corporate organizational structure not permitted in Koreauntil 1999 That year, in an effort to ease the restructuring process fordistressed chaebol after the financial crisis, the government started to allowholding company structures through a revision of the Monopoly Regulationand Fair Trade Act In 2003, LG Group, the second largest chaebol at the time,was the first to convert into a holding company LG was soon followed by

11) P EOPLE’S S OLIDARITY FOR P ARTICIPATORY D EMOCRACY , R EPORT ON THE T UNNELING A CTIVITIES OF

38 C HAEBOL F AMILIES (2006) (in Korean)

12) An example is LG Chemical’s sale in 1999 of its LG Petrochemical shares to LG group family members at a heavily discounted price In 2002, LG Petrochem was listed and the family members earned combined profits of approximately $200 million dollars on the transaction.This case of self-dealing later resulting in a derivative suit that was won by the plaintiffs in 2006, with

no appeal by LG family members.

13) Solidarity for Economic Reform, Why Are Chaebol Families Fond of IT Firms? 5 Economic

Reform Report (2007) (in Korean)

other large chaebol, including SK, the energy, chemical, and telecomconglomerate, and CJ Corporation, with major investments in foodprocessing, retail, and entertainment Figure 2 provides a diagram of the LGGroup ownership structure before and after its conversion to a holdingcompany structure, illustrating that the holding company structure makes theownership structure less complicated and less opaque A holding companyalso effectively eliminates the “chairman’s office”—the center of group

1 LGIS: LG Industrial Systems

2 LGIS: LG Investment & Securities

3 LGI: LG International Corp.

4 LGITM: LG Investment Trust Management

Figure 2-A.Before Transformation (December 2000)

1 LGIS: LG Industrial Systems

2 LGITM: LG Investment Trust Management

Source: Joo-Young Lee, Simpler Ownership Structure for LG Group, Center for Good Corporate Governance Issue Report (February 12, 2003)

Figure 2-B.After Transformation (February 2003)

Figure 2 Ownership Structure of LG Group before and after its Conversion to a Holding Company Structure.

LG Corp is the holding company and its member firms are highlighted using bold lines in black Note that some member firms continue to be outside the holding company structure.