Shareholder Suits and Outside Director Liability: The Case of Korea

Abstract:     
Recent reforms to Korean corporate and securities law have included two prominent features: a mandate that boards include a minimum number of outside directors and facilitation of shareholder lawsuits against board members for damages. The strategy of imposing liability risk on outside directors appears to follow U.S. practice. In actuality, however, outside directors in the U.S. rarely face out-of-pocket liability unless they engage in self-dealing. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. Outside directors in Australia, Canada, Britain, France, Germany, and Japan similarly enjoy near-immunity from out-of-pocket liability due to shareholder lawsuits. Moreover, when events have occurred in these countries that threaten to impose out-of-pocket liability on outside directors, there is a strong tendency for political or market forces to soon reestablish a minimal level of risk for actions that fall short of self-dealing. This experience suggests that if Korea's new lawsuit-facilitating rules turn out to expose outside directors to a significant risk of out-of-pocket liability, Korea may well experience a similar political and market reaction. Thus, Korea will likely need to look elsewhere for sources of incentives for outside directors to be vigilant watchdogs.

Keywords: corporate governance, director liability, fiduciary duty, securities law, securities class actions, law and finance, director duties

JEL Classifications: G32, G34

Accepted Paper Series