Executive Officer System South Korea Guide | Atlas Legal

Why was the executive officer system introduced?

Legislative Background and Purpose

The executive officer system is premised on the separation of the business execution function and the supervisory function within the board of directors structure of a stock company. Executive officers receive decision-making authority and execution power regarding business from the board of directors, while the board supervises these decisions and executions by the executive officers.

Previously, large listed companies had de facto executive officers (non-registered officers) in practice through their articles of incorporation or internal regulations, but there was no legal basis to support this, causing significant problems in determining liability for business execution.

Securing Management Stability and Transaction Safety

The amended Commercial Act established a legal basis for executive officers as the body dedicated to executing company business under the supervision of the board of directors, thereby securing management stability internally and promoting transaction safety externally.

When a company introduces the executive officer system, executive officers take charge of business execution, and the board, centered on outside directors, takes charge of important decision-making and supervisory functions over business execution, enabling mutual separation of functions.

Reference to Advanced Models in the U.S. and Japan

The executive officer system introduced is modeled after the U.S. officer system and Japan’s executive director system. In U.S. public companies, executive officers are responsible for business execution, and the board mainly performs supervisory functions over business execution, so the board is generally composed primarily of independent outside directors, unlike executive officers.

Japan’s executive director system was introduced in 2002 through the former Special Provisions of the Commercial Act, introducing executive officers along with outside directors in companies with committees. Subsequently, the 2005 new Company Act mandated executive officers for companies with committees where outside directors constitute a majority.

What are the key features of the executive officer system?

Voluntary Choice

The decision to introduce the executive officer system is left to the voluntary choice of the company. Therefore, regardless of company size, individual companies can make their own choices. Not only listed companies but also unlisted companies or small companies can establish an executive officer system.

Prohibition of Representative Director

Companies with executive officers cannot have a representative director (Commercial Act Article 408-1, Paragraph 1). This is to ensure clear separation between business execution and supervisory functions.

Strict Separation of Authority

The authority and functions of executive officers and the board of directors are strictly separated. The board is responsible only for appointing and supervising executive officers, while executive officers are responsible for the dedicated function of executing company business.

Board’s Appointment and Remuneration Authority

The board of directors has the authority to appoint, dismiss, and determine the remuneration of executive officers. This is to enable the board to exercise substantial supervisory authority over executive officers.

How does board authority change?

Main Powers of the Board

The board of directors of a company with executive officers has authority over the following matters (Commercial Act Article 408-2, Paragraph 3):

• Appointment and dismissal of executive officers and representative executive officers
• Supervision of executive officers’ business
• Appointment of persons to represent the company in litigation between executive officers and the company
• Delegation of decision-making regarding business execution to executive officers
• When there are multiple executive officers, determination of job distribution, command relationships, and other matters concerning mutual relationships among executive officers
• When there are no provisions in the articles of incorporation or approval from the general shareholders’ meeting, determination of executive officers’ remuneration

Requirement to Appoint Board Chairperson

The board of directors of a company with executive officers must have a chairperson to preside over meetings, and the board chairperson shall be appointed by board resolution if there are no provisions in the articles of incorporation (Commercial Act Article 408-2, Paragraph 4).

While it is not desirable for the board chairperson and representative executive officer to hold concurrent positions in order to ensure faithful supervision by the board, the amended Commercial Act did not include provisions prohibiting this, reflecting the reality of the business community. Therefore, it is interpreted that concurrent holding of the positions of board chairperson and representative executive officer is possible.

Authority of Individual Directors

Directors of a company with executive officers may request that the representative executive officer report to the board regarding the business of other executive officers or employees (Commercial Act Article 408-6, Paragraph 3). This is to enable directors, who have a duty to supervise business execution, to conduct business supervision more efficiently.

What are the qualifications and term of office for executive officers?

Number of Executive Officers

There is no limit on the number of executive officers. Therefore, even one executive officer is possible, but in this case, that executive officer becomes the representative executive officer. When there are two or more executive officers, a representative executive officer must be appointed by board resolution.

Since executive officers are not a collegial body like the board of directors, an executive officer committee is not necessary.

Term of Office

Unless otherwise provided in the articles of incorporation, the term of office for executive officers shall not exceed two years (Commercial Act Article 408-3, Paragraph 1). However, the articles of incorporation may provide that the term ends at the conclusion of the first board meeting convened after the regular general shareholders’ meeting concerning the final settlement of accounts during the term.

Thus, the term of office for executive officers is shorter than that of directors. However, while the term of office for executive officers can be extended beyond two years by provisions in the articles of incorporation, this is not desirable. Companies wishing to shorten the term of office for executive officers below two years can do so by board resolution alone without provisions in the articles of incorporation.

Relationship with the Company

The relationship between a company with executive officers and executive officers is governed by the provisions on mandate in the Civil Act (Commercial Act Article 408-2, Paragraph 2, Item 8). As the status of executive officers has been legislated as a mandate relationship with the company, the authority, duties, and responsibilities of executive officers have become almost the same as those of directors.

Therefore, executive officers have a mandate relationship with the company, like the relationship between directors and the company, which differs from the employment relationship applied to the relationship between the company and de facto executive officers (non-registered officers).

What are the powers and duties of executive officers?

Powers of Executive Officers

Executive officers have the following powers (Commercial Act Article 408-4):

• Execution of the business of the company with executive officers
• Decision-making regarding business execution delegated by the articles of incorporation or board resolution

If necessary, an executive officer may request convening of the board of directors by submitting to a director (or the convening authority if any) a written document stating the matters to be discussed and the reasons for convening.

If, after requesting convening of the board of directors, the director does not promptly carry out the procedures for convening the board, the executive officer who requested convening may convene the board with court permission.

Duty to Report

Executive officers must report matters concerning business execution to the board of directors at least once every three months (Commercial Act Article 408-6, Paragraph 1). Executive officers must attend the board of directors and report on requested matters whenever the board requests.

Applicable Duties

Not only provisions on directors’ liability but also provisions on authority are applied mutatis mutandis to executive officers. That is, the following provisions are applied mutatis mutandis to executive officers:

• Directors’ duty of loyalty (Commercial Act Article 382-3)
• Directors’ duty of confidentiality (Commercial Act Article 382-4)
• Prohibition of competitive business (Commercial Act Article 397)
• Prohibition of usurping company opportunities and assets (Commercial Act Article 397-2)
• Transactions between directors and the company (Commercial Act Article 398)
• Liability of persons directing business execution (Commercial Act Article 401-2)

Executive officers must immediately report to auditors when they discover facts that may cause significant damage to the company.

How is a representative executive officer appointed?

Appointment Method

When there are two or more executive officers, a representative executive officer must be appointed by board resolution. When there is one executive officer, that executive officer becomes the representative executive officer (Commercial Act Article 408-5, Paragraph 1).

Authority of Representative Executive Officer

When a representative executive officer is appointed, there cannot be a representative director, and the representative executive officer has the authority to perform all acts in court and out of court concerning the company’s business, like a representative director (Commercial Act Article 408-5, Paragraph 2, Article 389).

Provisions concerning representative directors of stock companies are applied mutatis mutandis to representative executive officers unless otherwise provided in this Act.

Apparent Representative Executive Officer

Commercial Act Article 395 (Acts of Apparent Representative Director and Company Liability) is applied mutatis mutandis to companies with executive officers (Commercial Act Article 408-5, Paragraph 3). That is, the company is liable to bona fide third parties for the acts of a director who uses a title such as president, vice president, executive managing director, managing director, or other title that could be recognized as having authority to represent the company, even if that director does not have authority to represent the company.

What is the scope of liability for executive officers?

Liability to the Company

Under the executive officer system, directors are in a position to supervise as members of the board of directors, and those who execute business are executive officers, so directors’ liability is supervisory liability, whereas executive officers’ liability is so-called management liability.

The liability of executive officers is mostly the same as that of directors. Executive officers’ liability is divided into liability to the company and liability to third parties. As liability to the company, if an executive officer intentionally or negligently violates laws or the articles of incorporation or neglects his/her duties, that executive officer is liable to compensate the company for damages (Commercial Act Article 408-8, Paragraph 1).

Liability to Third Parties

Regarding liability to third parties, if an executive officer intentionally or through gross negligence neglects his/her duties, that executive officer must compensate third parties for damages (Commercial Act Article 408-8, Paragraph 2).

When an executive officer has both liability to the company and liability to third parties, if other executive officers, directors, or auditors are also liable, they are jointly and severally liable to compensate with other executive officers, directors, or auditors (Commercial Act Article 408-8, Paragraph 3).

Exemption from Liability

Executive officers, like directors, are subject to provisions on exemption from liability (Commercial Act Article 408-9, Article 400). That is, even if an executive officer causes damage to the company, unless there is intent or gross negligence or violation of the duty of loyalty, the company may exempt the executive officer from liability for amounts exceeding six times the remuneration (three times for outside directors) according to the provisions of the articles of incorporation.

Shareholder Derivative Suit

The liability of executive officers is subject to shareholder derivative suits, and provisions concerning suspension of duties and acting executors are also applied mutatis mutandis to executive officers.

What should companies with non-registered officers do?

Separate Procedures Required

If a company currently has de facto executive officers (non-registered officers) and wishes to adopt the executive officer system, separate board resolutions or amendments to the articles of incorporation are required.

However, there is interpretive controversy over whether the articles of incorporation should provide a basis for establishing the executive officer system, with the prevailing opinion being that such a basis is necessary, while some opinions suggest it is possible by board resolution alone.

Difference from Existing Non-Registered Officers

For companies that already have de facto executive officers, the question arises whether these can be regarded as executive officers under the amended Commercial Act. However, these are merely what the company voluntarily had before the amendment of the Commercial Act, and to have executive officers according to the amended Commercial Act, the board must appoint executive officers and a representative executive officer, and registration of the executive officers must be completed after appointment.

Possible Coexistence of Non-Registered Officers

It is interpreted that companies that introduce the executive officer system can continue to have de facto executive officers (non-registered officers) who are not registered. That is, companies can simultaneously have executive officers and non-registered officers in addition to board members.

However, if non-registered officers who are not appointed as executive officers continue, when litigation related to non-registered officers is filed, their liability can be pursued through supplementation of concepts such as de facto business execution directors (Shadow Directors) and apparent representative directors under the Commercial Act.

Can executive officers and directors hold concurrent positions?

Concurrent Holding with Directors

According to the amended Commercial Act, it is unclear whether a director can concurrently serve as an executive officer, but since there is no provision prohibiting this, and considering that during the legislative process, a provision prohibiting concurrent holding of the positions of board chairperson and representative executive officer (CEO) was initially included but ultimately decided not to be included after discussion, it is interpreted that concurrent holding is possible.

In the United States, about 80% of companies allow executive officers to concurrently hold director positions, but the need for separation has been raised after the Enron scandal. In Japan, concurrent holding is explicitly allowed by law.

Concurrent Holding with Auditors or Audit Committee Members

There is also controversy over whether executive officers can concurrently serve as auditors or audit committee members, but in Japan, this is explicitly prohibited.

However, in South Korea, there are no such explicit provisions. It would be contradictory to the purpose of introducing the executive officer system for an executive officer to become an auditor or audit committee member and audit the business he/she executed.

Therefore, supervisory authority over executive officers cannot be exercised effectively, which is interpreted as contrary to the purpose of the executive officer system.

FAQ

Atlas Legal provides various corporate legal services in Songdo, Incheon, South Korea, including corporate governance, introduction of executive officer systems, amendments to articles of incorporation, and board operations. Atlas Legal has practical experience in legal advisory services related to the introduction of executive officer systems, amendments to articles of incorporation, and support for board operations. We provide systematic legal services from preliminary legal advice to system design and organizational refinement, and present comprehensive solutions related to improving corporate governance.