Stocks for outside directors debated

"Is it ethical for an outside trustee of a company to hold company stocks?"

Pointing out that the Minister of Education Song Ja has derived a huge margin of profit from the stock options he received while serving as outside trustee of Samsung Electronics, the participants in the debate have raised the issue of ethics for outside trustees holding company stocks.

By law, or procedurally, there isn`t any illegality. However, being in a position as a watchdog of the board of directors and executives of the company, such stock holdings can hinder the outside trustee`s impartiality but rather can lead to a conflict of interest between the trustee and the company.

Traditional practice of offering stocks to outside trustees:

In cases where university professors are given posts of outside trustees similar to the case of Minister Song, it is a common practice for them to receive actual stocks and compensatory stocks, making them stockholders of the company. Actually, in the case of Samsung Electronics, not only Minister Song but all the outside trustees at the time as well as auditors were given the same opportunity to obtain company stocks.

For the four occasions of capital increase compensation from 1994 to 1998, Minister Song received 7,000 shares of actual stocks for his service as an outside trustee. All four of the Samsung Electronics¡¯ outside trustees and the two auditors received this same compensation package.

The problem of paying with stock possession arises from the fact that the outside trustees and auditors did not contribute any amount of their personal fund but came to the possession through money lent them by the Samsung company.

It can be suspected that Samsung Electronics used this stock offer strategy to reign in the outside directors to their side. If they had obtained the stocks normally, they would have made a profit of 1.6 billion won each in the two years through margin difference.

By law or procedurally, nothing amiss:

Just because an outside director holds stocks in a company does not break the law nor the procedural policies. As the actual stocks are subject to the decisions of the board of directors, they can be offered to anyone, be it a company customer or investor, with the approval of the board of directors.

"The company allows the purchase of actual stocks for those who have greatly aided in the management of the company,¡± Samsung Electronics vice president Suh Jin-Seok said. ¡°However, lending them money to buy the stocks crosses the ¡®consideration compensation¡¯ line and points to some ulterior motives.¡±

Yet the Financial Supervisory Service stressed that there isn`t any illegality involved. "There may be a moral hazard in such a practice, but procedurally, it is not illegal," an FSS source said.

Concerning outside trustee management:

In other countries, it is rare for outside directors to receive stocks as compensation for their work. In foreign countries, there isn`t such a practice of priority given to the long-time stockholders for stock offerings. Mostly, stock offerings are made publicly where all have equal rights and chances. However, foreign firms sometimes do offer stock options on the store of stocks in company possession.

"Although outside directors do have a responsibility to represent the stockholders, as they also have the responsibility to watch for moral hazard in the management, there is a problem when they themselves hold stocks," the assistant director of the Stock Market Research Institute said.

"It is a conflict of interest for the outside directors to use the opportunity of their positions to increase personal wealth," A participant in the debate said. "It is worse for a public official to have been a part of such a practice."