The Illusion of Cumulative Voting in South Korea: A Call for a Balanced Perspective

Following the recent second amendment to South Korea’s Commercial Code, cumulative voting has become mandatory for listed companies with assets of 2 trillion won or more. More precisely, the amendment does not require cumulative voting to be conducted automatically; rather, companies must implement it upon request by qualified shareholders. This revised provision will take effect in September 2026.

While mandatory cumulative voting is widely seen as strengthening the rights and interests of minority shareholders, a view I broadly share, I am concerned that this mechanism is increasingly treated as an "absolute good" within the Korean market. Like any other mechanism, cumulative voting has drawbacks that are rarely discussed. To encourage a more balanced assessment among market participants, this article examines how, in the Korean market, the mechanism may fall short of its intended effects and, in some cases, even lead to a deterioration in governance.

First, the original intent of cumulative voting has been effectively superseded by the separate election of audit committee members. When cumulative voting was introduced in 1998, it served a meaningful purpose as many listed companies maintained entrenched control through cross-shareholding, and the audit committee system did not yet exist. Over the past 30 years, however, the landscape of Korean boards has shifted drastically. Under recent amendments to the Commercial Code, at least two directors who will serve as audit committee members must be elected separately, and in such elections the voting rights of the largest shareholder and its related parties are capped, in aggregate, at 3%. In practice, this effectively means that at least two board seats are determined largely by minority shareholders. This represents a more rational alternative, as it requires securing the support of the majority, rather than simply allowing a seat to be secured through cumulative voting. Moreover, as the separate election of audit committee members expands, the incremental governance impact of cumulative voting correspondingly diminishes, creating an inherent paradox.

Second, cumulative voting fails to reflect dissenting voices. Since cumulative voting only aggregates affirmative votes, there is no way to express opposition to a specific candidate. For instance, if four directors are being elected, securing a single seat through cumulative voting theoretically requires a minority shareholder to hold 20% plus one share. Conversely, even if shareholders representing the remaining 80% minus one share view the nominee as inconsistent with shareholder value, they have no effective means to express or block the appointment. In this regard, the shareholders' meeting fails to function as a mechanism for electing the candidate best aligned with shareholder interests.

Third, rather than strengthening corporate transparency or shareholder communication, cumulative voting can incentivize behaviors that undermine sound corporate governance. In the case of the separate election of audit committee members—effectively determined by a minority-shareholder majority, the company has strong incentives to expand communication with investors and improve transparency to gain broader support. In contrast, once a specific shareholder secures a certain threshold of shares under cumulative voting, the company is left feeling helpless. Even if the company maintains constructive relationships with other shareholders and meets their expectations, it has no effective means to prevent the election of a candidate the board considers unsuitable. To manage this risk, the only measures companies may resort to are reducing board size or implementing a staggered board, neither of which improves governance.

Fourth, the primary beneficiaries of cumulative voting will be short-term profit seekers, such as hedge funds. Efforts to place a shareholder-nominated candidate on the board have long been a powerful tool for these groups in pursuing their objectives. While such investors can play a constructive role by introducing market discipline and promoting boards to assess capital allocation better, cumulative voting could become an overly potent lever. To avoid a meaningless and costly proxy contest, boards may choose to settle by granting their demands, often through private arrangements. Because such 'backroom deals' are rarely disclosed, they are difficult for the market to observe, which can ultimately disadvantage long-term shareholders.

As with any mechanism, cumulative voting is not an absolute good for improving corporate governance. As explained above, depending on how it is utilized, it can become a mechanism that triggers conflict and social costs. This does not mean the mechanism should be rejected entirely; it may still be an effective tool for companies with certain structures and circumstances. For example, if the largest shareholder's stake approaches or exceeds 50%, thereby limiting the influence of external shareholders, and the threshold required to secure a board seat via cumulative voting is similar to a majority of the minority, the mechanism can serve as a protective shield. However, for companies where the largest shareholder holds only around 20% or less, such a mechanism may turn the firm into 'easy prey' for short-term profit seekers.

In this light, proxy advisors and investors must maintain a balanced view. Rather than unquestioningly endorsing cumulative voting, they should comprehensively consider various factors, such as shareholding structure, board composition, board effectiveness, governance standards, and shareholder communication, to determine whether it will safeguard minority interests or instead incentivize short-term opportunistic investors.