■ Introduction to the paper
- Title: Three Essays on Corporate Governance
- Author: DR Yang
- Source: Seoul National University doctoral thesis, 2017
- Original text: https://s-space.snu.ac.kr/handle/10371/119397
■ What the paper reveals — 3 demonstrations
[1] Outside directors are not monitors
- Outside directors selectively do not participate in board decisions that may be problematic.
- The purpose is not to protect minority shareholders, but to minimize one’s own legal risks.
- Conclusion: The outside director system does not keep controlling shareholders in check.
[2] Controlling shareholders use listed companies as real estate channels (key)
- Controlling shareholders dispose of or acquire their real estate through listed companies
- The transaction price is set to benefit only controlling shareholders → Minority shareholders suffer losses
- This is tunneling: the act of controlling shareholders transferring corporate assets for personal gain.
- Empirical analysis using data from Korean public companies → Confirmation of repetitive and structural patterns
[3] The CEO knows the company will fail
- CEOs of private companies move closer to headquarters when corporate profitability deteriorates
- The behavior of recognizing and responding to worsening profitability in advance
- Indirect evidence showing information asymmetry between insiders and outsiders (individual investors)
■ Empathy: This is a structure, not an exception.
- What the paper proves is not just a few cases of fraud.
- This is a structural pattern that is repeatedly observed in Korean corporate governance.
- It is within the law for a controlling shareholder to make profits at the expense of minority shareholders.
- That's why it's more dangerous. This is because it is not clearly revealed in the financial statements.
Typical sequence of controlling shareholder tunneling:
· Controlling shareholders move first (real estate, CB, affiliate transactions)
· Outside directors pretend not to notice (selective absence)
· The board of directors is replaced (filled with loyal people)
· An announcement is made (it’s already too late)
· Individual investors are the last to suffer
■ Connection with relational risk
- Tunneling necessarily involves a change in relationships.
- Change in board composition → Increase in directors close to controlling shareholder = Governance Risk signal
- Increased transactions with affiliates and specially related parties = Human Risk Signal
- Change in CB or asset trading structure = Funding Risk signal
- RaymondsRisk captures these three relationship changes as leading indicators
- When the controlling shareholder begins to rob the company → the network of relationships changes first.
■ Conclusion
- Controlling shareholders always know before minority shareholders.
- And it moves first with the preceding information.
- Traces of that movement remain in the network.
- While individual investors are looking at financial statements, controlling shareholders have already left.
■ Reference materials
- DR Yang, Three Essays on Corporate Governance, Seoul National University doctoral thesis 2017: https://s-space.snu.ac.kr/handle/10371/119397
- Financial Supervisory Service DART (Electronic Disclosure System): https://dart.fss.or.kr
- RaymondsRisk White Paper: https://www.konnect-ai.net/whitepaper
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RaymondsRisk - Relational Risk Analysis
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