Advisory Case on Executive Remuneration Limits, Performance Bonus Criteria, and Reorganizing Board Meeting Minutes

1. The Client's Situation

In operating its executive remuneration system, the client experienced internal confusion regarding the remuneration cap under its articles of incorporation, the division of roles between the board of directors and the general meeting of shareholders, and the criteria and procedures for paying performance-based incentives. In particular, because the method of determining the remuneration of directors and auditors was unclear, the possibility of impairing the auditor's independence was raised, and a structure of paying incentives based on provisional settlement profits posed the risk of conflicting with the existing executive remuneration rules. There was also a need for a practical standard as to the level of detail to which executive remuneration resolutions should be recorded in the minutes of the board of directors.

Your Legal Team comprehensively reviewed the articles of incorporation, the executive remuneration rules, and the provisions of the Commercial Act, and proposed a direction for amending the articles of incorporation so that the structure—whereby the executive remuneration cap is set by the articles of incorporation or the general meeting of shareholders, and the calculation of specific amounts is delegated to the board of directors—would be clearly reflected. In addition, we organized the purpose of the rule requiring that the agenda items for director remuneration and auditor remuneration be resolved separately, and, with respect to the determination of auditor remuneration, we proposed a neutral alternative that would be desirable from a corporate-governance standpoint, separate from the question of legal violation. Regarding performance-based incentives, on the premise that payment based on provisional settlement profits is itself lawful, we provided guidance on a direction for setting criteria to manage the risk of settling the difference against the final settlement, and we provided practical examples of the minimum and appropriate level of detail required when preparing board minutes concerning executive remuneration resolutions.

By overhauling its articles of incorporation and executive remuneration rules, the client was able to clarify the structure for determining executive remuneration and to simultaneously secure the auditor's independence and the stability of its governance structure. In addition, by clarifying the criteria for paying performance-based incentives, it reduced the possibility of disputes in the settlement process, and by establishing standards for preparing board minutes, it laid a foundation for securing procedural legitimacy even in future audit or dispute situations.