February 26, 2025 5 min to read

(ENG) ESG Survival Business WEEK 5

Written by ESG Team

ESG Management Starting with Governance

Definition of Governance

Governance is not easy to define in a single sentence, but internally, it plays the role of setting the direction and methods for corporate management. Externally, it influences the state, society, and environment, seeking changes that enable sustainable corporate development.

ESG for Small Businesses Starts with Governance, and Governance Starts with Compliance

The most fundamental and essential concept of governance is compliance. Compliance is the most basic system that supports corporate decision-making, ensuring that members are aware of and adhere to laws and internal company regulations.

Benefits of Compliance

• Enables responsible personnel to monitor potential issues and report them to management, mitigating risks in advance.
• Allows for the analysis of incidents when they occur and the implementation of preventive measures to maintain shareholder trust.

How to Implement Compliance

Identifying Legal Risks by Industry

The first step in establishing a compliance framework is for a company to review relevant laws and administrative regulations specific to its industry and conduct regular inspections. It is also essential to manage legal risks at the department level.

Steps to Successfully Operate Compliance

For compliance to be successful, management must recognize its importance and take the lead in ensuring that employees adhere to laws and guidelines.

Key Process for an Effective Compliance System

1. Educate employees and members
2. Enhance employees’ awareness of legal risks
3. Objectively handle problem situations
4. Analyze incidents as part of post-event measures
5. Develop and implement improvement and prevention measures

Importance of Delegation of Authority Regulations

Delegation of authority regulations define the scope of responsibility and reporting lines for personnel, departments, and executives. This is a fundamental method for implementing compliance.

• If the CEO holds full decision-making authority, timely responses may become difficult.
• If operational departments hold full decision-making authority, it may lead to misalignment with the CEO’s management philosophy and increase corruption risks.
• Proper delegation of responsibility and authority is necessary for compliance to function effectively.

Strengthening Governance to Enhance Compliance

Role and Responsibility of Directors in Separating Ownership and Management

If management causes operational issues, directors must intervene immediately to prevent illegal or harmful actions and report them to the general shareholders’ meeting.

Practical Measures for Strengthening the Board of Directors

• Holding board meetings at least once a year without the presence of management.
• Separating the roles of the board chairperson and the CEO.
• Strengthening the independent director system.
• Establishing an ESG committee within the board of directors.

Transforming Ethical Management into Compliance

Utilizing an Internal Monitoring System

For an internal monitoring system to be effective, audits must be independent of management.

• Combining an internal whistleblowing system with an audit system can create an advanced level of governance.

Compliance Issues by Business Growth Stage

Small & Medium Enterprises (SMEs)

Rising Issues of Unfair Trade Practices

Unfair trade practices take various forms. Laws such as the Fair Trade Act, the Subcontracting Act, the Act on the Regulation of Terms and Conditions, the Franchise Business Promotion Act, and the Act on Fair Transactions of Agency Business have been established to regulate them.

Surge in Subcontracting Law Issues

Under the Subcontracting Act, primary contractors must formalize contracts with subcontractors in writing and retain records.

• Prohibits primary contractors from unfairly infringing upon or restricting subcontractors’ interests.

Monopoly, Collusion, and Transactions with Affiliated Entities

As companies grow, regulations on monopolies become stricter, and transactions between affiliated entities require careful attention.

• Medium-sized enterprises must conduct market price research and prepare comparative estimates for each transaction.

Strengthening Consumer Protection Obligations

• Prohibits false and exaggerated advertising.
• Medium-sized enterprises, like large corporations, face regulatory scrutiny for failing to protect consumers.

Strengthening Corporate Data Protection Obligations

• Compliance includes protecting both employees’ and customers’ personal information.

Ensuring Workplace Safety and Employee Protection

• Companies must secure employees’ safety against industrial accidents.
• The Serious Accidents Punishment Act applies to businesses with five or more employees from 2024, extending its scope to all locations under substantial control and management.

Necessity of Trade Secret Protection

• Trade secrets must be safeguarded against both internal leaks and external cyberattacks.
• Companies should classify trade secrets, set access permissions, and monitor data exports.

Startups

Necessity of Business Model Review

Before launching a business in a highly regulated industry, companies must ensure their business model complies with legal requirements. If there are legal challenges, they should seek ways to legally operate within regulatory boundaries.

Importance of Shareholder Agreements Among Co-Founders

Startups should establish clear agreements among co-founders regarding their rights and obligations.

• Failure to do so may lead to complications during investment rounds, as founders may unintentionally make false statements to investors due to undisclosed side agreements.

What Governance is Suitable for Small Businesses?

ESG Management Aligned with Business Scale and Growth Stage

To implement governance effectively, companies must establish a compliance framework suited to their size and growth stage.

• A well-structured compliance system helps businesses continuously manage risks.
• By strengthening the board of directors and internal monitoring mechanisms, companies can enhance transparency in decision-making.

Conclusion: The key is to establish a well-prepared and transparent system from the beginning. As companies grow, they will face increasing regulations, requiring appropriate compliance measures at each stage.