The Labor Director System is a system in which a worker representative directly participates in management decision-making by exercising voting rights as an outside director on the board of directors. Following the passage of the amendment to the Act on the Management of Public Institutions in January 2022, it was mandatorily introduced for public enterprises and quasi-governmental institutions in August of the same year. A non-standing director elected from among workers with three or more years of service, either through the recommendation of the worker representative or by majority vote, participates in the resolutions of the board of directors and bears the authority and responsibilities of a director.
The Labor Director System differs from the existing labor-management council in that, whereas the council remained at the level of information sharing or consultation, the Labor Director System involves directly monitoring management and exercising decision-making authority within the board of directors. The Labor Director System has received positive evaluations for strengthening transparency and the checks-and-balances function, while negative concerns such as reduced decision-making efficiency have also been raised.
[Labor Director System Ⓟ ESG.ONL/ESG Today]
Currently, private companies are not subject to mandatory adoption under the Commercial Act, but discussions continue, centered on the financial sector and some large corporations. In parts of the financial sector, repeated attempts to appoint labor directors through shareholder proposals are being made. This shows that the recognition that companies must reflect the voices of not only shareholders but also a variety of stakeholders is spreading.
Overseas, there are numerous cases in which worker participation on boards has been institutionally established. Germany has institutionalized the participation of worker representatives in the composition of supervisory boards for companies above a certain size, and France also legally mandates the appointment of labor directors for companies meeting certain requirements. Amid such trends, discussion continues on how to view the domestic Labor Director System in comparison with global governance standards.
The Labor Director System is emerging as an indicator for judging the soundness and transparency of governance, going beyond mere labor-management relations. Amid the trend in which global disclosure standards such as ISSB emphasize the disclosure of information on governance structures and decision-making systems, domestic companies are also continuing to deliberate on how to reflect workers’ opinions in management, regardless of whether they adopt the system.
As experience in operating the Labor Director System in public institutions accumulates, discussions surrounding the evaluation and interpretation of the system’s effects will also continue. For companies, an important task is emerging: going beyond the formal adoption of the Labor Director System to formulating a governance strategy that can reflect stakeholder participation in a balanced manner while maintaining the independence and expertise of the board.
by Editor O