September 30, 2003
KT&G CORPORATION
Analysts:
Calvin Wong
Hong Kong
Tel: +852 2533 3501
Email: Calvin_Wong@
standardandpoors.com
Katrina Tai
Hong Kong
Tel: +852 2533 3538
Email: Katrina_Tai@
standardandpoors.com
Hyung Suk Kim
Korea
Tel: 82-2-2122-4407
Nam-Soo Kim
Korea
Tel: 82-2-2122-4321
Ga-Hyun Song
Korea
Tel: 82-2-2122-4307
*For important information
on Corporate Governance
Scores, including Country
Factors, please see the last
page of this report.
Korea
Overall Company Score (CGS) CGS–7 (maximum CGS–10)
Sovereign Credit Rating* 'A-' foreign currency; 'A+'
local currency
Component Scores:
Ownership structure and external influence Strong
Shareholder rights and stakeholder relations Moderate
Transparency, disclosure & audit Moderate
Board structure and effectiveness Strong
Executive Summary
KT&G’s overall score of 7, while indicative of a strong corporate governance standard, is also
reflective of a company in transition. The company’s governance policies and practices will continue
to evolve as it transitions from a domestically focused state-owned monopoly into a fully privatized
business competing in a global marketplace. A key positive governance feature is its simple and
reasonably transparent ownership structure. Following the recent completion of the privatization
process, KT&G’s shares are widely held with no major block holders. However, a significant
proportion of the shares are in the form of global depositary receipts (GDRs) and held under the
names of nominees whose beneficial owners cannot be positively identified. Notwithstanding the
potential influence of the government as well as non-financial stakeholders such as the labor union
and tobacco interest groups, KT&G is not currently subject to any significant influence from
external parties whose interests might conflict with those of shareholders.
KT&G’s shareholder meeting and voting procedures generally facilitate shareholder participation in the
shareholders meetings. The company provides sufficient notice of meetings and quality information to both
domestic and international investors. Voting procedures, however, are relatively unstructured given the
absence of voting by poll and third party verification of the voting results. However, such voting procedures
are commonplace in Korea, and there is no evidence to date that shareholder rights have been compromised
as a result. Shareholder rights are generally provided ample protection by the Commercial Code and
KT&G’s Articles of Incorporation. However, loopholes in the provisions granting preemptive rights and the
absence of a clearly defined long-term dividend policy represent potential governance problem areas. In
practice, however, KT&G has not diluted existing shareholders through new share issues and has no plans
to do so. While KT&G announces annually its near-term dividend payment objective and has paid
dividends on a regular basis, it has not articulated a detailed long-term payout policy.
 The quality, timeliness, and accessibility of KT&G’s public information disclosure are deemed
good by global standards but only with regard to the Korean language content. The English
language content is improving in both quality and accessibility but is still below par, particularly
for a company with a significant proportion of foreign ownership (29%). KT&G does not
provide financial statements prepared under an internationally recognized accounting standard or
a reconciliation of the Korean GAAP based financials with an international standard. This raises
concerns about financial transparency from the standpoint of foreign shareholders. Given the
company’s very recent privatization and transition into a more globally focused enterprise,
however, we expect to see KT&G continually upgrading its English language disclosure over
time. KT&G’s strong and improving audit process will drive the quality of disclosure going
forward. The presence of an empowered Audit Committee and the transparency of the most
recent process for selecting the new external auditor (KPMG Samjong) reflect positively from a
governance standpoint. However, privatization has hastened the need for stronger internal audit
and risk management processes that are currently at an early stage of development.
KT&G’s board structure provides a strong platform for representing the interests of all
stakeholders. It features a significant majority of non-executive directors and board level
committees for the audit, remuneration, and public services functions. KT&G’s Articles of
Incorporation and Corporate Governance Charter provide detailed direction regarding board
functions, composition, committees, and operations as well as director appointments, roles,
responsibilities, authority, qualifications, and independence. However, the structures and
procedures for some committees, particularly those relating to director nominations, are still
evolving. We expect to see continued evolution of KT&G’s board structure and processes as a
natural outgrowth of privatization and globalization. The board already demonstrates a high
level of independence and engagement, particularly on the part of the NEDs. Our interviews of
board members and a review of board meeting minutes reveal high levels of attendance and
participation in the board and committee meetings by the board members, including the NEDs.
Furthermore, the board has demonstrated strong leadership in guiding KT&G through the
privatization process. One area of concern, however, relates to the alignment of executive and
director financial incentives with the enhancement of long-term shareholder value in a changing
business environment. While existing executive compensation packages do contain both short
term and long-term performance-based elements, NEDs receive no monetary compensation for
their work other than expense reimbursements (albeit this is common amongst Korean
companies). Furthermore, KT&G’s NEDs currently are not subject to a formal performance
evaluation process. This situation gives rise to concerns that the company may not be able to
continue recruiting highly talented individuals from diverse backgrounds to the board and
maintain the board’s effectiveness in a more global and competitive business environment. The
board is also considering the addition of equity-based components to the executive compensation
packages. Such a move would merit close scrutiny to assure that the compensation packages
continue to appropriately align management’s interests with those of shareholders.

KT&G CORPORATION- COMPANY PROFILE

KT&G Corporation was established on April 1, 1987, as Korea Monopoly Corporation, a
wholly owned enterprise of the Korean Government. KT&G’s principal business is the
manufacture of tobacco products, and the company currently holds a 78.8% share of the
Korean cigarette market. Pursuant to the Management Reform and Privatization of Public
Enterprises Act, the company listed its stock on the Korea Stock Exchange in 1999 and
embarked on a privatization program that was successfully concluded in 2002. As of
December 31, 2002, KT&G employed 4,635 employees and had 14 regional headquarters and
146 branch offices throughout Korea.

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 2

 Table 1. KT&G Corporation Consolidated Financial Highlights (December 31, 2002 and 2001)
2002(KRW) 2001(KRW) 2002*(US$)
Net Sales 2,030,612,391,357 1,869,041,671,008 1,691,613,122
Gross Profit 1,007,344,467,029 816,574,741,600 839,173,998
Operating Income 586,305,430,687 488,714,271,509 488,425,051
Net Income 348,800,744,306 333,033,571,195 290,570,430
Total Assets 3,967,935,026,213 3,733,358,454,531 3,305,510,685
Total Liabilities 1,983,767,504,607 1,119,220,319,009 1,652,588,724
Total Shareholders’ Equity 1,984,167,521,606 2,614,138,135,522 1,652,921,961
* Converted to U.S. dollars at the rate of KRW1,200.40 to US$1.00.

Component 1: Ownership Structure and External Influence

Component Score—Strong
1.1. Transparency of Ownership
The ownership structure is simple and reasonably transparent. Regulatory requirements of
Korea demand a thorough disclosure of share ownership. However, the company cannot
identify the beneficial holders behind its global depository shares (GDS).

Key Analytical Issues Assessment

Share structure is simple, as there is only one class of shares outstanding. Positive
Parties whose direct or beneficial ownership accounts for 5% or more of outstanding shares are Positive
subject to strict reporting requirements prescribed by domestic regulators.
GDS ownership, which accounts for 14.7% of total issued shares as of June 30, is not actively Negative
monitored; hence, beneficial holders of GDS cannot be identified with reasonable accuracy.

As of June 30, 2003, KT&G had issued only one class of shares; these were 181,442,497
shares of common stock. Among these, 121,937,374 were outstanding shares while
59,505,123 were held in the form of treasury shares. 95,266,117 of the outstanding shares
were listed on the Korea Stock Exchange (KSE) and the remaining 26,671,257 shares were
listed on the Luxembourg Stock Exchange (LSE) in the form of global depository receipts
(GDR). The GDRs are registered under the Bank of New York and are held through nominee
accounts. All outstanding shares, including GDR, are provided equal ownership rights under
the Korean commercial code. Due to their LSE listing, KT&G must follow the regulatory
requirements of Luxembourg as well as those of Korea’s Financial Supervisory Service.
As of June 30, 2003, overseas investors owned 52,999,208 shares equalling29.21% of total
issued shares, of which GDRs comprised 14.7% of total issued shares while the remaining
14.5% was held in KSE listed common shares.
Korean regulations require disclosure by KT&G of all share ownerships of 5% or higher,
and KT&G has abided by these requirements. Kookmin Bank maintains a list of the owners of
KT&G shares on the Korea Stock Exchange for use by KT&G during annual shareholders
meetings. Kookmin Bank is one of three institutions that are authorized in Korea to provide
this kind of service. On the other hand, the monitoring of GDR ownership lacks accuracy as
KT&G relies solely on unofficial monitoring reports that are prepared on a quarterly basis by
the depository, the Bank of New York.
As of March 31, 2003, shares held by KT&G’s executive directors were relatively
insignificant, and KT&G did not maintain any cross-holdings with affiliates. As of the same
date, KT&G had title to 61,874,371 shares. These shares, which are not afforded voting rights
under the Korean commercial code, were held in the form of either treasury shares or through
a treasury shares fund.

September 30, 2003 • www.standardandpoors.com 3

Table 2: Major Shareholders as of Mar. 31, 2003
Name Total Outstanding Shares Owned
Industrial Bank of Korea 10.75 %
Daehan Investment Trust 7.45 %

Securities Employee Stock Ownership Association 6.40 %

Japan Tobacco Inc. 1.58 %

Korean Nation Pension Corporation 1.45 %

Mutual Discovery Fund 1.04 %

1.2. Ownership and External Influences

Although the government’s taxation policies toward tobacco products directly affect KT&G
and its customers, there is no evidence of any undue government influence. The privatization
process, which KT&G completed in 2002, has left the government with no direct ownership
stake in the company while keeping ownership concentration low. However, potential pressure
groups such as domestic tobacco farmers and the Employee Stock Ownership Association
(ESOA) will require continued attention.

Key Analytical Issues Assessment

Shares are widely held. Only one party holds a stake exceeding 10% while only two parties hold Positive
stakes exceeding 5%.
The company’s privatization process is complete and the government does not own any shares. Positive
Cumulative voting allows for minority representation. Positive
Due to the nature of the tobacco business, activities of political special interest groups and the Neutral
government need to be monitored closely for undue influence.

KT&G’s shares are widely held with only three parties holding a stake exceeding 5%. As of
March 31, 2003, KT&G’s largest and most significant shareholders were the Industrial Bank
of Korea, Daehan Investment Trust Securities, and the Employees Stock Owner Association
(ESOA), with holdings of 10.75%, 7.45%, and 6.40% of total outstanding shares respectively.
Although the Korean government has a history of exercising a significant amount of
influence over the company, there is little evidence of such influence in recent years, especially
since the completion of KT&G’s privatization in 2002. As of March 31, 2003, the Korean
government did not hold any direct stake in KT&G. Government shares were sold to the
private sector via domestic public offerings, international CB issuances, and international GDR
issuances. However, the government is indirectly connected to KT&G through the Industrial
Bank of Korea and Daehan Investment Trust Securities. Table 3 below provides a description
of KT&G’s privatization process.
The amendments to the Tobacco Business Law on July 1, 2001 resulted in many changes
within the Korean tobacco industry, including the abolition of KT&G's monopoly over
domestic cigarette manufacturing and the termination of KT&G’s obligation to purchase
domestic tobacco leaves. Prior to this amendment, the government required KT&G to obtain
its approval in order to increase product prices. Under the amended law, KT&G is only
required to provide six days advance notice of price changes to the government. This reporting
requirement for price changes is applied to KT&G and all of its competitors. Despite these
changes, the level of taxes levied on tobacco products is high enough such that changes in the
government’s taxation policies can impact KT&G and the demand for its products.

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 4

Table 3: Privatization of KT&G
No. of Shares Involved
Timing Type of Transaction in Transaction
Sep., 1999 The government and IBK liquidate shares following KT&G’s 34,369,411
listing on the KSE
Dec., 2000 Int'l EB issued by IBK 18,999,985
Oct., 2000 GDR issued by the government and IBK 22,700,000
Oct., 2001 Int'l CB issued by KT&G (backed by shares KT&G repurchased 15,200,000
from the Government and IBK)
Jun., 2002 IBK, KDB and KEXIM liquidate shares 9,234,370
Jun., 2002 Domestic CB issued by KT&G (backed by shares KT&G 27,765,630
repurchased from IBK, KDB and KEXIM
Sep., 2002 Shares bought back from KDIC and cancelled 9,549,400
Oct., 2002 GDR issued by IBK, KDB, KEXIM 17,908,329
Oct., 2002 Shares bought back from IBK, KDB and KEXIM 8,427,820
IBK; Industrial Bank of Korea
KDB; Korea Development Bank
KEXIM; The Export-Import Bank of Korea
KDIC; Korea Deposit Insurance Corporation

Component 2: Shareholder Rights and Stakeholder Relations

Component Score—Moderate
2.1. Shareholder Meeting and Voting Procedures
Procedures for calling and noticing shareholders meetings are well articulated within the
Korean legal code and KT&G’s Articles of Incorporation. There is evidence that investors have
been afforded sufficient information and time to cast informed votes at shareholders meetings.
Conversely, voting procedures are not stipulated in sufficient detail within any document or
law and thus remain an area of concern.

Key Analytical Issues Assessment

Written notices of shareholders meetings are mailed to all shareholders, including GDS holders. Positive
At least two weeks prior to meetings, notices are posted on the company’s Korean website and Positive
in daily Korean newspapers. For holders of GDS, the depository, The Bank of New York, is
noticed via fax three weeks prior to meetings.
Past meeting notices contained sufficient information for investors to address agenda items. Positive
Cumulative voting is allowed. Positive
Proxies may be appointed to attend and vote. GDS cannot be voted without instruction from their Positive
beneficial holders.
Investors can request access to the company’s documents. However, the request must be Negative
submitted in writing, and the company may not allow general access to all documents.
Although certain agenda items require notarization, third party verification of voting results is not Negative
a requirement and, for the most part, voting procedures at meetings are relatively unstructured.

Shareholders meetings are held at KT&G’s head office in Taejon, Korea. KT&G takes care to
notify all shareholders in writing, including GDR holders. As a precaution against mailing
errors, KT&G also posts notices on their website and Korean daily newspapers at least two
weeks prior to meetings. For the GDR holders, KT&G sends the depository (Bank of New
York) a fax notice three weeks prior to meetings. Written notices are mailed well in advance
and contain information necessary for shareholders to make informed decisions on agenda
items. Shareholders, including GDR holders, may appoint a proxy to attend and vote at
shareholder meetings, and all votes cast in absentia are given equal weight. Under the

September 30, 2003 • www.standardandpoors.com 5

Commercial Code of Korea, shareholders with more than 1% of voting rights can request
cumulative voting by notifying the company at least seven days prior to a shareholders
meeting. Shareholders of KT&G, however, have yet to make this kind of request.
The Commercial Code also allows investors access to the company documents upon
submitting a written request. In order to deny access, the company must prove the
inappropriateness of a request; hence, the burden of proof is borne by the company. However,
the Commercial Code also requires that the purpose of the request be precise enough to
identify specific documents relevant to the inquiry. The company is required to present only
those documents that are considered relevant. By disallowing general access to all documents,
the law may detract slightly from the effectiveness of an investor’s examination
Voting procedures are not articulated clearly in either the Articles of Incorporation or the
Korean legal code. In practice, a system where motions are passed when no objections are heard
is used to decide most agenda items at shareholders meetings. When motions are contested, an
alternative voting method for arriving at a final decision can be chosen at the meeting amongst
shareholders. While the deliberation results regarding certain agenda items require notarization -
such as the appointment and removal of CEOs, directors and auditors; the cancellation of shares;
the amendment of the number of authorized shares; and the issuance of convertible bonds - the
presence of an independent third party to verify voting results is not stipulated as a requirement.
The unstructured nature of the deliberation process at KT&G’s shareholders meetings may
present opportunities for abuse. However, there is no evidence that any party, including KT&G,
has ever attempted to take advantage of the meeting procedures currently in place.

2.2 Ownership Rights and Takeover Defenses

Provisions related to the safeguarding of shareholders’ financial rights are found mostly within
the Korean Commercial Code. Although the levels of authority conferred upon shareholders
and shareholders meetings by these provisions are relatively comprehensive, some investor
rights are limited compared to those offered to investors of other countries. However, some
significant decisions have not been clearly reserved for shareholders meetings, and KT&G has
yet to develop a detailed articulation of its long-term dividend policy. There is no evidence of
any take-over defenses at KT&G, although the Fair Trade Act of Korea prohibits KT&G’s
competitors from holding stakes exceeding 15%.

Key Analytical Issues Assessment

Minimum share ownership thresholds exist for calling emergency shareholders meetings and Positive
submitting agenda items.
The BOD does not have the right to veto agenda items and/or shareholder meeting requests Positive
submitted by minority shareholders.
Only a single class of shares has been issued, with each share conferring the right to cast one vote. Positive
The Articles of Incorporation govern the number and classes of shares allowed to be issued. Positive
Shareholders meetings dictate the content of the Articles of Incorporation.
The Korean Commercial Code specifies the types of agenda items reserved for shareholders meetings. Positive
The Board must approve major related party transactions and report them at the next Positive
shareholders meeting.
KT&G provides an annual statement detailing its intended near-term dividend payment; however, See Comments
it does not provide a detailed articulation of a long-term, quantifiable dividend payout policy.
Shareholders have preemptive rights, albeit with certain exceptions allowed. See Comments
The Articles of Incorporation contain no explicit anti-takeover defenses. However, domestic or Negative
foreign competitors cannot hold stakes exceeding 15% pursuant to the Fair Trade Act of Korea

Ordinary general meetings of shareholders are held annually in March. Emergency shareholders
meetings may be called through a board resolution or at the request of shareholders representing at
least 1.5% of outstanding shares. Shareholders with holdings of 0.5% or more may submit an agenda
item for shareholders meetings. Although the board may elect to reject agenda items submitted by
shareholders, such decisions must be based upon criteria prescribed in the Securities Exchange Act.
The criteria are relatively fair and precise. However, one of the criteria places the burden on the board
to decide on the practicality, feasibility, and/or appropriateness of a submitted agenda item. To date,
small shareholders have not attempted to call an emergency shareholders meeting.

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 6

 KT&G’s shares can be readily purchased on the Korea Stock Exchange or the Luxembourg
Stock Exchange through securities houses and other financial institutions. KT&G’s shares
trading on the Korea Stock Exchange are deposited with Korea Securities Depository (KDS), a
company incorporated under the Securities Exchange Act of Korea. KDS is the central
securities depository in Korea and is owned by a diversified group of Korean financial
institutions. KT&G’s GDRs are registered with the Bank of New York.
The Articles of Incorporation authorize the issuance of two classes of shares - common shares
and preferred shares. KT&G may issue both common and preferred shares up to limits prescribed
within the Articles through a resolution of the board of directors. For common shares, this limit is
800,000,000. All common stocks authorized for issue are afforded equal voting rights in accordance
with the Commercial Code. Preferred shares are non-voting, and rights conferred upon such shares
are clearly articulated within the Articles of Incorporation. Shareholders dictate the types of shares
that KT&G issues by exercising control over the content of the Articles of Incorporation.
Other decisions reserved for shareholders meetings, as per the Commercial Code, include the
election and removal of directors and auditors, the allocation of funds for directors’ and auditor’s
compensation, the approval of financial statements, the endorsement of a company’s
reorganization plan or changes to its principal business, and the approval of dividend payment
amounts. The scope of authority conferred upon shareholders meetings is comprehensive enough
to ensure that most of the essential financial rights of shareholders are adequately protected.
Shareholder dilution is a potential risk because only a fraction of the authorized issuance limit for common
shares has been exhausted to date, thus delegating to the board the authority to increase several fold the number
of outstanding shares. Although KT&G’s Articles of Incorporation grant shareholders preemptive rights,
dilution risk still exists given certain exceptions whereby the company can issue new shares and circumvent such
rights. The Articles of Incorporation define these situations in imprecise language, allowing most public and
private share issuances to be made without the offering of preemptive rights. The Commercial Code is equally
vague, as it only requires such situations to be defined within the Articles and to be necessary for the company to
attain its operational objectives. While the Articles give KT&G considerable leeway in this regard, the company
confirms that it does not have any plans to raise capital.
Furthermore, room for improvement can be found in KT&G’s dividend policy, as a detailed
articulation of a long-term, quantifiable payout policy does not exist. However, KT&G does
inform the public in April of each year of the targeted current year dividend payment in terms
of payment per share. The Articles of Incorporation do provide details regarding the timing of
payments and the dividend approval process. However, the company does not disclose a
specific long-term payout target or calculation. Although this is the prevailing practice in
Korea, and KT&G pays out dividends on a regular basis, the actual dividend amounts paid do
not reveal a consistent trend or payout policy. Over the past eight years, dividend payouts have
ranged from KRW 500 – 1,400 per share. KT&G did pay KRW 1,400 per share in both 2001
and 2002, however, and has announced its intention to pay this same amount in 2003.
The Articles lack provisions for controlling important internal or related party transactions
at the board and/or shareholders meeting level. Specifically, the absence of such provisions puts
the burden on the management and the board to assure that transactions with the related
parities are reviewed before the fact and to assure that they are conducted on an arms-length
basis. However, the Security Exchange Act requires that major related party transactions must
be approved by the Board and reported at the next shareholders meeting. A major transaction
is defined as being equal to or greater than 1% of total assets or total sales. A transaction
which causes the aggregate annual business with the transaction counterparty to become larger
than 1% of total assets or total sales is also considered a major transaction for purposes of this
requirement. Related parties are broadly defined as the largest shareholder, parties having a
30% or higher stake, and/or parties that exert influence over major managerial decisions.
There is no evidence of any explicit take-over defenses at KT&G. Pursuant to the Fair Trade
Act of Korea, however, industry competitors (domestic or foreign) cannot hold a stake in
KT&G exceeding 15% or become KT&G’s largest shareholder. This provision represents a de
facto takeover defence that potentially could deprive shareholders of the right to approve an
acquisition that they may deem to be favourable. For the most part, this regulation is applied
to KT&G in order to prevent the advent of a monopolistic player in the Korean tobacco
market. As of December 31, 2002, KT&G occupied 78.8% of the Korean cigarette market.

September 30, 2003 • www.standardandpoors.com 7

2.3 Stakeholder Relations
KT&G has a board subcommittee, called the Public Services Committee, in place to manage
relationships with its employees, customers, suppliers, and local communities. The committee
is also responsible for developing the company’s code of ethics.

Key Analytical Issues Assessment

A separate subcommittee is responsible for managing relationships with non-financial Positive
stakeholders.
There have been no major problems with non-financial stakeholders. Positive

While it is difficult to find Korean companies that establish a separate board subcommittee to manage
relationships with non-financial stakeholders, KT&G is exceptional in this regard. Established in May
2001, the Public Services Committee at KT&G has played an active part in managing such
relationships, including those with employees, customers, suppliers, and local communities.
Since 1994, KT&G has engaged in a wide range of civic activities in the areas of public
welfare, public health, education, environmental protection, and youth guidance. From 1994 to
2001, KT&G contributed KRW 84.3 billion to public welfare programs. Its programs included a
KRW 5 billion fund for unemployment assistance, a computer equipment donation campaign for
the disabled, and a program which pays for treatment received by child leukemia patients.
An example of the Public Services Committee’s effectiveness can be found in KT&G’s
relationship with its labor union, which has never gone on strike. This is rare in Korea where
labor unions at public enterprises or at newly privatized enterprises are traditionally very
influential and frequently use strikes as a tactic during negotiations with management.
This committee is also responsible for developing the company’s code of ethics. KT&G’s
Code of Ethics, Directors Code of Ethics, and Charter of Ethics were developed because of the
Public Services Committee’s active oversight. In July 2003, KT&G also announced its
Corporate Governance Charter, another product of this committee.
The number of legal suits pending against KT&G is small, and the largest amount being
claimed by these suits is KRW 307,000,000.

Component 3: Transparency, Disclosure & Audit

Component Score—Moderate
3.1 Content of Public Disclosure
KT&G’s public disclosure, especially the Korean content, is extensive. However, the company’s
financials are not produced using an internationally recognized accounting standard.

Key Analytical Issues Assessment

Financial statements are produced according to Korean GAAP. However, a conversion to U.S Negative
GAAP or IAS is not made nor is a reconciliation with an international standard provided.
Related party transactions are disclosed fully and clearly on a quarterly basis in Korean language. Positive
Management’s discussion of its operating strategy and the business environment is extensive. Positive
The company has a separate charter for corporate governance, and its Corporate Governance Positive
Policy Statement is disclosed.
Remuneration for executive and non-executive directors is not disclosed on an individual basis. Negative
In Korea, a company is required to disclose any investment made towards improving the environment. Positive

Management’s disclosure of the company’s financial results, operation, business environment,

long-term vision, and strategy is extensive. However, much of this disclosure is made only in
Korean, thus limiting the amount of information accessible to non-Korean speakers. This issue
is discussed further in section 3.2.
KT&G discloses its financials through the company website, its annual reports, the LSE
website, the Korean Financial Supervisory Service (FSS) website, and various news services
such as Bloomberg and Reuters. Among these, LSE only receives an English version of
KT&G’s year-end financials. The annual financial statements and the annual consolidated

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 8

 financials are audited, while the quarterly financials are not. All of these are prepared only
under Korean GAAP; a US GAAP and IAS conversion or reconciliation thereof is unavailable.
The company’s Korean website also provides KT&G’s Corporate Vision and Mission
Statement, Corporate Governance Policy Statement and Code of Ethics. Alongside these
disclosures, KT&G offers information regarding the company’s ownership structure, major
shareholders, background of board members, press releases, and company events. The company
keeps at the company head office for public inspection its records of the shareholders meetings.
Regarding social and environmental reporting, Korean GAAP requires the company to
disclose in the auditor’s report any investments made towards improving the environment.
This includes the company’s policy towards the environment, safety or accident related issues,
expenses incurred towards environment improvement facilities, the amount of resources or
energy used, and the amount of waste produced.

3.2 Timing of and Access to Public Disclosure

The level of timeliness and accessibility of KT&G’s public disclosure is very high, especially
from a domestic investor’s perspective. However, accessibility for international shareholders is
somewhat limited, as some information is not translated into English while other information
is translated but offered only through the company’s Korean language website.

Key Analytical Issues Assessment

Annual reports are produced on a timely basis and distributed simultaneously to domestic and Positive
international investors.
The company publishes Korean language financial reports on a quarterly basis. Positive
KT&G emails English language financials on a quarterly basis to those overseas investors whom the Neutral
company can identify. However, these financial statements are not published on KT&G’s website.
The company abides by domestic disclosure regulations, which include the Korean Fair Neutral
Disclosure Rule. However, continuous and fair disclosure is only offered in Korean.

The company abides by domestic disclosure regulations, which include the Korean Fair
Disclosure Rule. The Fair Disclosure Rule was instituted by the Korea Securities Exchange to
eliminate information asymmetry within the securities markets. Fair Disclosure is required
when company insiders make available information to certain parties before making timely
public disclosure. Information subject to the Fair Disclosure obligation fall under four
categories. These are the company’s business plan and strategy, business outlook, operational
results for the fiscal year, and information subject to timely disclosure.

Table 4: Information subject to Fair Disclosure

Category Disclosed Information
Business plan and strategy - Business plan or strategy for the next three years- New developments in its
business and operation, including strategic alliances and new technology
Business outlook - Business outlook for the next three years
Operational results for the - Sales and earnings for the previous quarter and the company's fiscal year to
fiscal year date- Other information related to such sales, earnings and operating results
Information subject to timely - Information that has yet to be disclosed through timely disclosure
disclosure
KT&G also makes timely quarterly filings to the Financial Supervisory Service (FSS), which
include quarterly financials. Information relating to the company’s financial results,
operations, and the business environment is accessible to the public through the FSS website.
Among the various mediums through which KT&G makes its disclosures, its Korean website and the
FSS website provide the most information. However, despite the high levels of disclosure achieved
through these two sources, it must be noted that nearly all of this information is in Korean. English
translations are limited to the company’s annual reports, annual financial statements, and certain
presentation materials prepared for foreign investors. The company’s English website, in particular, needs
to be upgraded if it is to advance KT&G’s efforts toward disclosure. At present, the English website only
offers a brief introduction to the company while carrying none of the aforementioned English content.

September 30, 2003 • www.standardandpoors.com 9

 Records of the company’s shareholders meetings are kept for public inspection at the head office, and
copies of the company’s incorporation documents are accessible through each of the branch offices.

3.3 The Audit Process

The presence of an empowered Audit Committee and the existence of a transparent selection
process for external auditors enhance the integrity of KT&G’s audit process. The external auditor
appears to be sufficiently independent with no non-audit engagements. However, the internal audit
process does not currently include a systematic audit of the company’s financial statements

Key Analytical Issues Assessment

Financial statements are audited by KPMG Samjong Accounting Corporation, a member company Positive
of KPMG.
The external auditor was selected via an open tender process. Positive
KPMG Samjong provides no other services beside those it provides as external auditor. Positive
Korean regulations require companies to retain the same external auditor’s services for at least Positive
three years.
The audit committee is composed of a majority of independent directors, all of whom are Positive
financially literate. One member has experience in financial statement preparation.
The audit committee actively oversees the relationship with KPMG Samjong. Positive
Financial statements are not subject to systematic audits by the company’s Internal Audit Office. Negative
The company discloses the fee paid to the auditor. Positive
The company does not possess any written guidelines regarding risk management. Negative

The existence of the Auditor and Executive Director position at the Board level, which is a requirement
under Korean law, enhances the independence and integrity of the audit process. Under this structure, the
internal audit function does not report to the finance function but instead reports directly to the Board. The
Internal Audit Office performs thirty-three different audits according to KT&G’s 2003 audit schedule -- five
general audits, eleven special focus audits, one in-depth audit and sixteen unscheduled audits. However, most
of these audits are oriented toward compliance issues, and a systematic audit of financial statements is not
included in the audit schedule. The latter may be due to a lack of accounting expertise within the Internal
Audit Office. This kind of expertise may not have been necessary in the past as pre-privatized KT&G was
subject to audits by the Korean congress and the Board of Audit and Inspection, a government agency. For
the most part, KT&G relies on its external auditor to audit financial statements.
KT&G’s Audit Committee is composed of one executive director and three non-executive
directors. The head of the Audit Committee is a university professor who teaches accounting
courses. He is also a CPA, certified in both the United States and Korea, with experience
preparing financial statements. While none of the other committee members can be considered
accounting experts, they are all financially literate. The Audit Committee is fully responsible for
the selection and management of the external auditor; and is the primary medium through which
the external auditor communicates with the company. Therefore, the strength and independence
of the Audit Committee offsets some of the weaknesses in the internal audit process.
The External Audit Act restricts listed corporations from replacing their external auditor within
three years of selection. Pursuant to this requirement KPMG Samjong, a member company of KPMG,
has been engaged to provide external auditing services for the next three years, starting with FY2003.
KPMG Samjong does not provide any non-audit type services to KT&G. The selection of KPMG
Samjong as external auditor involved an open tender process in which four accounting firms submitted
bids. Unwarranted information such as the fee amount received by the previous external auditor was
not offered prior to the bid. The selection criteria focused on accounting expertise and fee amount.
Prior to its privatization, KT&G did not develop a sophisticated risk management system, in part
because the government always supported the company’s finances. Although KT&G was
completely privatized in 2002, it has not yet created formal, written risk management policy
guidelines. On the other hand, the company has recently recognized this need and has proceeded to
develop a plan to remedy the situation. The plan calls for the creation of a task force to actively
analyze the company’s risks and a separate committee to develop risk management strategies.

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 10

Component 4: Board Structure and Effectiveness
Component Score—Strong
4.1 Board Structure & Independence
KT&G’s Board structure provides a strong platform for representing the interests of all
stakeholders. It features a significant majority of non-executive directors. The committee structure
provides for direct and predominantly independent Board oversight over the external audit,
remuneration, internal audit, and public services functions. However, the structures and procedures
for many of its committees, particularly those related to director nominations, are still evolving.

Key Analytical Issues Assessment

The board size, at thirteen members, is appropriate. Positive
NEDs occupy ten out of thirteen seats on the board and appear to maintain a high level of independence. Positive
The board and its subcommittees are comprised of members who have a good mix of Positive
professional experience and qualifications in key areas of KT&G’s activities.
The company is considering the addition of a bilingual person to the board in order to augment Positive
the qualities represented on the current board with more international experience.
KT&G has no plan to separate the positions of CEO and Chairman, which are currently held by See
one person. Comments
Company documents provide detailed direction regarding board functions, composition, Positive
committees, and operations as well as director appointments, roles, responsibilities, authority,
qualifications, and independence.
Both executive and non-executive directors do not possess any meaningful shareholdings. Negative
The structure of the board is appropriate with subcommittees for auditing, management Positive
compensation, steering, and public services. NEDs chair all subcommittees.
The subcommittees for management compensation and public services are composed entirely of Positive
NEDs. The steering and auditing committees only include one executive.
Although the nomination committee is, in theory, a standing committee, its members are relieved See
of their duties upon conclusion of the nomination process; hence, this committee is operated Comments
more on an ad-hoc basis. Details of its composition, however, are articulated.
There is no risk management committee or other formal mechanism in place for BOD oversight Negative
over risk management.

KT&G’s Board currently consists of three executive directors and ten non-executive directors.
The three executive directors are the Chairman & CEO, Executive Vice President and Auditor.
None of the three have any significant activities outside of KT&G. While Korean law calls for
NEDs to comprise at least two-thirds of a board’s members, KT&G exceeds this requirement
with its current ratio of ten out of thirteen.
The NEDs appear to be independent from the company and its management. This is evidenced
by BOD activity reports that document instances where the NEDs modified or rejected proposals
submitted by management. While the board members have a diversity of experience and expertise,
some board members have expressed the need for someone with financial industry background. The
company is also considering the addition of a bilingual NED with international experience. The
NEDs serve for three-year terms that are not concurrent. The terms for five NEDs end in March
2004, while two end in 2005 and three in 2006. The two longest serving NEDs have been on the
board since 1997, and the average tenure for the current NEDs is about three years.
While the same person at KT&G holds the CEO and Chairman positions, the company has
no plan to separate the two. KT&G is comfortable with the level of independence and
participation demonstrated by its NEDs and feels that this arrangement has not created an
imbalance of power between management and the NEDs. Furthermore, the most senior NED
on the BOD (currently Mr. Jong Kew Park) has traditionally played an informal role as “lead
NED”. While this position is not formalized within the board structure, it provides a platform
for the NEDs to meet separately from the rest of the board.

September 30, 2003 • www.standardandpoors.com 11

 NEDs chair all board level subcommittees, and the number of executive directors on each
subcommittee is kept to a minimum. The Securities Exchange Act of Korea and the company’s
Articles of Incorporation require more than two-thirds of the Audit Committee to be
comprised of outside directors. The Auditor is the only executive on the four-member Audit
Committee, and the Executive Vice President is the only executive on the five-member Steering
Committee. The other committees, the Management Compensation Committee and the Public
Service Committee, are comprised entirely of NEDs.
Although KT&G’s NED Nomination Committee is never formally disbanded and is, in theory, a
standing committee, it is operated more on an ad-hoc basis. Whenever the need arises, members are
selected to the NED Nomination Committee in accordance with procedures prescribed within the
Articles of Incorporation. However, at the conclusion of the nomination process, its members are
relieved of their duties. KT&G believes that permanent committee members could come under
constant external pressure. While the lack of a permanent committee raises concerns regarding
process accountability, the present system of affording temporary committee membership is
considered by KT&G to be a more effective method of maintaining the committee’s independence.

Table D: KT&G’s Board Members

Executive
Name Director Position Experience (Prior and Present) CommitteeMembership
Kwak, Joo Yes Chairman -Managing Director of KT&G Sales
Young &CEO Division-Managing Director of KT&G
Planning Division.
Kwak, Yes Executive -Managing Director of Sammi Steering Committee
Young Managing Corporation-Managing Director of
Kyoon Director Management Division
Cho, Young Yes Auditor -Auditor of Ministry of Justice (MOJ)- Audit Committee
Won Officer of MOJ Facilities
Management Office
Lee, Man Non- -Professor of Business Adm. Korea Chairman of Audit
Woo Executive University (present)-Investigator of CommitteeManagement
Director National Tax Service-Member of the Compensation Committee
Policy Committee of Korea Deposit
Insurance Co.
Park. Jong Non- -Advisor of KSS Line (present)-Co- Audit Committee
Kew Executive president of Administrative Public Services Committee
Director Management Committee at Ministry
of Maritime Affairs & Fisheries -
Member of Special Committee on
Public Sector at Korean Tripartite
Commission
Soh, Soon Non- -Lawyer of the law firm WOO YUN Audit Committee
Moo Executive KANG JEONG & HAN -Judge of High
Director Court (Seoul)-Judge of District Court
Oh, Yeon Non- -Dean of Graduate School of Public Chairman of Steering
Cheon Executive Administration, Seoul National CommitteeManagement
Director University (present)-Member of Compensation Committee
Planning and Budgeting Committee-
Member of Government Policy
Evaluation Committee
Kim, Ki Ho Non- -Advisor of STX Shipbuilding Co.-Vice Steering
Executive Chairman of Ssangyong Business CommitteeManagement
Director Group Compensation Committee
Yu, Shi Non- -President of the Northeast Asian Steering CommitteePublic
Kwon Executive Economic Institute-Non-standing Tax Services Committee
Director Judge of the National Tax Tribunal
Kim, Non- -President of Korean Institute of Steering CommitteePublic
Choong Sup Executive Chemical Technology-Managing Services Committee
Director Director of CJ-Chief Researcher of
KIST

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 12

Ahn, Suck Non- -Professor of Economics, Hanyang Chairman of Management
Kyo Executive University-Policy advisor of Ministry Compensation Committee
Director of Foreign Affairs and Trade-
President of the Northeast Asian
Economic Conference
Yoo, Jang Non- -Dean of Graduate School of Chairman of Public Services
Hee Executive International Studies, Ehwa Woman’s Committee
Director University-President of Korea
Institute for International Economic
Policy
Kim, Jin Non- -Researcher of Korea International Public Services Committee
Hyun Executive Trade Association (present)-President
Director of Ministry of Science and
Technology-President of University of
Seoul
4.2 Role and effectiveness of the Board
Although local regulations and the company’s Articles lack a clearly articulated definition of
independence, the NED nomination committee members at KT&G appear to have a strong
grasp of this concept. The company has deliberately brought in a substantial majority of NEDs
who appear to meet generally recognized standards for independence. The board’s importance
and activity level has increased in recent years, and it has demonstrated its effectiveness as an
independent force on several occasions.

Key Analytical Issues Assessment

Internal regulations, which guide the operation of the board, clearly articulate decisions that Positive
need to be made at the board level.
Board members receive advance notice of board and committee meetings. They also receive Positive
proper briefings with sufficient background materials for these meetings.
The KT&G Vision and Mission Statement was reported to and approved by the Management Positive
Compensation Committee.
In addition to the Code of Ethics, KT&G has a Charter of Ethics, a Director’s Code of Ethics, and a Positive
Corporate Governance Charter. However, an annual verification of compliance is not a requirement.
Board level procedures for controlling financial accounting practices, financial risks, and Negative
operational risks are still evolving.
The Public Services Committee is in charge of developing the Code of Ethics and managing Positive
relationships with key outside stakeholders.
Executive Directors and the CEO are subject to annual performance evaluations based on clearly Positive
articulated quantitative and qualitative criteria. This evaluation is directly linked to compensation.
There is no formal evaluation system for non-executive directors. Negative
A succession plan for the CEO position is articulated in the Articles of Incorporation. Positive
The board and the committees meet frequently with high attendance rates. Activity reports Positive
prepared in relation to these meetings evidence active participation by board members.
The CEO, executive directors, and non-executive directors are not overly burdened with external Positive
commitments.
Formal training programs for new and existing directors are not in place. However, ad hoc Negative
training programs are provided whenever the need rises.
The NED nomination process is independent, as the nomination committee is comprised solely of NEDs. Positive
The board’s and the non-executive directors’ capacity to cope with change has been verified Positive
through their successful management of KT&G’s privatization.

Board and subcommittee meetings are held frequently, and attendance rates at these meetings
have been high. In 2002, there were twenty-two board meetings and twenty-seven separate
committee meetings with attendance rates exceeding 90% on average. The Steering Committee
met the most frequently while the Public Service Committee met the fewest times. Management
keeps detailed records of these meetings.

September 30, 2003 • www.standardandpoors.com 13

 The company’s Board of Directors Regulation clearly articulates matters that are reserved
for deliberation and resolution at the board. These are as follows:
• Convocation of Shareholders Meetings and the agenda for these meetings
• Approval of the budget and accounts
• Issuance of new shares and bonds
• Major organizational change such as a business transfer or merger
• Selection of board members
• Borrowing long term capital
• Investments exceeding KRW 3 billion
• Purchase and disposal of property exceeding KRW 3 billion
• The opening, removal and closure of branch offices
• Approval of external commitments for executive directors
• Purchase and disposal of property exceeding KRW 3 billion
The content of the BOD activity reports mentioned in section 4.1 and the board’s successful
management of the many changes that accompanied KT&G’s recent privatization demonstrate
the effectiveness of KT&G’s board.
The Management Compensation Committee, which is comprised exclusively of NEDs, is
responsible for the evaluation of the CEO and executive directors. Evaluations are based on a
scorecard that is included in the Management Contract between the CEO and the company.
Despite these achievements, certain areas remain underdeveloped, including board level oversight
and controls over financial accounting practices, financial risk management, and operational risk
management. Formalized procedures for these areas as well as for NED evaluation systems and
board training programs are still lacking or are at an early stage of development.

4.3 Senior Executive and Director Compensation

The Management Compensation Committee provides strong and independent oversight over the
determination of remuneration packages. However, executive compensation packages are not
fully transparent, and NEDs do not receive any significant monetary compensation aside from
expense reimbursements. The latter, in particular, may affect the company’s ability to recruit
highly talented individuals to the board in the future. On the other hand, executive compensation
is based on objective measures, including long-term performance, and is not excessive.

Key Analytical Issues Assessment

Compensation packages for the CEO and executives include fixed base salaries and cash Positive
bonuses; bonuses are tied to quantitative and qualitative measures.
Monies paid to NEDs are mostly for expense reimbursement purposes. NEDs do not receive a Negative
fixed base salary or performance bonus.
The Management Compensation Committee, which determines the compensation amounts Positive
received by executives, is composed exclusively of NEDs.
Executives are not evaluated on an individual basis, as the CEO’s performance evaluation is Negative
applied, in part, to those of other executives.
While the compensation level for individual directors is not provided, the aggregate amount for Negative
the board is disclosed. Only the aggregate amount is approved at the shareholders meeting.

The compensation packages for all board members are cash based. The CEO and executive
directors receive a fixed base salary that is determined by the Management Compensation
Committee. The CEO and executive directors also receive a performance bonus that is paid in
cash. The CEO’s performance bonus is based on a scorecard that is included in the
Management Contract between the CEO and the company. The scorecard contains both
quantitative and qualitative components that include the company’s profitability, productivity,
market share, customer satisfaction, share price and dividend ratio, as well as an evaluation of
the CEO’s leadership. The Management Compensation Committee, which is comprised
exclusively of NEDs, conducts the CEO and executive director evaluations. However, the
bonuses paid to executive directors are based in part on the CEO’s performance evaluation.
While such a system clearly holds the CEO accountable for individual performance, it may not
sufficiently differentiate performance amongst the other executives.

Standard & Poor’s • Corporate Governance Score • KT&G CORPORATION 14

 NEDs do not receive a base salary nor do they receive a performance bonus. The only kind
of monetary compensation they receive is expense reimbursements. This is because, in Korea,
the position of non-executive director is widely viewed as a means for professionally
established individuals to perform a public service. Although the level of quality represented by
KT&G’s NEDs is very high, a continuation of the current NED compensation system may
affect the company’s future ability to recruit and retain a highly talented and diverse
membership and maintain the board’s effectiveness. The potential for this problem may be
further exacerbated by the lack of a system for evaluating the performance of NEDs at KT&G.
The current compensation system, which incorporates a bonus linked to the CEO’s performance
during the whole of his three year term, appears to appropriately align executive compensation with
the company’s long term performance The Management Compensation Committee is currently
reviewing the possible introduction of an equity component to the executive compensation
packages. The Committee is proceeding cautiously given some concerns about whether KT&G’s
accounting and finance systems are sophisticated enough to track and manage such a program.
This development and the potential impact on management incentives merits close monitoring.

September 30, 2003 • www.standardandpoors.com 15

Corporate Governance Scores

A Corporate Governance Score (‘CGS’) reflects Standard & Poor’s assessment of a company’s corporate
governance practices and policies and the extent to which these serve the interests of the company’s
financial stakeholders, with an emphasis on shareholders’ interests. These governance practices and policies are
measured against Standard & Poor’s corporate governance scoring methodology, which is based on a synthesis
of international codes, governance best practices and guidelines of good governance practice.
Companies with the same score have, in the opinion of Standard & Poor’s, similar company specific governance
processes and practices overall, irrespective of the country of domicile. The scores do not address specific legal,
regulatory and market environments, and the extent to which these support or hinder governance at the company
level, a factor which may affect the overall assessment of the governance risks associated with an individual
company (see below ‘Country Factors’).

A CGS is articulated on a scale of CGS 1 (lowest) to CGS 10 (highest).

CGS 10 and CGS 9—a company that, in Standard & Poor’s opinion, has very strong corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, few
weaknesses in any of the major areas of governance analysis.

CGS 8 and CGS 7—a company that, in Standard & Poor’s opinion, has strong corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
some weaknesses in certain of the major areas of governance analysis.

CGS 6 and CGS 5—a company that, in Standard & Poor’s opinion, has moderate corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
weaknesses in several of the major areas of governance analysis.

CGS 4 and CGS 3—a company that, in Standard & Poor’s opinion, has weak corporate governance processes
and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion, significant
weaknesses in a number of the major areas of governance analysis.

CGS 2 and CGS 1—a company that, in Standard & Poor’s opinion, has very weak corporate governance
processes and practices overall. A company in these scoring categories has, in Standard & Poor’s opinion,
significant weaknesses in most of the major areas of analysis.

GovernanceWatch
A ‘GovernanceWatch’ designation may be used to highlight the fact that identifiable governance events and
short-term trends have caused a CGS to be placed on review. GovernanceWatch does not mean that a change to
the CGS is inevitable. GovernanceWatch is not intended to include all CGSs under review, and changes to the
CGS may occur without the CGS having first appeared on GovernanceWatch.

Country Factors
Although Standard & Poor’s publishes country governance analyses from time to time, it is important to note that
Standard & Poor’s does not currently score individual countries. However, consideration of a country’s legal,
regulatory and market environment is an important element in the overall analysis of the risks associated with
the governance practices of an individual company. For example two companies with the same Company Scores,
but domiciled in countries with contrasting legal, regulatory and market standards, present different risk profiles
should their governance practices deteriorate i.e. in the event of deterioration in a specific company’s governance
standards, investors and stakeholders are likely to receive better protection in a country with stronger and better
enforced laws and regulations. However, in Standard & Poor’s opinion, companies with high corporate governance
scores have less governance related risk than companies with low scores, irrespective of the country of domicile.

In the absence of specific country governance scores, the sovereign credit rating can serve in many ways as a proxy.

Important Note

A CGS is based on current information provided to Standard & Poor’s by the company, its officers and any other sources Standard & Poor’s
considers reliable. A CGS is neither an audit nor a forensic investigation of governance practices. Standard & Poor’s may rely on audited
information and other information provided by the company for the purpose of the governance analysis. A CGS is neither a credit rating nor a
recommendation to purchase, sell or hold any interest in a company, as it does not comment on market price or suitability for a particular investor.
Scores may also be changed, suspended or withdrawn as a result of changes in, or unavailability of such information.
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