In Korea, the term corporate governance was rarely mentioned until the economic crisis in 1997, despite a long-standing controversy over the way Korean chaebol are managed and governed. When the economic crisis hit, however, a consensus emerged that the high leverage, over-diversification, and the resulting weak competitiveness of Korean corporations could be traced to poor corporate governance. The discretionary power of the chairman and his control over resource allocation decisions lie at the center of this line of criticism. The chairman could exercise such discretionary power and control because of the ownership structure of the chaebol and the lack of checks and balances.

Ownership structure has been an important subject in modern economics. The literature has focused on the potential conflicts of interest between owners (shareholders) and managers, or the principal-agent problem. Jensen and Meckling (1976) show that as managerial ownership increases, the interests of management become more closely aligned with those of shareholders. The “convergence-of-interest” hypothesis suggests that a firm's performance and value increase as the managers’ stake in the firm's future cash flows increases.

On the other hand, the entrenchment hypothesis predicts the opposite. When managerial ownership is low, firm performance is maximized because of the threats from various markets such as the capital market, he managerial labor market (Fama 1980), and the market for corporate control (Shleifer and Vishny 1986). However, when managerial ownership is high enough to provide effective control and to guarantee their jobs, managers will indulge their preference for non-value-maximizing behavior.