Financial holding company CEO nomination panels to be composed entirely of independent directors; improper interference could bring dismissal

Ruling party, government unveil financial firm governance reform plan

Inside directors, non-executive directors barred from nomination panels

Independent director system to be extended to all financial firms

Improper CEO interference to be codified as grounds for heavy sanctions

Separate shareholder vote on CEO appointment; reappointment threshold raised

National pension, institutional investors encouraged to expand succession role

Bill to be drafted this year; enforcement expected six months after passage

The Financial Services Commission inside Government Complex Seoul in Jongno-gu, Seoul. [Yonhap]

Candidates for CEO positions at financial holding companies and other financial firms will be recommended exclusively by executive nomination committees composed entirely of independent directors. Grounds for sanctions — up to and including a dismissal demand — will also be established against sitting CEOs who improperly interfere in succession procedures. Financial regulators plan to use these measures as part of a broader overhaul of financial firm governance that includes tightening the reappointment threshold for banking holding company chairs and introducing a system allowing shareholders to nominate independent director candidates.

The Financial Services Commission and the Financial Supervisory Service held a ruling party-government consultative meeting with the Democratic Party of Korea on Thursday and announced the "Financial Firm Governance Improvement Plan," which covers 25 reform tasks spanning limits on CEO influence over personnel decisions, stronger board independence, curbs on the practice of long-serving banking holding company chairs, expanded shareholder activism by institutional investors, and an overhaul of performance-based pay structures. Regulators plan to draft amendments to the Act on Corporate Governance of Financial Companies reflecting the key reforms by the end of this year, with detailed operating standards to be set through enforcement decrees, supervisory regulations and governance best-practice guidelines.

The centerpiece of the reform is strengthening the independence of the nomination committees that recommend CEO candidates. To that end, an independent director system will be introduced at all financial firms. Under current rules, inside directors and non-executive directors could sit on nomination committees, but the law will now explicitly require that such panels be composed entirely of independent directors. Committee members will also be barred from attending meetings at which they themselves are being considered as candidates — a step beyond the existing restriction, which only prohibits them from voting on such matters.

Sitting CEOs will also be barred from attending nomination committee meetings that recommend candidates for independent director and audit committee positions. To enforce this, regulators will create new legal grounds for sanctions — up to a dismissal demand — against any sitting CEO who improperly interferes in the succession process. Depending on the severity of the violation, minor sanctions such as warnings will be handled by the Financial Supervisory Service, while heavier penalties including suspension from duties and dismissal demands will be decided by the Financial Services Commission.

Contact between a sitting CEO and nomination committee members will also become a disclosure obligation. If a sitting CEO contacts a committee member while a succession process is under way, the reason and substance of that contact must be made public; failure to comply will result in separate sanctions. The intent is not to ban all contact outright but to increase transparency in the succession process by requiring disclosure of the circumstances.

The accountability of nomination committee members for vetting candidates will also be strengthened. The law will require that all committee members sign a confirmation statement attesting to the reasons for each candidate recommendation, to be attached to the notice of the general shareholders' meeting. The committee chair will be required to attend the meeting in person and explain the reasons for recommending each CEO or independent director candidate. A plan to apply a responsibility-mapping framework to the committee chair for nomination-related duties will be pursued through amendments to the enforcement decree.

The five major financial holding companies. [KB, Shinhan, Hana, Woori and NH NongHyup Financial Group]

The appointment and reappointment procedures for banking holding company chairs will also be tightened by law. Under the previous practice, a chair candidate was typically appointed as an inside director at the general shareholders' meeting and then designated as representative director by the board. Going forward, shareholders will vote separately at the general meeting on whether to appoint the person as CEO — a move aimed at giving shareholders more direct control over the selection.

The approval threshold rises with each successive term. At the nomination committee level, initial appointment requires the support of at least two-thirds of all committee members, while reappointment requires at least three-quarters. At the general shareholders' meeting, a first reappointment requires the support of at least two-thirds of votes cast and at least one-third of total issued shares. A second or subsequent reappointment requires at least three-quarters of votes cast and more than half of total issued shares.

A proposal to ban chairs from serving a third consecutive term was dropped from the final plan. Jeon Yo-seop, director-general of the FSC's financial policy bureau, said at a preliminary briefing held Wednesday that "there were views that a ban would not align with global standards and, taking into account freedom of occupation and constitutional considerations, would be excessive — so the decision was to instead strengthen voting requirements."

A chair who meets the higher voting thresholds may still serve a third or subsequent term. The stricter requirements apply only to banking holding companies with dispersed ownership; regulators said they are not currently considering extending them to other financial holding companies or non-bank financial firms.

The criteria for evaluating chair candidates will also change. Regulators plan to make the CEO evaluation standards used in succession procedures more specific, incorporating non-financial factors such as records of financial incidents and regulatory sanctions. Disclosure of the basis and results of evaluations will be strengthened, and the practice of arbitrarily changing evaluation criteria after a succession process has begun will be restricted. Measures such as starting succession procedures earlier, ensuring sufficient preparation time for external candidates, and placing CEOs of major subsidiaries in a standing candidate pool will be pursued through governance best-practice guidelines.

ATM machines at commercial banks in Seoul. [Herald DB]

Listed financial firms will be required to introduce a system allowing shareholders who have held at least 0.1 percent of shares for six months or more to nominate independent director candidates. Regulators plan to make it a legal obligation for financial firms to operate such a shareholder nomination system, while leaving the actual decision to nominate to each shareholder's own judgment. Any nominee put forward must pass a qualification review and screening by the nomination committee.

Regulators will also pursue a legal interpretation that broadens the scope of institutional investor participation. Previously, only candidate recommendations made at the board's request were in principle not regarded as having the purpose of influencing management. Going forward, the recognized scope will expand to include cases where institutional investors respond to nomination requests made through nomination committees, shareholder meetings or company websites — a move intended to ease the regulatory burden under the Capital Markets Act that arises when institutional investors are classified as seeking management participation.

The accountability and performance evaluation of independent directors will also be strengthened. Meetings attended solely by independent directors will be required at least twice a year, and standards for recording board minutes will be tightened. Best-practice guidelines will be revised to incorporate substantive activity metrics — such as the number of remarks made, time spent in discussion and requests for materials — into performance evaluations, with results to be disclosed in annual governance reports.

In addition, regulators will codify in law a "say on pay" mechanism requiring that executive compensation plans be explained and reported at general shareholders' meetings, as well as a "clawback" system for recovering improperly paid performance bonuses. Standards for deferred payment of performance-based compensation and disclosure of pay for highly compensated executives will also be strengthened, and disclosure requirements will be expanded to cover advisory fees paid to retired CEOs and advertising expenditure.

Regulators said they expect the overhaul to disperse authority currently concentrated in CEOs and to strengthen the ability of boards and shareholders to check management. Financial Services Commission Chairman Lee Eok-won, speaking at the ruling party-government consultative meeting held at the National Assembly members' office building, said the reform "is meaningful in that it marks a shift away from a closed, CEO-centric structure toward a more open and accountable governance model centered on the board and shareholders." Financial Supervisory Service Governor Lee Chan-jin said the agency would "respond with strict consideration of sanctions to ensure that the reform measures are not operated in a merely formal manner or in a way that departs from their original intent."

Regulators plan to draft amendments to the financial firm governance act reflecting the reform plan by the end of this year, while simultaneously revising related enforcement decrees, supervisory regulations and best-practice guidelines. Whether the bill will pass the National Assembly this year remains uncertain. Director-General Jeon said at the briefing that "even after the law passes, it will typically take about six months to implement, taking into account the revision of enforcement decrees." Regulators added that they plan to encourage financial firms to voluntarily implement measures that do not require legislative changes ahead of any formal amendment.

rim@heraldcorp.com