Background to a year-long push for governance reform at financial holding companies

Retired executives hired as advisers drew average annual pay of 700 million won

Some holding firms had zero external nominees actually appointed as independent directors

National pension fund's expanded role in nominating directors expected to stoke state-interference debate

FSC Chairman Lee Eok-won (center) speaks at a ruling party-government consultation on improving governance at financial companies, held at the National Assembly members' office building on Thursday. From left: Financial Supervisory Service Director Lee Chan-jin, FSC Chairman Lee, and Democratic Party of Korea Policy Committee Chairman Kwon Chil-seung. [Yonhap]
FSC Chairman Lee Eok-won (center) speaks at a ruling party-government consultation on improving governance at financial companies, held at the National Assembly members' office building on Thursday. From left: Financial Supervisory Service Director Lee Chan-jin, FSC Chairman Lee, and Democratic Party of Korea Policy Committee Chairman Kwon Chil-seung. [Yonhap]

Financial regulators have finally unveiled a plan to overhaul governance at the country's financial holding companies — nearly a year after President Lee Jae Myung publicly condemned the long-entrenched practice of CEOs extending their tenures as a "corrupt inner circle."

The review that preceded the plan turned up numerous cases suggesting those inner circles were very much in operation: in one instance, the head of a company that had received corporate social responsibility sponsorships from a sitting chairman went on to chair the very executive candidate recommendation committee overseeing that chairman's reappointment.

The final reform package is somewhat softer than the outright legislative ban on third consecutive terms that regulators had originally considered. Officials appear to have stepped back amid objections that such a cap would conflict with global standards and raise constitutional concerns. Even so, a provision to encourage institutional investors such as the national pension fund to nominate independent directors is expected to reignite the debate over government interference in private finance.

The Financial Services Commission announced the "Financial Company Governance Improvement Plan" on Thursday. Its core measures require that executive candidate recommendation committees be composed entirely of independent directors, and raise the voting threshold — above the current simple majority — needed at both the committee and the shareholder meeting when a holding company chairman is first appointed or seeks reappointment.

Incumbent chairman's reappointment interview materials prepared by the holding firm's own strategy team

The push to reform governance at financial holding companies traces back to remarks President Lee made at a Cabinet meeting late last year, when he criticized the practice of long-serving CEOs at financial conglomerates. "Left unchecked, a corrupt inner circle forms, and a small group takes turns wielding control as they please," Lee said at the time.

Regulators subsequently conducted a special governance inspection of eight financial holding companies from the start of this year, and found evidence that private networks had been activated in the processes of CEO reappointment and outside director selection.

At one holding company, the head of a firm that the current chairman had sponsored during his time as bank president was appointed chair of the executive candidate recommendation committee and played a role in the reappointment process. At another, a former colleague of the current chairman took charge of the committee when the chairman sought a third consecutive term.

A third holding company hired a retired former executive as an adviser and paid average annual compensation of 700 million won ($521,000) with no substantive performance review. At a fourth, the holding company's own strategy division directly prepared external interview materials when the incumbent chairman sought reappointment.

Regulators also found reason to suspect bias in the succession process itself. One holding company required candidates applying through an open external recruitment process to submit documents within five business days, a condition that caused most applicants to withdraw. At another, an outside director separately requested that remarks not made during a succession-related meeting be added to the record after the fact.

The pipeline for nominating independent directors was similarly skewed toward insiders. Two of the eight holding companies included external nominees in roughly half of their standing candidate pools, yet not a single one of those nominees was actually appointed. Three others kept the share of externally nominated directors appointed at between 10 and 20 percent. Only one company filled all of its independent director seats with externally nominated candidates. Regulators concluded that financial holding companies were running the external nomination system as a formality while CEOs continued to exercise real influence over who was selected.

Given the number of cases in which inner-circle dynamics appeared to be at work, regulators say sweeping reform was unavoidable. Jeon Yo-seop, director of the FSC's financial policy bureau, told a briefing on Wednesday: "Because ownership structures at banking groups are strictly regulated, management inevitably wields significant influence — and that has long fed concerns about extended tenures and so-called entrenchment. We found that meaningful checks on management were simply not functioning."

Three-term ban dropped after constitutional concerns and global-standards objections

The final plan is widely seen as a step down from the legislative ban on third consecutive terms that regulators had initially considered.

Well into the early stages of the governance reform discussions, a ban on third terms retained strong momentum. After President Lee's criticism, FSS Director Lee Chan-jin repeatedly stressed the need for term limits at successive press briefings.

The mood shifted in the second half of the year. Regulators discussed the reform package with ruling party lawmakers on the National Assembly's political affairs committee, aiming for a late July announcement. They presented two options — one centered on legislating term limits, another focused on tightening special resolution requirements — but lawmakers are said to have raised strong constitutional objections to the first. By August, regulators had abandoned the legislative term-limit approach and pivoted toward strengthening voting requirements instead.

Global standards also weighed heavily on regulators' thinking. In response to written questions from The Herald Business in May, proxy advisory firm ISS stated its opposition, saying that "a rigid cap applied without regard to performance or circumstances removes the important element of board discretion."

Jeon acknowledged that a three-term ban had been among the options considered, but said the direction changed after National Assembly deliberations surfaced concerns that it did not align with global standards and went too far from a constitutional standpoint, leading to the decision to strengthen voting rights instead.

Open director recruitment via company websites may also be treated as board requests — state-interference debate looms

Although the legislative term limit was dropped, several provisions in the plan are expected to reignite the state-interference debate. The push to encourage institutional investors such as pension funds to nominate independent directors is the most prominent example.

Under current rules, an institutional investor's nomination of an independent director at a board's request is not considered an attempt to influence management control. Accordingly, such a nomination exempts the investor from the obligation to return short-swing profits under the 10 percent shareholding rule.

Regulators now plan to seek a legal interpretation of whether open solicitations for independent director nominations through a financial holding company's public channels — such as its website — can in effect be treated as a board request.

Industry insiders warn that if the measure takes effect, nominations through the national pension fund would increase sharply, ultimately expanding the government's ability to exert influence over financial holding companies through state-run pension funds. "The number of outside director nominations coming through the national pension fund will increase dramatically compared to now," an official at one holding company said. "Isn't this essentially the government signaling that it intends to wield influence through pension funds?"


hyuk@heraldcorp.com