Outside directors face tougher regulations

FSC Chairman Shin Je-yoon speaks during a meeting of the financial development review committee held at its headquarters in central Seoul, Thursday. He announced the establishment of a corporate governance code introducing strict regulations regarding the appointment of outside directors. / Courtesy of FSC

By Chung Ah-young

Financial firms will be required to replace outside directors appointed to their boards, mostly professors and public servants, with financial experts, the nation's top financial watchdog said Thursday.

Also, the duration of a single appointment for outside directors will be reduced from two years to one in order to curb clubby relations with management.

The Financial Services Commission (FSC) announced a corporate governance code to reform current boardroom practices, citing a number of financial institutions in which board members have failed to monitor management activities.

"Currently, the board system has failed in checks and balances against management and consequently there is a lack of diversity in its composition, although a majority of board members are outside directors," FSC Chairman Shin Je-yoon said in the meeting of the financial development review committee.

Kim Yong-beom, director general of the Financial Policy Bureau at the FSC, said that the guidelines will be applied to a total of 118 financial institutions with more than 2 trillion won in assets starting from Dec. 10.

The FSC said that the number of outside directors at bank holding companies was 51 out of a total 58.

The regulator will strengthen qualifications to select board members who have expertise and experience in diverse financial sectors such as financing, accounting and auditing.

According to the FSC, among 20 global financial holdings companies, 46 percent of their outside directors have financial backgrounds. However, only 7.8 percent of outside directors of the nation's 10 bank holding companies have experience in the financial sector. Mostly, outside directors are professors and researchers or even public servants.

As of the end of September, among 32 outside directors from the four largest financial holding companies ― KB, Shinhan, Hana and Woori ― by assets, 16 or 50 percent were former professors and researchers, four or 12.5 percent were public officials and three were legal experts.

"We hope the financial corporations will select more qualified outside directors who have abundant expertise and experience related to the financial sector," Kim said.

Also, outside directors will not be allowed to take an additional position while serving on the board.

Under the guidelines, financial institutions are also required to prepare a CEO succession plan in the event of a leadership vacuum. Directors are supposed to clarify future CEO appointments in detail.

"There is no one-fits-all solution to improving the management structure because the financial institutions are in different situations," Shin said.

"Financial companies should voluntarily follow the guidelines and come up with their own internal regulations," he said.

Also, they must release annual reports listing all financial rewards given to executives and directors.

The Organization for Economic Cooperation and Development (OECD) espouses corporate governance principles in which the board and management pursue objectives that are in the interests of the company and its shareholders and facilitate effective monitoring.

Korea adopted the system of outside directors in 2000, following the 1997-98 Asian financial crisis in order to keep management in check. However, outside directors are often criticized for their cozy relations with management.

Recently, KB Financial's board members have been under fire for their failure in mediating an internal disputes before it worsened and created a leadership vacuum.

Former KB Financial Chairman Lim Young-rok and former KB Kookmin Bank CEO Lee Kun-ho ended up being removed after a months-long dispute over a change in the bank's computer system.

KB board chairman Lee Kyung-jae said that he will step down from the board and chairmanship Friday.

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