Shinhan ― case of CEO risk

Shinhan Financial Group Chairman Ra Eung-chan may now be breathing a sigh of relief, as the first round of a power game between him and CEO Shin Sang-hoon ended in his favor, with the group’s board of directors voting to suspend Shin from duty.

Shinhan Financial Group faces a tough time restoring its tarnished reputation as a result of an unprecedented power game involving its leaders in its short but properous 28 years in existence. / Korea Times

Power game saps stock, reputation, whole nine yards

By Kim Jae-kyoung

Shinhan Financial Group Chairman Ra Eung-chan may now be breathing a sigh of relief, as the first round of a power game between him and CEO Shin Sang-hoon ended in his favor, with the group’s board of directors voting to suspend Shin from duty.

However, the internal feud has yet to be completed and chances that Shin will return to his post are not being ruled out, depending on the outcome of the prosecution’s investigation against the former CEO of Shinhan Bank.

No matter how the case will unfold, one thing that is obvious is this will be a losing game for everyone in the long run ― not only for Shin but also for Ra and Shinhan. It seems that the biggest victim from the internal dispute is the group’s shareholders as more than one trillion won in market capitalization has evaporated since the incident began.

But Ra and the group itself are also expected to suffer from the aftermath of the internal feuding. With the incident, Shinhan lost its two key attributes that were the backbone of the group’s rapid growth over the decade ― governance structure and market reputation.

One of the group’s core strengths appreciated by global investors and its peers was that the group was not exposed to the so-called “CEO risk” thanks to its sound governance structure. Yet it is now turning into its Achilles’ heel.

Given that the group’s big three ― Ra, Shin and Shinhan Bank CEO Lee Baek-soon ― are all entangled in legal disputes, the CEO risk is likely to weigh the heaviest on the group for a while. Its share prices are already suffering from a “CEO discount,” losing more than 8 percent since the bank filed a complaint with the prosecution against Shin on Sept. 2.

Also, Shinhan’s team-spirit organizational culture has been heavily overshadowed by the internal feud, which significantly damaged its corporate value. Investors and market participants are now raising questions over the group’s internal processes, as well as its governance.

“This incident is likely to have a limited impact on Shinhan's financial profile given that the immediate impact from potentially problematic loans is not significant,” Standard & Poor’s analyst Kwon Jae-min told The Korea Times.

“However, this incident has put pressure on Shinhan's reputation and relatively stable management track record compared to its peers,” he added.

Beatrice Woo, a vice president of Moody’s Investors Service, said in a statement Monday, “While this situation is unlikely to harm Shinhan Bank's franchise or its profitability, the damage to its so far unblemished reputation, particularly in terms of corporate governance and internal controls, has already been significant and will linger."

Even if Ra achieves his intended goal of ousting Shin, who was once his most trusted partner but is now his biggest enemy, the feud is also likely to leave a huge scar on his leadership.

He will face criticism that he sacrificed the group’s image in order to extend his chairmanship. Ra is now serving as chairman of the group for a fourth term. He has led Shinhan for more than two decades since he took the helm of Shinhan Bank in 1991.

Ra, himself, is not untangled from legal disputes. He has been under investigation for violating the Real-Name Financial Transactions Law. He is also suspected of having links to Taekwang CEO Park Yeon-cha, the main “sponsor” of the late former President Roh Moo-hyun.

Sources say that the feud between Ra and Shin deepened after the former suspected that the latter leaked information regarding his case to lawmakers to keep him in check, which many believe became the trigger for Ra to turn his back on Shin.

“Shinhan was considered the best in Korea thanks to its internal processes and very well-working leadership structure. However, what has made the group successful is now pulling it down,” a consultant at a global consulting firm said on condition of anonymity.

“This incident illustrates the side effects of a prolonged chairmanship by one person and the weakness of Ra’s leadership. Regardless of how CEO Shin’s case will unfold, this incident will damage the image of Shinhan, which will in turn hamper Ra’s leadership,” he added.

If the group faces a management vacuum as a result of the prosecution’s investigation, chances are that the group will experience not only a fall in its share price, but also a downgrade in its credit rating.

“If this issue significantly threatens the stability of it management leaders, and affects the group's strategy and operations negatively, the ratings or outlook for Shinhan may come under pressure,” Kwon of S&P said.

Losing initiative

With the internal feud extended, Shinhan is likely to lose any initiative to solve the case internally, which is what Shinhan leaders have been dreading the most.

Given that it is considered the only privately-run financial group among the nation’s major financial services providers here, if the government steps in to resolve the issue, it will not only affect the reputation of Shinhan but also hurt the financial industry by taking it back 10 years.

There are already signs that the financial regulator will intervene. “Those who caused the problem should all be held accountable,” Financial Services Commission Chairman Chin Dong-soo told reporters Wednesday.

"The authorities have only limited measures now regarding what to do about the issue ... but we will seek institutional reforms to prevent such management problems, although they won't guarantee perfect prevention," the chairman said.

Shinhan’s internal fighting exposed the underlying problem of local financial groups, suggesting that now is the moment to overhaul their governance structure to secure independence from outside and to prevent one person from wielding absolute power for an extended period of time.

“It is true that the governance of Korean banks in general, can be improved significantly,” an executive at a foreign bank said, asking not to be named.

“Many factors could contribute to good governance structure including active involvement of independent directors with deep knowledge and understanding of the banking industry and the bank itself,” he added.