Shinhan faces uncertain future on internal feuding

Korean-Japanese shareholders urge Shinhan to postpone board meeting

Shinhan Financial Group has been regarded as one of the most competitive and well-established financial services companies here. Following the global financial crisis, it has further set itself apart from its peers by successfully weathering the unprecedented financial turmoil. Shinhan’s success has been credited mainly to the management’s leadership based on sound corporate governance structure. Its governance structure has often been picked as a role model for other financial firms. While other financial groups, such as KB and Woori, often experienced ups and downs due to the bureaucratic control, Shinhan has managed to avoid being swayed by external forces under the solid governance structure led by a troika _ Shinhan Financial Group Chairman Ra Eung-chan, Shinhan Financial Group CEO Shin Sang-hoon and Shinhan Bank CEO Lee Baek-soon. However, the abrupt legal action by Shinhan Bank, the flagship of the financial group, against its former CEO Shin, suggests that its seemingly-sound governance structure is no more than a pipe dream. In addition, the incident exposed the underlying problem of local financial groups, illustrating that now is time for them to overhaul its governance structure in a way of securing independence from the outside and of preventing one person from wielding absolute power for an extended period of time. ― ED.

By Kim Jae-kyoung

Despite swift action by Shinhan Bank, internal feuding in the nation’s third largest financial group is not expected to end in favor of the lender anytime soon as it is still uncertain whether the board will vote to dismiss Shin Sang-hoon due to opposition from the labor union and Korean-Japanese shareholders.

The group said that it plans to hold a board meeting in early this week to dismiss CEO Shin. But on Friday, the union denounced the group management’s move and requested the board of directors to postpone their meeting until an investigation is completed.

“The allegations were cleared in a previous internal investigation. It doesn’t seem right to dismiss Shin while nothing has been verified. We need to give Shin a chance to explain,” Kim Guk-hwan, head of the union said in a news release.

The prosecution launched an investigation Friday into allegations that Shin embezzled 1.5 billion won and arranged inappropriate loans worth 95 billion won for his relatives.

On the same day, The Korea Economic Daily reported that Korean-Japanese shareholders held an emergency meeting and reached a consensus that the board meeting should be delayed until the prosecution completes its investigation, which many believe implies that they will vote against the dismissal if the group tables the issue at a board meeting this week.

Four of the Korean-Japanese shareholders are outside directors. Korean-Japanese shareholders’ ownership reaches 17 percent, the largest followed by BNP Paribas with 6.35 percent and the National Pension Service with 4.45 percent.

Shinhan’s board consists of four internal directors _ Ra, Shin, Lee and non-standing director Ryu Shi-yul _ and eight outside directors, including four Korean-Japanese. To approve dismissal, at least seven out of the 12 should vote for it.

Therefore, any outcome is still uncertain. Given that Shin and four Korean-Japanese outside directors will vote against it, the move can be rejected if just one other person opposes it at the meeting.

“Korean-Japanese shareholders have great trust in Shin, as he successfully led the bank and the group over the past years. He also has an extensive network among Korean-Japanese shareholders,” a Shinhan official said, asking not to be named.

On his side, Shin is preparing to mount a counterattack against the lender and Ra, saying that he has no intention to step down voluntarily.

“This is non-sense. The loans in question were extended after the proper credit screening process, and these loans were not to any of my relatives,” the CEO said in a phone interview with The Korea Times

“The allegations have proved to be groundless in the previous audit. I will soon take a legal action against them,” he added.

Breach of duty or power game?

The bank has claimed that it filed a criminal filing with the prosecution against Shin as it found that Shin committed breaches of duty and embezzlement while he headed the lender during 2003-2009.

However, no one in the industry believes this. Many speculate that what’s happening is related to who will become the next group chairman. In other words, it is considered the byproduct of a power game between Ra and Shin.

It is widely believed among market participants that under the connivance of Chairman Ra, the incumbent bank CEO Lee Baek-soon spearheaded the move to oust Shin, who worked for Ra for about three decades. Sources said that Ra might have picked Lee, who was once the head of Ra’s secretarial office, as his successor.

The speculation does not seem groundless. First of all, unlike a usual internal inspection carried out by its audit team, the inspection against Shin was led by Lee’s secretarial office, according to informed sources.

Secondly, the case had already been investigated by the police who cleared Shin. Thirdly, Ra was well aware of the lending in question while Shin headed the bank but did not bring it into question then.

“I think that this is a very bizarre case. Shin is a person who knows all about Shinhan and Chairman Ra from A to Z. I don’t understand why the bank decided to take such action at the expense of its image,” a source close to the financial group told The Korea Times, asking not to be named.

“I think that Shinhan was well aware that the action will deal a blow to the image of the financial group. In that regard, I believe that the lender did not refer Shin to the prosecution just to eradicate internal corruption as it claimed. The speculation that it is related to the succession of the chairmanship is a very feasible scenario,” he added.

Ra’s leadership in trouble

The swift attack against Shin, who was once his life-time partner but is now his biggest rival, may achieve its intended goal by ousting Shin, but ironically, it is also expected to put Ra’s leadership in big trouble.

He will have no choice but to 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 free from the legal dispute. He has been under investigation for violating the Real-Name Financial Transactions Law. He is under suspicion for 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 has been deepening after the former suspected that the latter leaked information regarding his case to lawmakers to keep him in check, which many believe became a trigger for Ra to turn his back on Shin.

The speculation over the power game is brewing as this is not the first time that Ra has ousted a key person. Former Shinhan Financial CEO Choi Young-hwi, Shin’s predecessor, was also dismissed in 2005. At the time, Choi was in a dispute with Ra over the acquisition of Chohung Bank.

“This incident illustrates the side effects of a prolonged chairmanship by one person and the weakness of Ra’s leadership,” a local bank executive said on condition of anonymity.

“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.

Governance structure in question

Market experts said that with the unprecedented internal fighting, Shinhan will face its biggest challenge since it made its debut in 1982, as it will weaken the group’s governance structure and damage internal cohesion, which has been seen as the biggest strength of the group. Depending on the outcome of the financial regulator’s investigation into Ra, the group can face a huge management vacuum.

“Regardless of the outcome of the investigation against CEO Shin, Shinhan’s image and brand will be tarnished,” another bank executive said, asking not to be named.

The incident is also likely to become a major stumbling block preventing the group from becoming the leading financial group in Korea. Currently, Shinhan is behind KB Financial Group in terms of total assets, but it has already overtaken KB in market capitalization and net profits, solidifying its leading position in the banking industry.

Shinhan shares have been hit hard by the news. Its shares lost 3,100 won to close at 43,100 won on Friday from Wednesday.