By Kim Tae-gyu
In 1998, in the wake of the Asian financial crisis, outside directors were dubbed as the Holy Grail to bring economic transparency to a then debt-stricken country, which was feared to face a sovereign default.
One and a half decades later, however, an increasing number of experts argue that the system fails to do what it is supposed criticizing outside directors as rubber stamps.
``The country phased in the format in a bid to improve the overall governance structure and corporate transparency by injecting outside watchdogs inside the companies,’’ professor Jun Sung-in at Hongik University said.
``But the reality is that they are just rubber stamps, who want to continue to receive payments from the companies by staying as outside directors. To do so, they can hardly be at odds with management.’’
Jun concluded that the outside director’s system has proved a failure and Asia’s fourth-largest economy needs to work on a fresh way of bettering corporate governance.
``Outside directors are scarcely responsible for damages caused by decisions at board of directors’ meetings. Such a system will not make things better,’’ he said.
Critics particularly take issue with the revolving-door system where companies recycle old outside directors of their own or others.
A majority of outside directors due to be approved at this month’s shareholders meetings of Korea’s large firms will be old faces.
According to the Financial Supervisory Service on Tuesday, 68 of the country’s 100 largest companies in terms of annual sales are scheduled to pick a total of 182 outside directors this month.
Up to 96 of them, or 52.7 percent, will be reelected while the remaining 86, or 47.3 percent, will be new names.
Samsung Electronics plans to appoint Yoon Dong-min, a lawyer at leading law firm Kim & Chang, to a three-year term once again this week.
Hyundai Motor is set to extend the terms of its two outside directors Kang Il-hyung and Yim Young-chul. The former previously worked for the Ministry of Justice while the latter served on the Fair Trade Commission.
Korea’s largest steelmaker POSCO will also offer one more term to three of its four outside directors this week whose first tenure expires this month.
Industry observers are split into opposing camps over the policy of the big companies, which are seemingly reluctant to bring fresh figures to their boards.
Critics point out that many second-term outside directors will become rubber stamps.
``Outside directors are supposed to play the role of watchdogs, who are required to keep tabs on insiders to prevent any violation of regulations or dubious activities by management,’’ Corporate Governance Service researcher Song Min-gyeong said.
``Those who successfully assume the tall tasks in their first term are feared to become close to management in the next one so that they cannot keep critical stances on many issues.’’
He noted that most advanced countries discourage the reappointment of old outside directors under the belief that they might not be critical of management.
In contrast, an official of a local company said that they cannot afford to lose the knowledge and experience of existing directors.
``When outside directors first take part in board meetings, they typically have little knowledge about most of the pending issues. It sometimes takes years for them to be accustomed with all the topics,’’ said the official, who asked not to be named.
``It would be a waste of time and resources to replace all the outside directors every three years.’’
A mounting number of people seem to side with the critics that the outside director system cannot bring checks and balances to the firms they have to monitor.
Worse, harsher condemnation is springing up against them.
Of the 182 outside directors who will take their first or second terms this March, professors accounted for the largest proportion at 65 followed by businesspeople at 37 and former high-ranking bureaucrats at 29.
Included in the list are a host of former ministers or heads of top agencies such as Song Jeong-ho at Korea Zinc, Kwon O-kyu at Hyosung and Lee Hee-beom at Korean Air.
Song was the minster of justice and Kwon was a deputy prime minister while Lee was in charge of the ministry of commerce, industry and energy.
Hana Financial Group Chairman Kim Seung-yoo, who is poised to step down this month, has been named as an outside director of Korean Air.
Three are even outside directors of multiple companies at the same time.
Some industry watchers say some of the high-profile outside directors work as de-facto lobbyists.
``Why do you think companies attempt to put big names on the lists of their directors? Many are suspicious that they are helping the companies’ business outside of board meetings,’’ said a Seoul analyst, who also asked not to be named.
Yet corporations hiring the above-mentioned bigwigs flatly rebuffed the claims as groundless, contending that they were selected thanks to their expertise and experience in top roles.