[Gangnam Perspective] ‘Government Intervention’ More Daunting Than Governance Risk

"A corrupt inner circle forms, allowing a small group to rotate power and maintain control as they please. This is not something that should be left unchecked." (President Lee Jae-myung, December 19, Financial Services Commission (FSC) and Financial Supervisory Service (FSS) business report)
"Some individuals, upon becoming the chairman of a holding company, place their own people on the Board of Directors (the Board) and build 'trenches.' This makes them no different from owner-led manufacturing or listed companies, and it raises concerns about the erosion of the public nature of finance." (Lee Chanjin, Governor of the Financial Supervisory Service (FSS), October 21, National Policy Committee audit)
With both the nation's top leader and the head of financial supervision issuing consecutive criticisms of the governance structures of financial companies, the financial sector is now walking on thin ice. The FSS has launched an on-site inspection of BNK Financial Group, which has become the 'first target,' while also driving efforts to improve governance through the Task Force on Improving Corporate Governance of Financial Companies (TF). Governor Lee Chanjin increased the pressure by meeting with financial holding company chairmen and stating, "The nomination process for Independent Directors should be diversified, including recommendations from institutions representing the entire public."
Although financial companies display clear dissatisfaction, they are making every effort not to fall out of favor with the authorities. Most financial companies are perceived as 'ownerless' due to the absence of a controlling shareholder. There have been persistent criticisms that Chief Executive Officers (CEOs) extend their own terms, while the Board merely rubber-stamps these decisions instead of providing oversight. Reappointment is seen as a given, and there have even been cases of CEOs serving three consecutive terms.
Since the announcement of the 'Best Practices for Corporate Governance' in December 2023, Financial Holding Companies (FHCs) have completely overhauled their management succession procedures. Following the core principles outlined in the best practices, they have established comprehensive and systematic succession plans, from managing and nurturing CEO candidates to final selection. Departing from the previous practice of initiating succession only as the term ended, they now manage candidate pools on a rolling basis and begin the process at least three months before the term expires. There is now a growing consensus that succession based on a systematic process is taking root.
However, few believe that all chronic problems have been resolved. Some still criticize the opaque management of candidate pools and the lack of transparency.
Financial companies, including banks, generate profits using funds entrusted by the public. Therefore, they are required to uphold a stronger public character than companies in other manufacturing or service sectors, and it is essential to have a governance structure where checks and balances function effectively.
The problem is that with every change in administration, the authorities rush to intervene in the governance of financial companies. While these companies may lack dominant shareholders, they are still private enterprises with shareholders. Some level of regulatory oversight is necessary, but excessive intervention is inappropriate. Financial companies lack the power to resist the immense authority of financial regulators. One industry insider asserted, "Fundamentally, FHCs are also companies governed by shareholders. It is the shareholders who decide on the CEO's reappointment based on management performance."
If the so-called 'corrupt inner circle' is ousted, who will fill the void? Looking back at past cases, it was common for former bureaucrats or politically connected figures to parachute into these positions. This is why there are doubts about the regulators' sincerity. If competent management is replaced at the whim of politicians or regulators, the risk of government intervention could come back as a boomerang.
Due to their ownership structure, financial companies concentrate oversight functions in the Board, especially among Independent Directors. Only by ensuring diversity and independence on the Board, and severing the parachute appointments, can the governance of financial companies be considered complete. Experts have long discussed the need to limit the consecutive terms of Independent Directors and to expand the role of the National Pension Service (NPS) in recommending Independent Directors. These are not new suggestions.
Institutional mechanisms are already well established. Rather than introducing new systems, it is more important to ensure that existing ones function properly.
blue73@fnnews.com Reporter