“75% shareholder approval for a third consecutive term raises questions about effectiveness”...Ruling party and government unveil bank holding company governance reform plan [Governance Reform]

[Financial News] A governance reform plan was announced 11 months after President Lee Jae Myung sharply criticized the long-serving chairmen of financial holding companies as a “corrupt inner circle” last December. The proposed ban on serving a third consecutive term was dropped in favor of a requirement for 75% shareholder approval, and other measures were added, including renaming outside directors as independent directors.
Because legal amendments and other steps will take time before this reform plan can be applied to the actual appointment of financial holding company chairmen or subsidiary CEOs, it will not apply to immediate year-end appointments. However, financial authorities have set out a direction through measures such as best-practice guidelines and expect financial companies to use the plan as a reference in fostering a culture of transparent governance.
The Democratic Party Policy Committee and the Financial Services Commission held a party-government consultation meeting at the National Assembly Members’ Office Building in Yeouido, Seoul, on the 12th and announced a plan to improve the governance of financial companies. The plan, drawn up to improve the fairness and transparency of financial company governance, focuses on strengthening the independence of executive candidate nomination committees and succession procedures; improving the practice of long-term CEO reappointments at bank holding companies; introducing a system for shareholders to nominate independent director candidates; and making performance and compensation management more reasonable.
Since CEOs of bank holding companies are appointed at shareholder meetings, voting requirements for both the executive candidate nomination committee and the shareholder meeting will be tightened in stages. The nomination committee must recommend a CEO with the approval of at least two-thirds of its members for an initial appointment and at least three-quarters for one reappointment. At shareholder meetings, approval of at least two-thirds will be required for one reappointment and at least three-quarters for two or more reappointments. The proposed ban on a third consecutive term, discussed shortly after the governance reform task force was formed, was dropped.
Jeon Yo-seop, director general of the Financial Policy Bureau, said, “The issue was discussed, but during the party-government consultations we settled on tightening voting requirements, taking into account the freedom to choose one’s occupation and global standards.” Some have questioned whether the plan can lead to meaningful governance reform, given that bank holding company CEOs are appointed with support ranging from 80% to 90% when seeking reappointment or a third consecutive term. Jeon said, “Looking at recent cases, including initial appointments, there were about three out of 14 in which the candidate did not receive at least 75% support,” adding, “When they manage the company well enough and earn shareholders’ trust, many pass with 75% support. If they deliver business results while adhering to the governance reform measures, they can also be reappointed again.”
CEO evaluation requirements and detailed criteria will be made more specific, and disclosure of evaluation results will be strengthened. Succession procedures will begin early, allowing sufficient time for vetting, while companies will maintain an ongoing pool of CEO candidates and provide a fair competitive environment for external candidates. The measures also include establishing and disclosing compensation standards when former CEOs and executives are appointed as advisers, and controlling improper advertising expenditure aimed at securing the current CEO’s reappointment.
Institutional investors will be able to nominate independent director candidates through the newly introduced nomination system, and will be encouraged to actively review the independence and accountability of boards (independent directors) under the Stewardship Code. The role of institutional investors in providing market assessments during CEO succession will also be strengthened.
The transparency and reasonableness of performance-based compensation arrangements will also be improved. Listed financial companies above a certain size will have to explain and report individual executive compensation plans at shareholder meetings, and disclosure will be expanded on total compensation for highly paid employees and how it relates to their performance. The minimum deferred-payment ratio and deferral period for performance-based compensation will be increased, and a clawback system will be introduced to recover compensation already paid if a company incurs losses due to intentional misconduct or gross negligence, or if its financial statements are corrected.
The Financial Services Commission plans to draft an amendment to the Act on Corporate Governance of Financial Companies incorporating these reforms within the year and move swiftly toward legislation. It also plans to promptly pursue follow-up measures, including revising the Stewardship Code, subordinate regulations and best practices. The commission will continually monitor financial companies’ progress in implementing the measures and support their adoption in practice through engagement with the financial sector.
Policy Committee Chair Kwon Chil-seung said, “The most important asset in finance is the public’s trust,” adding, “This plan is significant because it will enable the market, including boards and shareholders, to effectively hold management in check and establish the principle that performance is rewarded and losses carry accountability.” Political Affairs Committee Chair Yoo Dong-su said, “Progress toward financial company governance centered on shareholders and greater shareholder participation are important.”
Financial Services Commission Chairman Lee Eog-weon stressed that “the governance of financial companies is directly linked to financial market stability and public trust.” Financial Supervisory Service Governor Lee Chan-jin stressed, “As independent directors are being given the authority and conditions to properly check and monitor management, these institutional changes must be backed by independent directors’ expertise commensurate with their responsibilities and their responsible performance of their roles if they are to bring about meaningful governance reform.”
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