After the global financial crisis, the importance of corporate governance in financial companies has been growing bigger and bigger and the issue began to be discussed at the global level. With this global trend, Korean banks’ outside director system was pointed out with a few flaws. So let’s look at the issue in detail.
Three main problems : Independence, Clubby Boards, Lack of responsibility and expertise
When it comes to problems of Korean banks’ outside director system, the issues may be summarized as follows. First, outside directors’ independence, second, the so-called “clubby board” problem, third, lack of outside directors’ responsibility and speciality.
Based on the understanding of improving outside directors’ management, the Korea Federation of Banks (KFB) organized a T/F team to provide best practice guidelines for banks’ corporate governance. The guidelines follow the internationally accepted ‘Comply or Explain’ rule, while they strengthen requirements of outside directors.
The best practice guidelines (‘guidelines’) are to enhance accountability, transparency and soundness of banks (banks holding companies) management by improving independence and expertise of outside directors in banks and banks holding companies. The guidelines are applied to banks and banks holding companies (except KDB holding companies) and some special banks (only KDB).
In order to prevent outside directors from forging corruptive relationship with the management, one fifth of outside directors should be replaced every year.(Art 12) It may be desirable for an outside director to serve as a BOD chairman to enhance independence of outside directors; however, in terms of the effective management of the board, it is also desirable for a bank CEO (or CEO of a banking holding company) to chair the board.
In this regard, when a bank CEO(or CEO of a banking holding company) serves a board chairman, the guidelines recommend that a senior outside director be appointed as a means of holding the management in check. It should be disclosed that a bank CEO serves as a board chairman.
Also, the guidelines require stricter qualifications for outside directors to prevent conflicts of interest and to enhance expertise of outside directors.
Overseas cases : OECD, Ireland, Germany, London, the U.S.
OECD – Outside director with cross-dictatorship disclose the fact
Ireland – Cross-dictatorships are forbidden for all directors by law since the financial crirsis
Germany – The board is separated into a management board and a supervisory board. The chairmanship of the two boards shall not be served by a single person at the same time.
London – One of independent non-executive directors is appointed as a senior independent director.
U.S – Sele-evaluation should be conducted annually.
Banks (banks holding companies) have to select the BOD chairman every year and principally it doesn’t allow the BOD chairman being concurrently elected as a bank CEO (or CEO of a banking holding company) since a general stockholders meeting in 2010. Moreover, we are expecting flexibility, expertise and transparency with enforcement of outside directors’ terms and qualifications. However, we need to fix our eyes on how it works under the new best practice through markets and media. Thus, we finally look forward to breaking the code of so-called ‘non-executive director’ and getting a title “credible management” by protecting company’s centered powers and abuse like cases of success in the U.S.
by Min Young Kim (firstname.lastname@example.org)