[Shaking Financial Leadership]② A Fox as Master in a Den Without a Tiger

Naiji Filling the Vacancy Left by Gwanji

[Asia Economy Reporter Yu Je-hoon] # “It is never desirable for the government to intervene in personnel matters of private companies in which it holds not a single share.” This statement was made by former President Moon Jae-in during a senior secretaries meeting at the Presidential Office in the fall of 2017. Jang Ha-sung, then Chief of the Presidential Policy Office, Choi Jong-gu, Chairman of the Financial Services Commission, and Choi Heung-sik, Governor of the Financial Supervisory Service, who were concerned about the ‘self-renewal’ of the chairman of a financial holding company, turned pale.

At the time when former President Moon repeatedly declared the policy of non-intervention in personnel affairs of private companies, Kim Jung-tae, former chairman of Hana Financial Group, was gearing up for a third term, and financial authorities were applying all-round pressure for his voluntary resignation. This was due to mixed evaluations of his performance during his tenure and criticism that he did not make noticeable efforts to cultivate a successor pool. However, due to President Moon’s statement on ‘non-intervention in private company personnel,’ the financial authorities stepped back. Kim went beyond a third term and even served a fourth term in 2020.

Ironically, the period when the influence of government (官) in the financial sector, which had been gradually waning since the mid-2000s, sharply declined was during the Moon Jae-in administration, which declared the principle of non-intervention in private company personnel. Although this was a measure to ensure the autonomy of private financial companies, the so-called ‘non-intervention from above’ led to performance competition for the reappointment of financial company CEOs. Some financial holding companies even experienced chronic ‘internal factional struggles.’ It has also been pointed out that this was the background for continuous financial accidents.

With No Tiger, the Fox Acts as the Master

The common cause pointed out for financial company CEOs being able to challenge reappointments, third terms, and even fourth terms despite various financial accidents and illegal activities is the regime-level policy of non-intervention in personnel matters. In a situation where the government’s control (官治) over private financial companies has weakened, the era of internal governance (內治) where the influence of financial company CEOs has grown has fully begun.

Similar criticisms have been raised by financial-related civic groups. Kim Deuk-ui, head of the Financial Justice Solidarity, said, “In some respects, the Moon Jae-in government completely let go of controlling financial companies,” adding, “As a result, looking at recent financial holding company chairmen, they have become more omnipotent than chaebol owners who at least resign from internal director positions or temporarily go into hiding when causing social controversies or illegal acts.”

The regime-level principle of non-intervention in personnel also caused side effects by weakening the influence of financial authorities, who are assigned the role of controlling financial companies as market watchdogs. The financial sector insiders explain that an atmosphere has even emerged where the principle of non-intervention is exploited in reverse.

An insider familiar with the financial sector said, “Even if financial authorities try to raise issues, who can bell the cat when a single anonymous tip or slander accusing the authorities of personnel intervention can cost them their position?” He pointed out, “In this process, reckless attempts such as the third and fourth terms of financial company CEOs have become a reality and are taken for granted.”

Only ‘Performance’... Frequent Financial Accidents

Meanwhile, what drove the reappointment of financial company CEOs was performance. Between 2017 and 2021, when financial holding company chairmen repeatedly secured reappointments, third terms, and fourth terms, the annual net profit of the five major financial holding companies (KB, Shinhan, Hana, Woori, NH Nonghyup) increased by 84.6%, from 9.1 trillion won in 2017 to 16.8 trillion won in 2021. Performance announcements labeled as ‘all-time high’ or ‘record-breaking’ became stepping stones for reappointments and third terms.

However, this period was also marked by several financial accidents that undermined the trust and stability of the financial market. Representative cases include suspicions of recruitment corruption in commercial banks (2015?2017), the Lime Asset Management fund redemption suspension incident (2019), the massive loss incident of overseas interest rate-linked derivative-linked funds (DLF) (2019), the Optimus incident (2020), and the Discovery Asset Management fund redemption suspension incident (2020). Among the CEOs of the four major financial holding companies (KB, Shinhan, Hana, Woori) from the mid-to-late 2010s until 2021, the only CEO who resigned due to these financial accidents was Lee Kwang-gu, president of Woori Bank.

Beyond trust and stability in the financial industry, the reason performance became the biggest gateway for reappointment is attributed to the foreign-dominated governance structure. On the surface, the largest shareholders of each bank are the National Pension Service, but the actual owners are foreign shareholders. According to the Korea Exchange (KRX), as of the 27th, the foreign ownership ratio of KB Financial Group, the largest financial company in Korea, reached 73.99%. Hana Financial Group (71.73%) and Shinhan Financial Group (63.46%) also have similarly high foreign ownership ratios. Most shareholders holding more than 5% of shares are foreign capital such as JP Morgan Chase (KB) and BlackRock (KB, Shinhan, Hana).

An insider in the financial sector said, “From the perspective of foreign capital, interest in the CEO’s morality or internal control issues is inevitably less than interest in the CEO’s management performance and dividends,” adding, “The fact that each financial company pushes for dividend increases every year is largely due to awareness of foreign shareholders. In a way, it can be seen as a symbiotic relationship.”

‘Litigation at All Costs’... Authority Lost by Themselves

It is also pointed out that the financial authorities’ aggressive sanctions against financial company CEOs and the prolonged litigation battles with the financial sector have led to a loss of their own authority. During the tenure of former Financial Supervisory Service Governor Yoon Seok-heon, the FSS was evaluated as having imposed excessive heavy sanctions on financial holding company or bank CEOs during major financial accident phases such as the DLF and Lime incidents.

In fact, Chairman Sohn, who received a heavy sanction related to the DLF incident, eventually won the lawsuit after going through three trials. Chairman Cho Yong-byeong of Shinhan Financial Group and Jin Ok-dong, the designated CEO of Shinhan Financial Group, who also received heavy sanctions due to the Lime incident, were reduced to a warning and are currently performing their duties.

The pattern of financial companies responding to the authorities’ ‘excessive’ litigation with ultra-luxury legal teams has also become entrenched. For example, in the lawsuit filed by Chairman Sohn to nullify the heavy sanction related to the DLF incident, the Financial Supervisory Service appointed a lawyer from the Government Legal Service and later added the law firm Kim & Chang, but Chairman Sohn’s side hired the country’s largest law firm Kim & Chang and major law firms such as HwaWoo, mobilizing all their capabilities early on.

An insider familiar with the financial sector said, “The Financial Supervisory Service’s numerous ‘disputes’ with the financial sector during former Governor Yoon’s tenure also undermined its own authority. As the FSS repeatedly lost individual lawsuits, financial companies became more aggressive in litigation,” adding, “In a way, financial companies might have been exploiting this situation.”