[Tenured Outside Director]③ "Need to Evaluate if Outside Directors Are Critical... Term Limits Required"

Appointed After Overseas Financial Authorities' Eligibility Test
In Korea, Outside Directors Selected at Financial Firms' Discretion
FSS Verifies Independence and Expertise Through Meeting Records and Interviews

▲On the 6th of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, is speaking at the '2023 Business Plan Press Conference.'

The Financial Supervisory Service (FSS) has set a policy that "since there was no system to verify qualifications before becoming an outside director, verification will be conducted even after becoming one." Although governance supervision was conducted in the past, it was superficial. According to stories circulating within the FSS, "so-called 'prestigious' outside directors, such as high-ranking officials, legal professionals, and professors, often took a high-handed attitude, saying 'Who do you think you are?' whenever the FSS investigation team leader tried to approach the board of directors."

Recently, with President Yoon Suk-yeol stepping in to support the effort, the FSS's stance has changed 180 degrees. Starting this year, they have decided to hold regular meetings with outside directors at least once a year and to inspect the actual operation of the board of directors. The core plan is to evaluate the expertise and independence of outside directors through minutes, interviews, and internal and external reputations.

Assess Whether They Only Listen to the Chairman or Offer Critical Opinions

In the UK, senior executives of financial companies undergo a 'Fit and Proper test' when appointed. The same applies to outside directors appointed externally. They must be tested once at the initial appointment and once a year during their term. The main evaluation criteria are 'reputation,' 'competence,' and 'financial soundness.' Senior executives can only be appointed after approval by the supervisory authority. In contrast, in South Korea, financial companies have much greater discretion in selecting or reappointing outside directors.

A senior official at the FSS stated, "For example, when highly specialized agenda items such as who should be appointed as the successor to the chairman of a financial holding company, how to operate the management succession program, how to determine performance-based compensation, or whether to decide on mergers and acquisitions are brought to the board, we will evaluate through specific records whether each director critically identifies problems and offers opinions or simply listens to whatever the chairman decides." Strengthening the financial authorities' oversight of the board is expected to ultimately prevent directors from being blindly reappointed.

Financial Professionals Should Also Become Outside Directors to Utilize Expertise

There are also opinions that institutional measures are needed to control the long-term tenure of outside directors. A former senior official of a financial holding company said, "Currently, the term structure for outside directors in financial companies is a system where the initial appointment is for two years, with one-year extensions annually, which inevitably makes them cautious of the CEO." He added, "There are calls, mainly from the political sphere, to legally limit the term of financial holding company chairmen, and similarly, the term of outside directors could be fixed, whether 2+2 years or 2+1 years."

There are also arguments that "the restrictions on the qualifications of outside directors should be lifted." According to the governance law for financial companies, those who have been full-time executives or non-executive directors of the financial company or its affiliates within the last three years, or those who have been full-time executives of corporations that have significant business relationships, competition, or cooperation with the financial company within the last two years, cannot become outside directors. This means it is difficult to find new candidates due to conflicts of interest.

An executive at a commercial bank said, "Most of our outside directors are professors or former government officials, but businesspeople or financial professionals are restricted for various reasons such as conflicts of interest, so the pool itself is narrow," and added, "We need to consider ways to expand the pool of outside directors with expertise."