[Shaking Financial Leadership]⑤ "Independent Outside Directors Needed... Financial Authorities Must Assess Independence"

As financial accidents caused by internal control failures of CEOs and large-scale consumer damages continue to occur in the financial sector, calls for institutional improvements to prevent these incidents are pouring in from regulatory authorities, academia, and civil society. Experts advise that to prevent financial companies' misconduct from leading to the extreme remedy of a 'revival of government control (Gwanchi)', the current outside director system?which merely acts as a rubber stamp?must be reformed, and robust measures to improve internal control systems should be firmly established to thoroughly organize the system.

"Independent Outside Directors Needed"

The key is not the ‘outside director’ but the ‘independent director.’ In South Korea, it is not important to simply appoint professors, accountants, or former bureaucrats from outside the company as outside directors, but whether there are independent outside directors who are independent from management and can raise voices of checks and balances is crucial in corporate or financial company governance.

South Korea tries to secure the independence of outside directors through preemptive regulations by stipulating disqualifications for appointment as outside directors in the Commercial Act. The disqualifications are specified as persons who have worked for the company within the last two years, spouses and direct relatives of major shareholders, employees of major shareholder corporations, employees of the company’s parent or subsidiaries, and employees of corporations that have business dealings with the company.

As long as a person is outside the company, even friends of the owner or management or recommended candidates can serve as outside directors. In reality, since the appointment rights for outside directors lie with the owner or management, it is difficult to establish ‘independence’ under this structure.

In contrast, the United States stipulates the requirements for independent directors in stock exchange listing rules, but additionally allows courts to retrospectively judge whether a director was independent based on legal interpretation. According to precedents, an independent director must be a disinterested person with no conflicts of interest with the company. Naturally, anyone under the influence of the owner or management is disqualified.

Japan also requires listed companies, about half of which comply with the corporate governance code, to appoint at least two independent outside directors. These independent outside directors are expected to make decisions independently of owners, management, or minority shareholders for the benefit of the entire company. Professor Kwon Jong-ho of Konkuk University Law School explained, "Japan’s independent outside directors are not representatives of specific groups such as major or minority shareholders but act for the company’s sustainable growth." He added, "In South Korea, systems such as labor union-recommended outside directors or minority shareholder-recommended outside directors have been discussed, but these directors perform duties for the interests of labor unions or minority shareholders, which could turn the board into a battleground." Professor Kwon also mentioned, "I heard that Japan legalized the independent outside director system through the 2019 amendment of the Company Act."

Need to Refer to Advanced Countries’ Cases of Financial Company Governance Improvement

Academia and the financial sector argue that attention should be paid to various internal control systems introduced after the 2008 global financial crisis in response to criticism of ‘predatory finance.’ Predatory finance refers to lending to people without repayment ability or pursuing profits by selling financial products without properly explaining risks to customers. Recent cases of incomplete sales, such as the Lime incident, are also a type of predatory finance.

The United Kingdom introduced the Senior Manager and Certification Regime, requiring financial companies to submit reports to regulators detailing the core duties and responsibilities of senior executives when newly appointed or when there are significant changes in their responsibilities. Financial companies conduct at least annual internal fit and proper tests for employees performing duties that pose significant risks of consumer harm. Regulators evaluate suitability by reviewing submitted materials and conducting interviews, then provide feedback on the results. The United States and the European Union also operate similar executive suitability assessment systems.

Australia requires senior executives (Accountable persons) and financial companies to comply with conduct rules set by regulators to prevent widespread consumer harm and protect the sound reputation of financial companies caused by inappropriate employee conduct.

The Netherlands actively intervenes by assessing risks related to corporate culture in financial companies. Risk factors include ‘behavior’ such as active participation of all members in board decisions and vigorous minority opinions; ‘organizational dynamics’ such as board member diversity and methods of reconciling differing opinions; and ‘mindset’ such as ideal employee profiles and lessons from past important tasks. Based on the assessment, regulators classify companies into Red (requiring immediate intervention), Orange (requiring medium- to long-term intervention), and Green (no intervention needed).

Additionally, some argue that for internal controls in financial companies to function properly, monetary sanctions imposing fines severe enough to shake the company are more important than personal sanctions against CEOs or employees.