[2023 Financial Forum] Professor Jo Myung-hyun "Independent Board Structure Needed, Including Single-Term Outside Directors"

The 12th Seoul Asia Financial Forum Held
'Desirable Financial Company Governance and Internal Control Systems'

Professor Jo Myunghyun of Korea University’s Department of Business Administration is giving a presentation on the topic "Problems of Corporate Governance in Korean Companies and Directions for Reforming Governance in Financial Companies" at the 12th Seoul Asia Financial Forum held on the 25th at the Chosun Hotel in Jung-gu, Seoul. Photo by Kang Jinhyung aymsdream@

Professor Jo Myunghyun of Korea University Business School stated on the 25th that financial companies should establish an independent and professional board of directors by setting the term of outside directors to a single three-year term as part of governance reform. He also emphasized the need to improve the evaluation of the board of directors.

On the 25th, at the 12th Seoul Asia Financial Forum held at the Westin Chosun Hotel in Sogong-dong, Seoul, under the theme "Desirable Financial Company Governance and Internal Control Systems," Professor Jo pointed out the problems of companies with dispersed ownership such as POSCO, KT, and financial holding companies. Professor Jo is a corporate governance expert who has served as the chairman of the Korea Stewardship Code Development Committee and the president of the Korea Corporate Governance Service.

"Importance of Independent Boards... Improvement of Individual Evaluation Systems"

Professor Jo highlighted that South Korea ranks 9th out of 12 countries in Asia in terms of corporate governance and said, "The regulatory system for checks and balances inside and outside companies is not well developed," adding, "The core issue is that the board of directors does not function properly."

To address this, Professor Jo proposed a reform direction to establish an independent and professional board of directors. He explained, "In advanced countries, there is an internal pool of candidates for both CEOs and outside directors, but in Korea, there is no such pool, so companies hold open recruitment shortly before appointments or CEOs make various efforts to appoint people they know as outside directors. Forming an independent board is not an easy task in Korean society."

He first advocated for setting the term of outside directors to a single three-year term. Currently, outside directors typically serve two-year terms with one-year extensions. He said, "Since the chairman's term is three years, if outside directors extend their terms by one year at a time, they inevitably become cautious." He added that if reappointment is allowed, the system should be improved to a 3-year + 3-year structure.

He also emphasized the need for periodic individual evaluations of the board. Professor Jo said, "Such evaluations are rarely conducted in Korea," and explained, "In the U.S., professional consulting firms that evaluate boards have grown into a large industry." He further criticized, "When objective internal evaluations are not possible, a system should be established where non-independent and non-professional directors can be quickly replaced, rather than continuing as is."

Professor Jo also pointed out the ambiguous role of the board 'chair' in Korean companies. He said, "The chair should gather the opinions of outside directors and convey the board's overall opinion to the CEO, and should take the lead in evaluating the CEO, but there are almost no such individuals in Korea." He added, "A transparent succession plan led by the board is important," and noted, "Since the formation of the chairman candidate recommendation committee often takes place behind closed doors, it is necessary to institutionally introduce overseas practices in Korea."

"Dispersed Ownership Companies like Financial Holding Firms Face 'Trench Building' and 'Parachute' Issues"

Professor Jo identified 'trench building' and 'parachute issues' among professional managers as problems in companies with dispersed ownership. He said, "In companies with dispersed ownership, professional managers run the business, but the biggest problem is trench building," referring to CEOs creating a 'trench' to secure their position by removing competitors to stay safely and long.

He also mentioned the 'parachute issue' involving frequent intervention by regimes and political circles in companies with dispersed ownership. Professor Jo added, "Despite privatization, the phenomenon occurs where incompetent 'parachutes' appointed by the government or political circles become CEOs, leading to a decline in corporate value." He criticized, "Since independent boards are not established and not only CEOs but also many outside directors are parachutes, criticism among allies rarely occurs."

Professor Jo added, "Institutions like POSCO and financial holding companies play an important role in the Korean economy, so when they have more autonomy and good governance, corporate value increases and management performance improves."

Korea's Governance Ranking 'Lower Tier'... 95% Family-Run

Professor Jo also pointed out issues with domestic companies that have owners. He said, "Korean chaebol groups hold only 1-2% of the core ownership shares of companies, but through affiliates, they actually control 30-40% of the voting rights," adding, "Because the voting rights exercised through affiliate shares are larger than the actual shares held, there is a large gap, and the greater the gap, the more negative the impact on corporate value."

Professor Jo also mentioned the loyalist groups. He explained, "Each chaebol group has a control tower and implicitly places great importance on family succession of management rights," adding, "While side effects such as preferential treatment and loopholes have largely disappeared in large business groups, these problems are serious in smaller companies where owners dominate." According to Professor Jo, about 95% of companies in Korea are family-owned.