[2023 Financial Forum] "The Core of Internal Control is Risk Management... Establishing the Right Culture is Essential"

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

Jubin Mogul, a McKinsey partner, attended the 12th Seoul Asia Financial Forum held on the 25th at the Chosun Hotel in Jung-gu, Seoul, delivering a keynote speech on the topic "Corporate Governance of Financial Companies: Lessons from Global Advanced Systems." Photo by Jinhyung Kang aymsdream@

"If financial companies regard internal control merely as a regulatory cost imposed externally and perceive it as a cumbersome rule, internal control will not be able to fulfill its original function. Internal control must be a management strategy and organizational culture of financial companies that protects their reputation and profits in the long term." (Kim Ju-hyun, Chairman of the Financial Services Commission)

On the 25th, Asia Economy successfully held the 12th Seoul Asia Financial Forum under the theme of 'Desirable Financial Company Governance and Internal Control Systems' at the Westin Chosun Hotel in Jung-gu, Seoul. About 300 compliance officers and practitioners responsible for internal control from major domestic financial holding companies and banks gathered, showing high interest in improving internal control in financial companies.

Attendees at the forum included Asia Economy CEO Woo Byung-hyun, National Assembly Financial Services Committee Chairperson Baek Hye-ryun, Chairman Kim, Kim Kwang-soo, Chairman of the Korea Federation of Banks, Jung Ji-won, Chairman of the Korea Insurers Association, Sohn Byung-doo, Chairman of the Korea Exchange, Lee Jae-geun, CEO of KB Kookmin Bank, Jung Sang-hyuk, CEO of Shinhan Bank, Lee Seung-yeol, CEO of Hana Bank, Lee Won-duk, CEO of Woori Bank, Lee Seok-yong, CEO of NH Nonghyup Bank, Park Jong-bok, CEO of SC First Bank, Yoo Myung-soon, CEO of Citibank Korea, Seo Ho-sung, CEO of K Bank, and Oh Hwa-kyung, Chairman of the Korea Federation of Savings Banks.

In his opening remarks, CEO Woo explained the forum's theme, saying, "Domestic financial companies transitioned to a financial holding company system with the enactment of the Financial Holding Companies Act in 2010. Currently, 10 holding companies have enormous influence, generating annual net profits of about 20 trillion won, but they are not free from internal control issues. Internal control is a task that financial holding companies with dispersed ownership structures must improve."

He continued, "Looking back at the 'Lehman Brothers incident,' the epicenter of the 2008 financial crisis, we can feel how important governance and internal control are. It is necessary to consider why Wall Street investment banks, which control the global financial market, collectively engaged in such wrong behavior at that time, what happened inside the banks, why the CEOs managed as they did, and what the boards of directors did," he emphasized.

"Timely and meaningful agenda... Financial companies' autonomous control efforts are also important"

Baek Hye-ryun, Chairperson of the National Assembly's Political Affairs Committee, Kim Ju-hyun, Chairperson of the Financial Services Commission, along with heads of major commercial banks and financial organizations, are attending the "12th Seoul Asia Financial Forum" held on the 25th at the Chosun Hotel in Jung-gu, Seoul, and posing for a photo. Photo by Kang Jin-hyung aymsdream@

Chairman Kim Ju-hyun of the Financial Services Commission, in his congratulatory remarks, said, "As the financial industry develops, financial transactions become more complex and diverse, making it difficult to prevent financial accidents and maintain sound management in financial companies. In that regard, the theme of this forum is a timely and meaningful agenda," emphasizing, "While external regulation is necessary, above all, autonomous control efforts by financial companies to identify and respond to potential risks threatening sound management are important."

Following him, Chairperson Baek said, "Enhancing the effectiveness of internal control is not only a way to reduce various risks but also a path to prevent financial accidents in advance and restore trust in the financial market," adding, "The National Assembly will also strive to revise the Financial Company Governance Act and make institutional improvements so that a proper internal control culture can be stably established."

At the forum, Partner Jubin Mogul of McKinsey delivered a keynote speech on 'Financial Company Governance: Lessons from Global Advanced Systems,' and Professor Kawaguchi Yasuhiro of Doshisha University Law School in Japan spoke on 'The Independent Outside Director System of Japanese Financial Companies.' Partner Mogul advised securing diversity on boards of directors. He emphasized, "To secure diversity of thought on financial company boards, it is important to bring directors from other industries. It is also necessary to design short board terms and rotate board composition. Of course, the criteria for board selection should be stringent from the start."

Professor Kawaguchi introduced the 'Independent Officer (Outside Director, Auditor) Report' system required by the Tokyo Stock Exchange for listed companies. He explained, "At the exchange level, detailed information must be provided about who the appointed independent officers are, whether they can maintain independence from management, and the reasons for their appointment. The three major Japanese financial holding companies?Mitsui Sumitomo, Mizuho, and Mitsubishi UFJ Financial Group?are also listed on the Tokyo Exchange Prime market and thus subject to this self-regulation."

"The core of internal control is risk management... Establishing the right culture is essential"

David Chu, Chief Compliance Officer of Citibank Hong Kong and Head of the Greater China and Korea Cluster, attended the "12th Seoul Asia Financial Forum" held on the 25th at the Chosun Hotel in Jung-gu, Seoul, and gave a presentation on the topic of "Corporate Risk and Compliance Risk Management System." Photo by Jinhyung Kang aymsdream@

Following this, David Chu, Chief Compliance Officer (CCO) of Citibank Hong Kong and head of the Greater China and Korea cluster, presented on 'Corporate Risk and Compliance Risk Management Systems.' Professor Jo Myung-hyun of Korea University Business School spoke on 'Desirable Financial Company Governance and Internal Control Systems.' Professor Kwon Jong-ho of Konkuk University Law School discussed 'Problems and Innovation Tasks of Corporate Governance in Korea from a Legal Perspective.' Research Fellow Lee Hyo-seop of the Korea Capital Market Institute presented on 'Reasons Why Internal Control Systems Do Not Work in Korean Financial Companies and Solutions.' Lee Hyung-joo, Director of the Financial Policy Bureau at the Financial Services Commission, spoke on 'Desirable Financial Company Governance and Internal Control Systems.'

CCO Chu emphasized the importance of 'culture' related to internal control by introducing the case of Citibank Hong Kong. He said, "To properly implement internal control, the culture?values pursued by the bank, principles of management, and the board's leadership direction?must be established. Without setting the right direction and values to establish culture, employees cannot be provided with a behavioral compass."

The culture emphasized by Citibank is primarily customer value orientation. All actions and decisions must align with the best interests of customers. Establishing such a culture inevitably leads to taking responsibility for risk management. Chu CCO also stressed, "Banks have large business scales and always carry risks. It is not a matter of business planning but operational issues or compliance areas. Rather than making excuses, having ownership, early detection, and correction of problems is proper risk management and leadership."

He particularly urged the need for a culture where concerns can be reported timely to higher-ups when problems arise or conflicts of interest occur. He also advised that managers should create an environment where employees do not merely read the internal code of conduct but always keep it in mind and put it into practice.

Chu CCO also emphasized the need to build an environment where the board of directors can operate soundly. Citigroup has a Risk Management Committee, Audit Committee, Nomination and Governance/Public Affairs Committee, Compensation, Evaluation and Culture Committee, and Technology Committee within the board. Additionally, the Group Executive Management Committee has detailed organizations for risk management, assets, business risk, reputational risk, and strategic risk, providing appropriate information and support to each board committee. He said, "We must consistently provide summarized, proper information so that the board can ask appropriate questions about management strategy and conduct oversight. Only then can the board deeply examine issues and perform monitoring and supervision."

Director Lee Hyo-seop viewed the cause of internal control failures in domestic financial companies as a 'short-term performance-oriented culture' and emphasized strengthening the management's internal control duties and responsibilities. He said, "Improving internal control involves significant costs, but the investment effect tends to appear only after the CEO's term ends. Domestic financial company CEOs pursue short-term profits for reappointment and neglect investment in internal control improvement."

Professor Kwon Jong-ho commented on the domestic outside director system, saying, "The system itself is advanced-country style, but its operation is developing-country style." He added, "Regulations related to outside directors should be rationalized so that professionals such as economic figures can enter outside director positions in large numbers." He also noted that many outside directors in the financial sector are still former bureaucrats or influenced by political circles, emphasizing, "It is necessary to recognize the seriousness of political logic interfering in economic issues."