[Inside Chodong] Internal Control Failures Return as a Harsh Wind

Long-Serving CEOs Leading the Securities Industry Step Down in Succession
Record-High Scandals Including Stock Manipulation and Forgery
Urgent Need for New Leaders to Strengthen Internal Stability

"This winter seems to have brought an unprecedentedly severe cold wave early to Yeouido."

These are the words of a senior official at a securities firm I recently met. Even before the full onset of the cold wave, a harsh wind is blowing fiercely through the Yeouido securities district.

The atmosphere in Yeouido's securities district at the end of the year is more unsettled than ever. This is because the CEOs of major securities firms are being replaced one after another, and subsequent personnel changes and restructuring are expected to be inevitable. Previously, Mirae Asset Securities, Meritz Securities, Korea Investment & Securities, Kiwoom Securities, and Samsung Securities all changed their heads. Many long-serving CEOs who had led the securities industry have stepped down. Recently, CEOs of securities firms who received heavy disciplinary actions from financial authorities related to the Lime and Optimus private equity fund scandals are also expected to be replaced. In addition, several securities firm CEOs whose terms expire early next year suggest that the wave of leadership changes in the securities industry will not subside easily.

This year-end harsh wind was already anticipated. Amid ongoing concerns about real estate project financing (PF) defaults this year, securities firms’ performance has been poor, and various incidents and accidents have occurred. According to the Financial Supervisory Service (FSS), the number and amount of financial accidents at securities firms this year reached record highs. The number of financial accidents increased from an annual average of 7.8 cases between 2019 and 2022 to 14 cases this year, and the amount surged from 14.3 billion KRW to 68.8 billion KRW this year. Kiwoom Securities was involved in all major stock manipulation cases that shook the market this year, including the Ra Deok-yeon incident and the Yeongpung Paper price manipulation. At Mirae Asset Securities, an employee forged loan contracts, causing shock. Meritz Securities was embroiled in allegations of insider information use to avoid losses by selling large amounts of stock just before the trading suspension of Ewha Electric. The aftermath of weak internal controls has swept in the form of leadership changes.

Financial authorities are also strongly urging financial companies to strengthen internal controls as incidents and accidents occur frequently. The recent heavy disciplinary actions against securities firm CEOs related to the Lime and Optimus scandals reflect the financial authorities’ determination to hold them clearly accountable for inadequate internal controls. The Financial Services Commission held a regular meeting at the end of last month and decided on heavy disciplinary measures, including a three-month suspension and reprimand warnings, against KB Securities CEO Park Jung-rim and NH Investment & Securities CEO Jung Young-chae, respectively. Notably, Park’s disciplinary level was unusually raised above the original 'reprimand warning' decided by the FSS’s disciplinary committee.

The CEO position carries immense responsibility. In the past, what mattered was the achievements made, but now how the internal controls are managed and problems prevented has become an important criterion for evaluating CEOs. Several long-serving CEOs who recently stepped down or were disciplined had achieved remarkable results while leading securities firms for a long time, but ultimately were unable to continue due to internal control risks.

The recent wave of generational change sweeping through Yeouido’s securities district reflects this shift. If the focus had been solely on growth until now, it is time to run while solidifying the foundation. Newly appointed CEOs face the challenge of not only focusing on rapid growth and outstanding performance but also emphasizing the improvement of internal control systems and organizational stability. As the saying goes, 'Sushin Je-ga Ji-guk Pyeong-cheon-ha (修身齊家治國平天下),' meaning 'cultivate oneself, regulate the family, govern the country, and bring peace to the world.' It is urgent and important to govern oneself and the internal environment first.