[Why & Next] New CEO 'Elected' After 9 Years... Internal and External Challenges at KT&G

Allegations of Extravagant Overseas Trips and Split Donations by Outside Directors
Resurface as a Series of Revelations
Internal and External Candidate Selection Process Seen as a 'Power Struggle'
Similar to Cases of Ownership Dispersion in POSCO, KT, and Others

KT&G, facing the election of a new CEO for the first time in nine years, has been engulfed in controversy both internally and externally. Following allegations regarding some outside directors who took company-supported business trips that included leisure activities, an internal whistleblower revealed suspicions that KT&G engaged in so-called 'split donations' to lawmakers to circumvent tobacco-related regulations. Activist funds have also filed lawsuits against former and current outside directors, accusing them of negligence in monitoring the company's shares, which caused losses to the company. Similar disturbances have occurred in ownership-dispersed companies such as POSCO and KT ahead of CEO elections, leading to growing speculation that KT&G is experiencing a 'power struggle' to gain control during the process of selecting candidates for the new CEO.

KT&G Headquarters Building Exterior

Is This an Internal Whistleblowing for Reform or a 'Pureblood' Faction's Attempt to Tarnish?

According to industry sources on the 26th, KT&G recently faced allegations that the company spent tens of millions of won annually of corporate funds to send outside directors on overseas trips with leisure purposes. Since 2012, except for the years 2020-2021 when COVID-19 occurred, KT&G's outside directors have taken overseas business trips once a year for about a week. The company supported them with business-class airfare and luxury hotel accommodations, and paid an additional $500 per day for meals and transportation. The issue arose because some outside directors in the past were criticized for engaging in leisure activities such as cruise tours unrelated to work or bringing their spouses along during these trips.

KT&G explained regarding the overseas trips of outside directors, "We support related work activities according to regulations," adding, "We conduct overseas trips once a year, within seven days, targeting not only overseas subsidiaries but also major markets, for purposes such as visiting local markets and production facilities, meeting overseas experts, and reviewing new business candidates. The cost is about 6.8 million won per person on average (excluding airfare), following internal regulations."

Regarding spouses accompanying some outside directors, KT&G stated, "Those who accompanied did so at their own personal expense," and added, "The recent issues raised relate to incidents in 2012 and 2014 and are unrelated to current outside directors."

Earlier, allegations surfaced that in 2017 KT&G illegally provided political funds to lawmakers through 'split donations' by mobilizing some employees. Internal documents containing mobile phone messages sent to employees about this and donation details were exposed through media reports, with claims that this was an organized measure to block tobacco-related regulations. This matter potentially violates the Political Funds Act. KT&G stated, "The company is not aware of this matter," and added, "If necessary, we will verify the facts and take appropriate measures."

Additionally, on the 17th, an internal source claimed that KT&G violated U.S. health authorities' tobacco regulations and submitted incorrect documents during the approval and review process of tobacco products, which may result in the company being unable to recover approximately 1.54 trillion won in long-term deposits paid to state governments. Long-term deposits are funds held by state governments in the U.S. to prepare for health or physical damages to smokers caused by tobacco companies' faults. KT&G responded, "We have not yet received any notifications or sanctions regarding regulatory violations," and explained, "No such issues have occurred related to the company so far, and we expect to receive refunds sequentially from 2025 depending on the payment schedule."

POSCO and KT Show Similar Patterns... CEO Appointment Struggles in 'Ownership-Dispersed Companies'

These allegations emerged consecutively after KT&G began the candidate selection process for the next CEO on the 28th of last month, and current CEO Baek Bok-in announced on the 9th through the board of directors that he would not seek a fourth term. Baek, a KT public recruitment alumnus, became the first CEO in 2015 and served three consecutive terms. As allegations linked to his tenure surfaced one after another, there is speculation that the outside directors who will evaluate the new CEO selection process are being shaken to appoint an external candidate rather than an internal one.

KT&G's CEO appointment process is conducted in three main stages according to relevant laws and procedures: the Governance Committee (Governing Committee), the CEO Candidate Recommendation Committee (Recommendation Committee), and shareholder meeting approval. Most members of the first stage, the Governance Committee, are outside directors. The Recommendation Committee, responsible for the second stage, is composed entirely of outside directors. The company's board of directors consists of eight members, with six being current outside directors except for two inside directors.

All these outside directors were appointed during Baek's tenure from 2018 to 2021. A business insider noted, "It is important to pay attention to the fact that most of the past incidents are becoming contentious issues like the recent situation," and speculated, "The disclosure of insider testimonies and evidence-like materials escalating into a whistleblowing battle suggests an intention to shake the current system and empower external candidates."

Similar disturbances occurred during the CEO selection processes at POSCO and KT, where insiders had previously held the top position. POSCO, whose chairman Choi Jeong-woo, a public recruitment alumnus, recently declined a third term, held overseas board meetings in China in 2019 and Canada last year through its holding company POSCO Holdings. Allegations arose that outside directors went on lavish trips, prompting police investigations. Former KT CEO Koo Hyun-mo, an internal alumnus, was also accused and reported by labor unions and civic groups in 2022 for involvement in past 'split donations.' All these disclosures occurred during the process of selecting candidates for the next CEO.

The industry consensus is that conflicts escalating into whistleblowing battles over CEO appointments are inevitable in ownership-dispersed companies like KT&G, where governance is unstable. Meanwhile, voices are also calling for strengthening the role of outside directors who should check the CEO in these companies.

Flashlight Capital Partners (FCP), an activist fund owning about 1% of KT&G shares, criticized the CEO appointment process earlier this month as a "wordplay secret ballot," pointing out that the Governance Committee, CEO Candidate Recommendation Committee, and board of directors are effectively the same group composed of outside directors appointed during CEO Baek's term. FCP also claimed that former and current KT&G board members have caused losses of about 1 trillion won to the company by donating approximately 10 million treasury shares to foundations and funds for free instead of using them to enhance shareholder value through cancellation or sale since 2001, and recently filed lawsuits against them. Accordingly, FCP insists that outside directors recommended by shareholders, not the CEO side, should be included to monitor management.

Meanwhile, KT&G's Governance Committee confirmed a total of 24 candidates for the next CEO candidate pool (longlist) on the 11th, including 14 outside candidates and 10 inside candidates. They plan to select the first shortlist of CEO candidates to recommend to the Recommendation Committee by the end of this month. The Recommendation Committee will review and narrow down the second shortlist by mid-next month, disclose the list, and finalize the candidate by the end of next month.