[NH Financial 2.0]② Subsidiary CEOs and Non-Executive Directors Without Expertise

CEO Without Financial Expertise from NongHyup Central
Non-Executive Director Replaces Holding Chairman on CEO Selection Committee
"Central Association's Intent More Important Than Financial Expertise"
Conflict Erupts Between Central Association and Holding Company
Some Argue Central Association Personnel Needed for NongHyup's Purpose

Editor's NoteThe NongHyup, established for the advancement of South Korean farmers, has seen 12 years pass since the separation of its credit and economic businesses. The separated credit business transformed into NongHyup Financial Group, aiming to grow into a global financial group. However, voices are growing that the unique governance structure, with 100% ownership by the NongHyup Central Association, is causing various issues such as financial accidents, agricultural support project funds, personnel systems, and weakening competitiveness in mutual finance among agricultural cooperatives. Recently, we revisit the controversies surrounding NongHyup Financial Group and its mutual finance business to explore the direction NongHyup Financial should take. If the separation of credit and economic businesses was version 1.0 of NongHyup Financial's development, it is now time to create a version 2.0 blueprint and improve systems and institutions for the next leap forward.

The governance structure of NongHyup Financial Group, wholly owned by the NongHyup Central Association, has sparked controversy not only over financial accidents but also in personnel systems, represented by the appointment of non-executive directors and CEOs. Non-executive directors, who recommend executive candidates or decide compensation systems, have consistently been former NongHyup Central Association members or heads of agricultural cooperatives, raising concerns about 'financial expertise.' Criticism exists that the NongHyup Financial Executive Candidate Recommendation Committee (ECRC) excludes the financial group chairman, making the NongHyup Central Association's intentions more influential than financial expertise in appointing subsidiary CEOs. However, there is a counterargument that considering the founding purpose and basis of NongHyup, the perspective of farmers should be reflected throughout management.

In March, NongHyup Financial Group appointed Park Heung-sik, head of Gwangju Bia Agricultural Cooperative, as a non-executive director. Non-executive directors are executives who decide major issues such as management appointments at board meetings, and it has become customary to appoint close associates of the Central Association chairman. Park is known to have been recommended by Kang Ho-dong, chairman of the NongHyup Central Association. The previous director, Ahn Yong-seung, head of Namseoul Agricultural Cooperative, was classified as a close associate of former chairman Lee Sung-hee.

Non-executive directors of NongHyup Financial Group belong to board committees that decide major matters of the holding company. The ECRC is a representative example. The ECRC recommends the financial group chairman and outside directors to the shareholders' meeting. It also recommends subsidiary CEOs to each subsidiary's ECRC, such as NongHyup Bank and NongHyup Life Insurance. In other financial groups (KB, Shinhan), non-executive directors are mainly CEOs of one of the subsidiaries, usually the bank. Hana and Woori Financial Groups also had bank presidents in this role until recently.

This ECRC structure continues within subsidiaries. Non-executive directors participate as members of subsidiary ECRCs, some of whom are from the Central Association. Looking at the status of non-executive directors in the four major subsidiaries of NongHyup Financial Group (NongHyup Bank, NongHyup Life Insurance, NongHyup Property & Casualty Insurance, NH Investment & Securities), in NongHyup Bank, one of the two non-executive directors is a former agricultural cooperative head. In Life and Property & Casualty Insurance, two out of three are former cooperative heads. NH Investment & Securities is the only subsidiary where the non-executive director is not a former cooperative head.

It is also notable that the financial group chairman does not participate as a member of the ECRC. Among the five major financial groups (KB, Shinhan, Hana, Woori, NH NongHyup), NongHyup Financial is the only one where the holding company chairman is absent from the committee recommending subsidiary CEO candidates. Instead, if a non-executive director from the NongHyup Central Association participates as a member, it suggests that the Central Association's intentions are more important than the financial group chairman's personnel authority. In fact, many subsidiary CEOs have backgrounds in the Central Association. All current and former CEOs of NongHyup Bank, Life, Property & Casualty Insurance, Card, Savings Bank, and Capital have experience in the Central Association. NH Investment & Securities, incorporated into NongHyup Financial through a merger and acquisition in 2014, is the only one without any current or former CEO having Central Association experience.

This has triggered conflicts over personnel authority between the NongHyup Central Association and the financial group. Last month, there were reported disagreements between the NongHyup Central Association and NongHyup Financial over the appointment of the president of NH Investment & Securities. Yoo Chan-hyung, former vice chairman of the NongHyup Central Association, was a strong candidate to succeed the outgoing president Jung Young-chae. It is reported that Kang Ho-dong, chairman of the NongHyup Central Association, personally recommended Yoo to Lee Seok-jun, chairman of NongHyup Financial Group. However, Lee reportedly raised concerns about Yoo's lack of financial and securities expertise. Ultimately, NH Investment & Securities recommended internal candidate Yoon Byung-woon, vice president of NH Investment & Securities, as the final CEO candidate.

However, considering NongHyup's founding purpose, there is a counterargument that it is necessary for cooperative heads to serve as non-executive directors. NongHyup emphasizes 'cooperation and innovation' as its fundamental purpose and management philosophy. Through cooperation and innovation, it aims to provide a prosperous future for farmers and the best value to customers, contributing to national and community development. It also states that NongHyup exists for the happiness and advancement of farmers and pursues the improvement of farmers' economic, social, and cultural status.

There is also legal legitimacy for the NongHyup Central Association to exert influence over NongHyup Financial Group under the NongHyup Act. According to Article 142-2 of the NongHyup Act, the Central Association may guide and supervise subsidiaries to contribute to the interests of its members and cooperative members. This means that subsidiary CEOs and non-executive directors, including those in the financial group, can be appointed for the benefit of cooperative members.

Cooperative heads also hold positions overseeing the mutual finance sector in their regions, so some argue that their financial expertise is not lacking. A financial industry official said, "Regional agricultural cooperative heads oversee credit businesses locally, so raising concerns about their financial expertise may not be appropriate."

Financial authorities are cautious but closely monitoring non-executive directors, stating that their appointment is a shareholder right under commercial law. A senior official at the Financial Supervisory Service said, "Non-executive directors are a shareholder right under commercial law, so authorities cannot infringe on shareholder rights."