Lack of Specificity in Some Banks' Implementation Plans... Unclear Implementation Status and Timing
Discussion and Improvement Guidance on Bank-Specific Supplementary Requirements
Utilization of 'Guidelines' as Best Practices in Governance Supervision and Inspection Tasks
Domestic bank holding companies and banks have prepared and are implementing improvement plans in line with the financial authorities' proposed 'best practices for governance.' However, some banks still lack specificity in their implementation plans or have unclear timelines and execution status, indicating a need for continuous supplementation. The financial authorities plan to discuss necessary improvements with each bank holding company and bank and use the best practices as guidelines when conducting governance supervision and inspection tasks.
On the 26th, the Financial Supervisory Service (FSS) announced that it had received and reviewed implementation plans related to the 'best practices for governance' from banks during the first quarter and identified deficiencies in some bank holding companies and banks, which will be required to make improvements. The review covered eight bank holding companies (KB, Shinhan, Hana, Woori, NH, BNK, DGB, JB) and 16 banks (Kookmin, Shinhan, Hana, Woori, Nonghyup, Busan, Gyeongnam, Daegu, Jeonbuk, Gwangju, Jeju, SC, Citi, Kakao, K, Toss).
In December last year, the FSS finalized the 'best practices for governance of bank holding companies and banks' after discussions with the banking sector and external experts through a task force (TF) to encourage improvements in bank governance and enhance the global consistency of supervisory standards. The best practices consist of four areas: ▲support organizations and systems for outside directors ▲CEO appointment and management succession procedures ▲collective consistency and independence of board composition ▲evaluation systems for the board and outside directors.
Kim Hyung-soon, Director of the Bank Inspection Division 1, stated, "Some bank holding companies and banks have implementation plans that are not specific or have unclear execution status and timing, indicating a need for improvement. Especially regarding management succession procedures, board composition, and evaluation, it is necessary to promptly finalize improvement plans before the formal processes of CEO appointment and outside director appointment and evaluation begin at each bank."
The review found that 11 bank holding companies and banks have completed establishing dedicated support organizations (secretariats) for outside directors under their boards, and most of the remaining banks plan to implement this within the year. Most banks designate the person in charge of the work as a department head or higher and plan to establish procedures for prior reporting to and participation of the board in the appointment and performance evaluation of the person in charge. Additionally, the board support organization staff generally includes the person in charge (secretariat head) plus two dedicated personnel.
The timing for sending meeting materials has been formalized to at least seven days in advance, with exceptions and procedures for early distribution being revised. However, while all banks have established grounds for holding meetings exclusively for outside directors to ensure thorough agenda discussions and agreed to record key details such as meeting summaries, some bank holding companies and banks have unclear convening procedures.
Regarding the best practices for strengthening outside director education and training, all bank holding companies and banks have presented plans to report education and training plans to the board and to expand and enhance educational content. However, detailed content such as specific education topics and mandatory hours are still under review.
Some bank holding companies and banks show insufficient concretization and documentation of management succession plans... 'Specific CEO qualification requirements' are rarely presented
Regarding comprehensive succession plans and review principles under the best practices for CEO appointment and management succession procedures, most financial institutions are in the process of concretizing and documenting their succession plans. Some bank holding companies and banks plan to increase the frequency of reviewing the adequacy of succession plans, including CEO qualification requirements, when the CEO's term is about to expire.
Few bank holding companies and banks have specifically presented CEO qualification requirements. Only four have completed this, while most are still working on concretization. Furthermore, all bank holding companies and banks are considering starting the succession process at least three months before the current CEO's term expires, and many are considering allocating minimum required time for each stage.
Regarding evaluation and verification systems, some bank holding companies and banks plan to utilize external experts during candidate evaluation and verification, but most are still reviewing detailed measures. While global companies select candidates early and appoint CEOs after long-term evaluation and verification, domestic banks have short evaluation periods and lack diversity and objectivity in evaluations. Bank holding companies and banks are reportedly preparing systematic verification procedures for both internal and external candidates to appoint suitable CEOs.
Regarding ensuring the role of subsidiary executive nomination committees, each holding company is considering providing banks with information on subsidiary CEO candidates, opportunities for interaction, interview attendance, and rights to recommend and submit opinions.
Some bank holding companies and banks also need to concretize details of the board 'competency diagnosis sheet'
Regarding securing collective consistency of board composition, most bank holding companies and banks have established management systems, but documentation is needed to clearly define these as board responsibilities. According to best practices, the board must collectively ensure consistency commensurate with the bank's size, complexity, and risk profile. The board should also formalize responsibility for establishing criteria for collective consistency, regularly reviewing and inspecting them, and preparing countermeasures when deficiencies arise.
The 'Board Skill Matrix,' which all bank holding companies and banks plan to introduce, was found to require concretization of detailed aspects such as preparation and management standards and utilization methods to ensure practical use rather than mere formal completion. The skill matrix is a tool that visually represents the expertise, abilities, experience, and qualities of board members, as well as diversity information such as gender, age, and social background, in tables or charts to assess the appropriateness of board composition. Additionally, only three have completed mid- to long-term board succession plans that include appropriate term policies such as 'staggered terms.'
Meanwhile, regarding board and outside director evaluation systems, banks are reviewing expanding quantitative indicators, diversifying evaluation items such as questionnaires, and adjusting the weight of evaluators (self, peers, employees). All bank holding companies and banks plan to conduct regular evaluations of procedures and system adequacy, with some considering using external professional organizations. However, some banks have not formalized improvement plans for deficiencies identified in evaluation results or procedures for checking implementation, indicating a need to strengthen feedback functions.
Director Kim stated, "The Financial Supervisory Service will urge active interest and efforts from boards of directors to advance governance by discussing necessary improvements for each bank. We also plan to use the best practices as guidelines when performing governance supervision and inspection tasks for banks."
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