[The Im Jong-ryong Administration in a Tight Spot]② A 'Small Society' Operating Only on Connections... 20 Years of 'Ownerless Companies'

"Forecast and government also 'agents' supervising proxy CEOs... The root cause is the double agency problem"
Commercial and Hanil faction conflicts persist... Deepening culture of lining up and loyalty

Editor's NoteWoori Financial Group has once again become the center of controversy due to improper loans involving relatives of former Chairman Sohn Tae-seung. Why do various unprecedented financial scandals such as embezzlement, misappropriation, and breach of trust involving hundreds of billions of won occur more frequently here than at other banks? While in other banks, individual misconduct outside the system is a major issue, Asia Economy believes that the core cause at Woori Financial is a long-accumulated organizational culture. This series begins with a focus on Woori Financial's flawed organizational culture, hoping that exposing it through articles will lead to a complete transformation. Asia Economy plans to continue addressing the organizational culture issues of Woori Financial in future articles.

A, who held a senior position at Woori Financial Holdings and Bank, recently passed by a hotel in Yeouido, Seoul, and witnessed a dozen former company employees busily preparing ceremonial protocol. As usual, A thought, "This must be an event where the chairman or president is coming," and casually approached, but it was a mistake. Upon arriving at the hotel, the official cars receiving the protocol were vehicles typically assigned to department heads and vice presidents. A said with a bitter smile, "At a certain bank, even the chairman attends weddings alone..." and added, "It's been several years since I retired, but I don't understand why such old-fashioned factionalism keeps repeating."

The financial sector is abuzz over the improper loan scandal involving relatives of former Chairman Sohn Tae-seung at Woori Financial and Bank. The general view is that it is a "hard-to-understand incident." According to Woori Bank's explanation, hundreds of billions of won in loans were granted to the CEO's relatives, who are under public scrutiny, without any instructions or pressure, and through a very lax screening process.

However, inside Woori Financial and Bank, there is also an assessment that this is "quite possible." Even without direct instructions or pressure, it is interpreted as a case of so-called ‘sontaku’ (忖度?a Japanese cultural term referring to acting according to another person's unspoken desires). In the financial sector, some interpret that after the 1997 foreign exchange crisis, Woori Financial and Bank became a "company without an owner" for over 20 years, creating a "small society" where internal logic operates independently.

‘Company Without an Owner’ Only Pretending to Have One... Blind Loyalty Culture Takes Root

The identity of Woori Financial and Bank can be summarized as a "company without an owner." During the 1997 foreign exchange crisis, the five major commercial banks?so-called ‘Chohung, Commercial, Jeil, Hanil, and Seoul Banks (Chosangjehanseo)’?all became insolvent, prompting the government to undertake restructuring through mergers and acquisitions. In this process, about 3.2 trillion won of public funds were injected to facilitate the merger of Commercial Bank and Hanil Bank, resulting in the birth of Hanbit Bank (now Woori Bank), which was once ranked among the world's top 100 global banks. Hanbit Bank later merged with Peace Bank to become today's Woori Bank.

Unlike cases where relatively sound banks absorbed others (Shinhan-Chohung, Hana-Seoul) or were sold to foreign financial companies (Jeil-SC), this was a merger between two insolvent banks. The major shareholder was the Korea Deposit Insurance Corporation (KDIC), a financial public enterprise without a clear owner. The actual major shareholder role was taken by the government overseeing KDIC and the National Assembly supervising and checking the government. Attempts at privatization three times since 2010 failed, and the ownerless company system lasted nearly 20 years until 2016. Woori Financial and Bank successfully completed full privatization this May, the 24th anniversary of its founding, when the KDIC sold its remaining shares.

In the financial sector, the ownerless company system is seen as having strengthened internal politics. A former official of a financial company under the old Woori Financial Holdings said, "Financial companies managed with public funds instantly became ownerless companies, and executives, employees, and labor unions tended to form interest groups closely connected with government agencies and politicians," adding, "Management aims to keep their positions, while employees and unions seek job security, aligning their interests and solidifying these movements."

It is also evaluated that since KDIC, the de facto owner, acted as a government agent, there was strong government intervention and a lack of CEO ownership awareness. A financial regulator said, "In Woori Financial and Bank's case, KDIC, which supervises the CEO as an agent, was also a government agent, creating a 'double agency' problem," adding, "For example, former Chairman Sohn was not the owner, but neither the government nor KDIC, who should have monitored him, were owners either, which can be seen as a cause of the problem."

Woori Financial and Bank, ownerless from the start, were very vulnerable to external influence. Looking at past presidents, the first to fourth presidents (including Hanbit Bank) were mostly outsiders. Former CEOs of the old Woori Financial Holdings were also closely connected to the government and political circles, such as former Chairman Park Byung-won, who served as the first vice minister of the Ministry of Finance and Economy; former Chairman Hwang Young-ki, associated with the Lee Hun-jae faction; and former Chairman Lee Pal-sung, known as one of the "four financial kings" during the Lee Myung-bak administration.

Because CEO appointments could not escape external influence, the combination of external connections and internal blind loyalty became an organizational culture, according to analyses inside and outside Woori Financial and Bank. A Woori Bank official said, "Since the start with public funds, a culture where promotions are decided based on external connections has been rooted for over 20 years," adding, "Since promotions are not based on merit, people cultivate external ties or offer blind loyalty to powerful superiors to secure their future."

The official added, "In that sense, the claim that the department head who handled loans to former Chairman Sohn's relatives did so carelessly without instructions or pressure is understandable," adding, "If the loan officer knew the borrower was the chairman's relative, they might have refrained even if told not to. They grew up seeing this culture and probably benefited to some extent themselves."

Commercial-Hanil Still ‘In Conflict’... Only Conspiracies Like Complaints and Anonymous Letters

Under this structure, the lack of chemical integration between Commercial Bank and Hanil Bank is also seen as a factor accelerating the "small society." At the time of their merger in 1999, Commercial Bank and Hanil Bank were traditional banks boasting histories of 100 and 67 years, respectively. For example, Commercial Bank's early presidents included Prince Yeongchin (1897?1970), the last crown prince of Joseon.

Because the two influential banks took the form of a "merger of equals," competition between their lineages inevitably intensified. Similarly, KB Kookmin Bank, which also took a merger-of-equals form, had a competitive structure between the so-called "Channel 1 (former Kookmin Bank)" and "Channel 2 (former Housing Bank)." In contrast, Shinhan (Chohung) and Hana (Seoul) Banks, which merged with the five major banks before the foreign exchange crisis, had clear acquirer and acquiree roles, and their acquirers were established in the 1970s?1980s with relatively flexible organizational cultures, distinguishing them from Woori Financial.

Accordingly, from relatively early on, Woori Financial had key positions alternately held by people from Commercial and Hanil Banks. For example, if a branch manager was appointed from one bank, the deputy branch manager would be from the other. Looking at past presidents, while the first to fourth presidents were mostly outsiders, from 2011 onward, internal figures took over, with the fifth president Lee Jong-hwi (Hanil), sixth Lee Soon-woo (Commercial), seventh Lee Kwang-gu (Commercial), eighth Sohn Tae-seung (Hanil), ninth Kwon Kwang-seok (Commercial), tenth Lee Won-duk (Hanil), and eleventh Cho Byung-kyu (Commercial) generally alternating the presidency between the two factions.

However, as the CEO's influence grew in the ownerless company, this factional structure accelerated the culture of networking to secure key positions and blind loyalty. Inside and outside Woori Financial, including financial authorities, political circles, and the media, various conspiracies such as complaints and anonymous letters have stained the environment, rooted in this background.

A person familiar with Woori Bank's affairs pointed out, "The biggest characteristic is that there are too many informal groups based on personal relationships within the bank," adding, "For example, informal groups are formed based on the bank of origin (Commercial-Hanil), regional ties, blood relations, academic ties, and even people who worked under a specific middle boss at a certain time, creating a complex network where attending multiple groups for promotion and career advancement is common."

The person further said, "While the Commercial-Hanil conflict is often cited as the biggest problem, that is only a broad conflict. The core issue is the culture of cultivating ties with external forces or internal power holders and offering blind loyalty to gain influence for promotion," adding, "People who competed and ostracized each other as members of different banks until yesterday suddenly respond with smiles when the power dynamics change, even if they had previously excluded those from the other bank. This is the root of the problem."

Even after privatization under an oligopoly shareholder structure, this culture has not changed. The hiring scandal that led to the resignation of the seventh president Lee Kwang-gu was triggered by complaints sent to authorities and lawmakers' offices, and the Financial Supervisory Service's inspection of the improper loans to former Chairman Sohn's relatives also started from a tip-off. Since oligopoly shareholders hold similar stakes around 4%, networking toward political circles and financial supervisory authorities that can exert real influence, as well as toward the incumbent CEO, is openly conducted based on factions. The fact that more than a dozen candidates emerged as potential chairman nominees during the last selection process also reflects this.

So, will the organizational culture naturally change once full privatization settles and generations beyond the Commercial-Hanil distinction, including Hanbit and Woori Bank generations, grow? There are many skeptical responses. A financial sector official said, "Even if a new generation emerges, since they have learned and internalized this growth path for over 20 years, such a culture will not disappear overnight."