No Right Answer, But... "Need for Governance Improvement and Performance-Based Culture Establishment" [Cornered Im Jong-ryong Administration]⑤

‘Dongbyeongsangryeon’ KB Financial, Transformed After 10 Years
"If Board Transparency and Independence Are Secured, Organizational Culture Will Naturally Improve"

There is a growing call for innovation in the organizational culture of Woori Financial Group and Woori Bank, beyond just system improvements, following the scandal involving improper loans by relatives of former Woori Financial Group Chairman Sohn Tae-seung. Despite repeated internal control reinforcements after several financial incidents, including a 70 billion won embezzlement by an employee in the Corporate Improvement Department and an 18 billion won embezzlement by a deputy-level employee at the Gimhae branch, the same issues have recurred even under the new chairman and president system.

Within the financial sector, this is seen as an aftereffect of Woori Financial Group and Woori Bank surviving as 'ownerless companies' for about 20 years since the 1997 Asian financial crisis. Attention is also being paid to the case of KB Financial Group, which was in a similar situation just over a decade ago. Although KB Financial Group also had many limitations, it is analyzed that only when transparency and independence in governance are established and a performance-based promotion and compensation system is in place, as seen in KB Financial Group, can the organizational culture find an opportunity for change.

[Image source=Yonhap News]

How KB, once rife with connections and factions just over a decade ago, has changed

Woori Financial Group and Woori Bank shared many similarities with KB Financial Group and KB Kookmin Bank in the past. KB Kookmin Bank was also formed through an equal merger between Housing Bank (including the former Dongnam Bank) and Kookmin Bank (including the former Long-term Credit Bank and Daedong Bank). Just as Woori Bank still carries labels like 'Commercial Bank origin' or 'Hanil Bank origin,' KB Kookmin Bank used to have terms like 'Channel 1 (former Kookmin Bank origin)' and 'Channel 2 (former Housing Bank origin)'.

Unlike Woori Bank, which received separate public funds, the merged Kookmin Bank started as a policy bank, and by the end of 2001, the government held a 9.64% stake, making it the largest shareholder. Other foreign shareholders included Bank of New York (7.59%) and Goldman Sachs (6.82%), with foreign ownership reaching 71.1%. Like Woori Bank, which was wholly owned by the Korea Deposit Insurance Corporation, it was essentially an ownerless company. This explains why KB Financial Group and KB Kookmin Bank faced strong external pressures from the start.

Looking at the backgrounds of the seven KB Kookmin Bank presidents after the merger, four were from outside, one from Kookmin Bank (former President Min Byung-duk), one from Long-term Credit Bank (former President Heo In), and one from Housing Bank (President Lee Jae-geun). Among the six KB Financial Group chairmen, only one (Chairman Yang Jong-hee) was an internal candidate (from Housing Bank). The other five included figures such as former Chairman Uh Yoon-dae, known as one of the 'four financial kings' during the Lee Myung-bak administration, former Chairman Hwang Young-ki, associated with the Lee Hun-jae faction, and former Chairman Lim Young-rok, a former bureaucrat.

An extreme example of conflict caused by external pressures and parachute appointments was the 2014 mainframe replacement incident. Chairman Lim Young-rok, a former Deputy Minister of Strategy and Finance, and President Lee Gun-ho, from the Korea Financial Research Institute, clashed head-on over the mainframe system replacement. Some interpreted this conflict as a confrontation between 'Mofia' (former Ministry of Finance officials) and 'Yeonpia' (Korea Financial Research Institute officials). Ultimately, both Lim Young-rok and Lee Gun-ho were forced to resign in disgrace.

Despite such external pressures and turmoil, which once cost KB Financial Group its position as a 'leading bank,' the group underwent significant changes under former Chairman Yoon Jong-kyu. Although Yoon was recruited as a deputy president of the merged Kookmin Bank from 2002 to 2004, he began his career as a bank clerk at Korea Exchange Bank and mainly worked at Samil Accounting Corporation, making him an external hire. After taking office in 2014, he concurrently served as KB Financial Group chairman and KB Kookmin Bank president for three years and is credited with transforming the group's organizational culture.

Independent board operation, predictable succession structure... partial success in blocking external pressures

KB Financial Group, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

Under Chairman Yoon's leadership, KB Financial Group sought to improve governance to prevent appointments based on connections. The nomination of outside director candidates was split between shareholders and external institutions, while the Outside Director Candidate Recommendation Committee within the board handled verification and appointments, strengthening the independence of outside directors. The CEO, who could potentially cause internal governance controversies, was excluded from the nomination committee.

A robust management succession program was also established. Since 2016, KB Financial Group has prepared and continuously managed and evaluated a pool of next-generation candidates to increase predictability. Internal candidates are evaluated and verified through internal succession programs, while external candidates are entrusted to external consulting firms. For example, during the last chairman candidate recommendation, internal candidates such as Chairman Yang Jong-hee and former KB Kookmin Bank President Heo In were included in the final pool. This contrasts with Woori Financial Group, where dozens of candidates competed chaotically.

Park Jae-ha, former Deputy Director of the Korea Institute of Finance and former chair of KB Financial Group's Outside Director Candidate Recommendation Committee, said, "Looking back at my time as an outside director, Chairman Yoon respected the independence and authority of the board, and the outside directors themselves were determined not to be influenced by the chairman or government officials, showing strong independence." He added, "By creating a candidate pool in advance and quantitatively evaluating candidates through an external advisory group, there was no room for intervention by management or financial authorities. Newly appointed directors were selected through relatively transparent procedures, allowing them to act without hesitation."

Of course, there are evaluations that the independence of the board and the management succession program built over time were somewhat weakened around the time of Chairman Yoon's departure. Early last year, Financial Supervisory Service Governor Lee Bok-hyun praised KB Financial Group's succession program but later expressed discomfort. Nevertheless, KB Financial Group is considered relatively free from external pressures, parachute appointments, and government or external interference that constrained the company over a decade ago.

A financial industry insider said, "KB Financial Group's board independence is relatively guaranteed, and although the principles are not perfectly applied in operation, they seem to function to some extent. Outside directors do not merely play a ceremonial role, and the succession process is relatively transparent, so the culture of lining up has diminished significantly, and the organizational culture has gradually changed." He added, "Outstanding charismatic figures like former President Kim Jung-tae and former Chairman Yoon also influenced this change."

There is no definitive answer... governance and organizational culture must change simultaneously

In the financial sector, there is a consensus that there is no 'correct answer' regarding organizational culture innovation. Each company has a different history, and the organizational culture formed based on that history also varies, so a uniform solution cannot be proposed. However, inside and outside Woori Bank, there is agreement that, based on cases like KB Financial Group, innovation in governance and leadership must precede the establishment of a performance-based promotion and compensation system.

A former senior official of Woori Financial Group said, "In a few years, someone who joined Hanbit Bank might become president or even chairman, but until then, people who have connections outside or who are loyal to higher-ups have been advancing rapidly. Will that change?" He added, "Instead of waiting for time to pass or hoping for an outstanding CEO, a system where competent people are promoted and such a culture is internalized must be established for change to begin."

There were also suggestions that personnel management should prevent certain factions from monopolizing key positions or, conversely, certain groups from dividing key positions among themselves. Former Hana Financial Research Institute Director Bae Hyun-ki said, "We must break the practice of certain individuals or lines monopolizing or dividing positions. The CEO should not rely on a specific line; instead, information related to personnel should be transparently disclosed, and the organization should be managed by continuously rotating personnel."

Above all, there were calls for governance improvement. Just as clean water flows from a clean source, the relationship between the board, the highest decision-making body within the bank, and management must be healthy for the internal culture to naturally change. Former Deputy Director Park Jae-ha said, "The essence of governance issues lies in the outside directors' will to maintain authority and board independence, and management's will not to project vested interests onto the board. If management and outside directors maintain transparency in director appointments and independence in board operations, the board functions well. When governance improves this way, the principles and rules of organizational operation also proceed naturally."