Major Overhaul of Outside Directors at 4 Major Financial Holding Companies? ... Will They Shed the 'Rubber Stamp' Stigma?

72% of Outside Directors at Four Major Financial Holding Companies Near Term Expiration
Spotlight on Board Reshuffle Amid 'Internal Control' Failures and Criticism of 'Rubber Stamp' Directors

Financial Supervisory Service Governor Lee Bok-hyun, Korea Federation of Banks Chairman Cho Yong-byeong, and financial holding company chairmen are attending a business agreement ceremony on the 13th at the Korea Institute of Finance in Samcheong-dong, Seoul, for the training and capacity building of outside directors among the Financial Supervisory Service, Korea Institute of Finance, Korea Federation of Banks, and financial holding companies. Photo by Jo Yong-jun

With the regular shareholders' meeting scheduled for next month, 'internal control' has emerged as the biggest issue in the financial sector, drawing increased attention to outside directors who are tasked with checking and monitoring management. In particular, as financial authorities have recently called for strengthening internal controls and emphasized the role of outside directors in overseeing the board, and with over 70% of the boards of the four major financial holding companies approaching the end of their terms, expectations are growing for a large-scale reshuffle. Outside directors, who have long been criticized as mere 'rubber stamps' due to a lack of expertise and independence, are now under the spotlight to see if they can shed this stigma.

According to the financial sector on the 21st, among the 32 outside directors of the four major financial holding companies (KB, Shinhan, Hana, Woori), 23 (72%) will have their terms expire at the March regular shareholders' meeting. In particular, KB, Hana, and Woori Financial expect to replace their board chairs this year as they reach the maximum term.

The term for outside directors at financial holding companies follows a '2+1' format. They are initially appointed for two years and then extended by one year at a time, up to a maximum of six years, except for KB Financial Holding, which has a maximum of five years.

Earlier, KB Financial Holding nominated Professor Cha Eun-young of Ewha Womans University and Kim Sun-yeop, CEO of Lee Jung Accounting Corporation, as new outside director candidates. This move follows the completion of the maximum five-year terms by former IBK Industrial Bank President Kwon Seon-ju and Professor Oh Kyu-taek of Chung-Ang University.

Woori Financial Holding is also set to replace up to five of its seven outside directors. Following internal control failures such as improper loans involving relatives of former Chairman Sohn Tae-seung last year, and criticism from the Financial Supervisory Service that the board acted as a rubber stamp during the recent acquisitions of Dongyang and ABL Life, Woori Financial is aiming for reform through a large-scale replacement of outside directors.

Among Woori Financial Holding’s seven outside directors, five?excluding Park Sun-young and Lee Eun-joo, who were first appointed last year?are expected to be replaced regardless of their maximum six-year terms. The five to be replaced were each recommended by major shareholders: Korea Investment & Securities, Eugene PE, Fubon Hyundai Life, Kiwoom Securities, and IMM PE. Director Jung Chan-hyung (recommended by Korea Investment & Securities) has completed the full six-year term, and Director Ji Sung-bae is stepping down as IMM PE, who recommended him, lost its major shareholder status. Among the remaining directors Shin Yo-hwan, Yoon Soo-young, and Yoon In-seop, at least two are expected to be replaced regardless of their terms.

Shinhan Financial Holding reportedly has seven of its nine outside directors approaching term expiration. Unlike other financial holding companies, none have completed the maximum term, but a slight reshuffle is anticipated.

Hana Financial Holding has five of its nine outside directors reaching term expiration. Among them, Board Chair Lee Jung-won (serving a fifth term) will leave after completing the maximum six-year term.

The four major financial holding companies aim to complete the nomination of outside director candidates by the end of this month and are accelerating the selection process while planning to establish internal control committees within their boards at this shareholders' meeting. Hana Financial has been the quickest to act. It recently revised its internal governance regulations and established an internal control committee within the board. The board now consists of the Chairman Candidate Recommendation Committee, Risk Management Committee, and Management Development and Compensation Committee. Hana Financial abolished the previous Board Operations Committee and newly established the Internal Control Committee.

A financial sector official said, "Since internal control has been the biggest issue in the banking sector last year and this year, companies are paying close attention to the composition of outside directors," but added, "However, it is difficult to find personnel with expertise in internal control, and practical challenges such as the 'prohibition of concurrent positions' clause make it hard to secure a talent pool, so a large-scale replacement will not be easy."