This Is Why Financial Accidents Happen... 100% Approval Rate for Agenda Items by Outside Directors of the Four Major Financial Institutions [Yes-Man Outside Directors]①

No Objections from Outside Directors of Financial Holding Companies on Hundreds of Agenda Items
Appointment Structure Makes It Difficult to Voice Proper Opposition
Internal Control Functions Weakened as Outside Directors Serve as Rubber Stamps

The image of outside directors who act as rubber stamps in the board of directors. ChatGPT generated image.

Last year, the approval rate for board agenda items by outside directors of the four major financial holding companies and four major banks reached 100%. Hundreds of agenda items were raised at board meetings, but all were passed smoothly without a single objection. Amid ongoing financial accidents in the banking sector, such as incomplete sales of financial products and unfair loans, concerns have been raised that outside directors are not effectively performing their role of checking and monitoring management.

No Objections from Outside Directors of Financial Holding Companies on Hundreds of Agenda Items

According to the '2024 Annual Report on Governance and Compensation Systems' disclosed on the 7th by the four major financial holding companies?KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?the outside director boards of these companies held a total of 161 official meetings last year. Hana Financial Group had the most with 46 agenda items, followed by Woori Financial Group with 42, Shinhan Financial Group with 39, and KB Financial Group with 34.

Among the total 161 agenda items, none were rejected, resulting in a 100% approval rate. Throughout the year, none of the 37 outside directors from the four major financial holding companies expressed opposition to any agenda item.

The same trend was observed at the four major banks: KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank. The outside director boards of these banks resolved a total of 382 agenda items last year, with an almost 100% approval rate. On March 26 last year, during the 7th extraordinary board meeting at Kookmin Bank, there was a sole reservation from directors regarding the voluntary compensation adjustment plan for customers who suffered losses from Hong Kong equity-linked securities (ELS). However, the agenda was re-submitted and immediately approved at the board meeting held three days later on March 29. At that time, outside director Seo Tae-jong was the only one to abstain, but the agenda was approved as all other outside directors voted in favor.

The so-called 'rubber-stamp' controversy surrounding outside directors in the financial sector?where they raise their hands without personal opinions, simply following orders from above?is a chronic problem repeatedly raised every year. This is attributed to the fact that outside directors are appointed based on recommendations from internal senior executives such as financial holding company chairpersons, making it difficult for them to properly point out internal issues. Many outside directors are former senior officials from financial regulatory bodies or have ties through pro-government political activities or academic connections, leading to criticisms of lacking independence from the company or government.

Last month, the Economic Reform Institute released an economic reform report analyzing that, as of the end of October last year, among 456 outside directors serving at 108 domestic financial companies, 108 (23.7%) require verification of their independence from the company and government. Those requiring verification included 34 with experience as outside directors at affiliates, 31 former senior officials or financial research institute personnel, 20 with pro-government political activity backgrounds, and 59 with conflicts of interest. Similar issues were found not only in the four major financial groups but also in major banks such as NH Nonghyup Financial, IBK Industrial Bank of Korea, Korea Development Bank, and BNK Financial Group.

Lee Seung-hee, a research fellow at the Economic Reform Institute, emphasized, "Looking at the composition of outside directors, there is still a tendency to prefer those who may be friendly to management or controlling shareholders. Financial companies need to make efforts to secure independent outside directors who consider the interests of the company and all shareholders."

Internal Control Functions Weakened While Outside Directors Act as Rubber Stamps

While outside directors have been acting as rubber stamps, the internal control functions of companies have continued to weaken. The Financial Supervisory Service (FSS) released the results of regular inspections last month on Kookmin Bank, Woori Bank, and Nonghyup Bank, pointing out the chronic problem of boards being bypassed by banks. Kookmin Bank injected 200 billion won into its subsidiary, Bank Bukopin in Indonesia, in 2023 to provide additional liquidity, but the board or risk management committee effectively skipped evaluations. The FSS criticized that the board was only formally informed after all decisions had already been made.

In the case of Woori Financial Group, criticism arose that the board's monitoring function was hindered because the agenda to acquire Dongyang Life Insurance and ABL Life Insurance was decided to be submitted to the board even before the risk management committee to discuss it was held. Additionally, the Hong Kong ELS incident, which caused social issues by inflicting thousands of billions of won in damages to investors, as well as ongoing internal embezzlement and unfair loan problems, have also been criticized as resulting from limited board oversight. FSS Governor Lee Bok-hyun urged, while announcing the regular inspection results, that "the outdated governance centered on holding company chairpersons in the banking sector is causing large-scale financial accidents, and thorough organizational culture reform is necessary."

Meanwhile, despite the annual recurrence of the outside director rubber-stamp controversy, the four major financial holding companies plan to retain most of their directors this year as well. Among 23 outside directors whose terms expire this month, only 9 will be replaced. Including those with remaining terms, only 28% of the entire outside director group will be replaced. Woori Financial Group, which has faced various issues such as unfair loans and embezzlement, has taken the largest reform steps by replacing 4 out of its 7 outside directors.