Regional Financial Groups Overhaul Governance in Response to Regulatory Crackdown

As Financial Holding Companies Face Special Governance Inspection
Improvement Measures Rolled Out for Outside Director System
Calls Grow to Address Structures That Strengthen Chairman's Control,
Including the Single Inside Director System

As financial supervisory authorities have launched a special inspection of the governance structures of financial holding companies, regional financial holding companies-including iM Financial Group, which serves as a regional hub-are also moving swiftly by introducing improvement measures to advance their governance. However, some point out that unless fundamental changes are made to issues such as the 'single inside director system,' which the authorities have flagged as problematic, it will be difficult to avoid criticism of a 'corrupt inner circle,' as highlighted by President Lee Jaemyung.

BNK and iM Financial: Strengthening Shareholder Communication and Expanding the Outside Director Recommendation System

According to the financial industry on January 16, BNK Financial Group held a shareholder meeting the previous day to discuss governance improvement plans with its major shareholders. In a press release, BNK Financial explained, "This meeting was organized to respond proactively to the concerns raised by supervisory authorities regarding the CEO succession process and to address the calls from major shareholders for greater independence and checks and balances within the board."

Previously, Life Asset Management, one of the major shareholders, sent a public shareholder letter requesting the suspension of the chairman appointment process due to a lack of communication. In response, BNK Financial stated that it would actively communicate with shareholders alongside the final chairman candidate once the candidate is confirmed. Accordingly, on January 12, BNK Financial held a meeting with outside directors to discuss the shareholder meeting and, on January 15, published a notice inviting public recommendations for outside directors from shareholders, thereby initiating governance reforms. Shareholder recommendations will be accepted until January 30, after which candidates will be vetted by the Executive Candidate Recommendation Committee and outside directors will be appointed at the regular general meeting of shareholders in March. Through this meeting, BNK Financial plans to introduce a system for public recommendations of outside directors by shareholders, as proposed by major shareholders. The company also aims to ensure that a majority of outside directors are recommended by shareholders and plans to compose the Executive Candidate Recommendation Committee entirely of outside directors.

iM Financial has already begun its public call for shareholder recommendations of preliminary outside director candidates, a system it introduced in 2018. Since then, the company has annually solicited recommendations for preliminary outside director candidates from shareholders. Any individual shareholder (excluding corporate shareholders) holding at least one voting share can recommend one preliminary outside director candidate per person. In practice, the Outside Director Candidate Recommendation Committee manages the candidate pool twice a year, and as of June 2024, there are eight shareholder-recommended candidates. Chairman Cho Kangrae of the iM Financial board was first included in the outside director candidate pool through shareholder recommendation at the end of 2019. He was subsequently appointed as an outside director of the group affiliate Newzstock and later recommended as a group outside director.

JB Financial Faces Fallout from Vice Chairman's Resignation... Authorities Target the 'Single Inside Director' System

In the case of JB Financial Group, attention is focused on the background of Vice Chairman Baek Jongil's sudden resignation, as he had been considered a likely successor to Chairman Kim Gihong. After completing his term as President of Jeonbuk Bank earlier this month and being appointed Vice Chairman, he resigned just nine days after taking office, citing 'personal reasons,' and moved to an advisory role. Some interpret this as a response to President Lee Jaemyung's criticism of financial company governance, in which he pointed out, "A corrupt 'inner circle' forms, allowing a small group to rotate and maintain control at will."

From the time of his appointment, there was a view that his elevation to Vice Chairman was part of the CEO succession process. The role of Vice Chairman at JB Financial is largely symbolic rather than practical. According to the executive appointment disclosure, the Vice Chairman's responsibilities are specified as assisting the Chairman and conducting external activities. This differs from other financial holding companies, which utilize multiple division heads or vice chairmen. Furthermore, since being appointed Vice President of Jeonbuk Bank in 2015, former Vice Chairman Baek has served as CEO of JB Asset Management, President of Phnom Penh Commercial Bank in Cambodia, and President of Jeonbuk Bank, holding key positions at all JB Financial affiliates except JB Woori Capital for an extended period.

However, it remains uncertain whether the financial authorities will be satisfied with these improvement measures. This is because they are also concerned about the single inside director system, in addition to the issue of outside directors. The Financial Services Commission and the Financial Supervisory Service will review the composition of inside directors at the Governance Improvement Task Force (TF) starting January 16. At the three regional financial holding companies (BNK, iM, and JB), the group chairman participates in the board as the sole inside director. There is criticism that if the group chairman is the only executive on the board, without any other inside directors, it creates a concentration of decision-making power and strengthens the chairman's control. This also leads to a situation where outside directors are appointed around the chairman, forming so-called 'trenches' and attempting to secure repeated terms.