[Editorial] Feud at top bank

By Korea Herald

Discord highlights governance problems

  • Published : May 27, 2014 - 20:58
  • Updated : May 27, 2014 - 20:58
KB Kookmin Bank is in disarray as an internal feud that has erupted over the replacement of its computer system is boiling over into a power struggle between the bank’s CEO and the chairman of KB Financial Group.

The feud at the bank started last month after its board of directors, allegedly supported by KB Financial Group chairman Lim Young-rok, had decided to shift from the existing IBM mainframe system to a Unix-based one.

Both systems have strengths and weaknesses. The mainframe platform is generally considered more secure than others. Security is an important consideration for banks, as they have to ensure that all transactions are secure.

Yet mainframes are inflexible, making it difficult for organizations to make changes. And they involve higher maintenance costs, as IBM monopolizes supply. For these reasons, several domestic banks have migrated from mainframes to more flexible Unix servers.

But the bank’s president, Lee Kun-ho, and its top auditor, Jung Byung-ki, opposed the board’s decision, arguing that it intentionally underestimated the risks involved in the proposed system change.

As the board turned a deaf ear to their objections, Lee and Jung took the case to the Financial Supervisory Service, asking the regulator to look into what they saw as the board’s ill-conceived decision.

The regulator has decided to inspect not just the bank’s computer system replacement plan but the overall relationship between the bank and its holding company. It suspects that the holding company had unduly intervened in the affairs of its banking subsidiary.

As the row between the bank’s president and outside directors dragged on, hurting the entire financial group, Lim weighed in. On Monday, he told Lee, Jung and other board members to sort out the problem by May 30.

Whether this deadline will be met remains to be seen. For the discord to be resolved, one of the two sides has to back down. But the dispute has already escalated to the point where neither side can reverse its position voluntarily.

The monthlong feud has again highlighted the problem of “parachute appointments.” Lim is a former vice minister of the Finance Ministry, while Lee is a former researcher at the Korea Institute of Finance. They have never worked together before.

It has also brought into focus the governance problems of domestic financial holding companies. Conflicts have often arisen between the CEOs of financial holding companies and their banking subsidiaries, as their roles have not been clearly defined.

The financial regulator needs to find ways to address the problems. The government should also stop parachuting government officials in as CEOs of private financial companies.