Flawed recruitment methods render system virtually meaningless


Outside directors at South Korea’s banks and financial firms have been mostly nominated by their largest shareholders and chief executives, undercutting their roles as corporate watchdogs, financial regulators’ data showed on Sunday.

Officially, a neutral committee is supposed to name eligible outside directors, whose primary function is to protect the shareholder value and keep executive management from abusing their power. In reality, chief executives dominate such committees, appointing their close friends or acquaintances as outside directors in a system where opposing views are next to non-existent in return for as much as 100 million won ($94,500) in annual salary.

Outside board directors, as a result, are mostly former government officials, tax office heads, judges and prosecutors who maintain cozy relations with their appointees.

Data from the Financial Supervisory Service and other state-affiliated agencies show that 85.4 percent of banks, brokerages and insurance firms have the outside director recommendation committees controlled by the largest shareholders or chief executive.

A total of 134 outside directors have been named for 41 financial companies this year, and 63 were nominated by top executives or largest shareholders.

Brokerage houses led the trend. Six firms appointed new outside directors this year, and all of them had a committee controlled by their own chief executives. Unsurprisingly, all of the candidates were affiliated with those powerful top managers.

In the insurance sector, about two in three outside directors were recommended and eventually given the positions by top management and largest shareholders.

Local banks selected 82 outside directors during the same period, 21 of whom have a direct affiliation with top management. Although the banking sector’s ratio is relatively low, the figure is misleading because other outside directors have close relations with chief executives, as well.

The recruitment of outside directors is similar at companies outside of the financial industry. Of the country’s 30 largest listed companies, 20 firms turned out to have an internal recommendation committee controlled by their own presidents and top executives.

Among well-known conglomerates, Hyundai-Kia Automotive chairman Chung Mong-koo and SK Group chairman Chey Tae-won are members of the internal committee for recruiting outside directors.

At many listed firms, outside directors take up the role of auditors, whose position should be strictly neutral and objective. But many of them are former judges, ministers and tax officials who had maintained close relations with conglomerates amid growing public doubt about their neutrality.

By Yang Sung-jin (insight@heraldcorp.com)