Financial Holding Company Outside Directors Earn 80 Million Won Annually, Never Oppose Board Proposals < Video < Article

Outside directors of major financial holding companies in South Korea are receiving nearly 80 million won ($60,000) in annual compensation while consistently approving all board proposals, raising concerns about their effectiveness in corporate governance.

According to a recent investigation, the 31 outside directors of the four largest financial holding companies - KB, Shinhan, Hana, and Woori - received an average of 79.6 million won in compensation last year. KB Financial Group paid the highest average at 92 million won, followed by Woori Financial at 80 million won, Shinhan Financial at 78 million won, and Hana Financial at 70 million won.

Individually, KB Financial's board chairman Kwon Sun-joo received the highest compensation at 102.66 million won, while Shinhan Financial's chairman Yoon Jae-won and Woori Financial's chairman Jung Chan-hyoung received 92.1 million won and 94.5 million won respectively.

Outside directors receive a base salary plus additional compensation of about 1 million won for each board or committee meeting attended. The total annual compensation is determined by the number of meetings held throughout the year.

In 2023, as financial holding companies' business activities increased, the number of board meetings also rose. Shinhan Financial increased from 69 to 72 meetings, Hana Financial from 58 to 63, and Woori Financial from 57 to 62. Only KB Financial saw a decrease from 73 to 65 meetings.

The average number of board and committee meeting attendances per outside director was highest at Woori Financial with 46.5 times, followed by KB Financial at 44.5, Shinhan Financial at 35.5, and Hana Financial at 33.4 times.

When converted to an hourly rate, KB Financial's outside directors earned approximately 214,000 won per hour, Hana Financial 203,000 won, Woori Financial 198,000 won, and Shinhan Financial 179,000 won.

[Anchor] Despite receiving such high compensation, it seems that outside directors rarely voice opposition during board meetings. Is this correct?

[Reporter] That's right. In the past year, there wasn't a single instance where an outside director cast a dissenting vote at board meetings of the four major financial holding companies.

KB Financial held 12 board meetings, Shinhan Financial 14, Hana Financial 11, and Woori Financial 17. The main agenda items included management plans, budgets, dividends, bond issuances, and revisions to internal regulations. All proposals were unanimously approved.

Outside directors are expected to provide oversight and checks on management at board meetings, but in reality, they mostly just approve proposals. This has led to ongoing criticism that they are merely rubber stamps for management decisions.

However, there were some instances where outside directors at Shinhan Financial and Hana Financial provided input. At Shinhan Financial, outside directors expressed concerns about the downturn in overseas real estate markets and requested stronger monitoring of alternative investments abroad. They also emphasized the board's role in improving corporate governance.

At Hana Financial, outside directors urged stronger management of the common equity tier 1 ratio and highlighted the need for risk-weighted asset management.

In contrast, outside directors at KB Financial and Woori Financial did not provide any notable opinions during board meetings.

[Anchor] It seems that financial authorities are also taking this issue seriously. Can you elaborate on that?

[Reporter] Yes, financial authorities have been continuously calling for stronger internal controls at financial holding company boards.

Last month, Financial Supervisory Service Governor Lee Bok-hyun summoned the chairmen of the five major financial holding companies to emphasize the need to strengthen the role of outside directors.

He stated that "the expertise of the board of directors is an important foundation for balanced decision-making in financial institutions."

Financial holding companies are also taking measures to address these concerns. Shinhan Financial has increased the frequency of audit committee and risk management committee meetings and implemented quarterly reviews of consumer protection activities.

KB Financial and Shinhan Financial have introduced "nomination advisory panels" to enhance the independence of outside directors. This approach aims to move away from appointing former government officials and instead manage a pool of external expert candidates for outside director positions.

[Anchor] In this context, the five major financial holding companies are set to replace some outside directors at their upcoming regular shareholders' meetings. I understand they're bringing in experts from various fields instead of former financial bureaucrats. What's the background for this change?

[Reporter] This replacement of outside directors is seen as a measure to strengthen internal controls. Financial holding company boards have faced criticism for being "rubber stamps" that approve management proposals without proper scrutiny.

This time, instead of favoring former financial bureaucrats as in the past, the financial holding companies are recruiting experts from diverse fields such as ICT, accounting, and economics. This appears to be an attempt to enhance both internal controls and the expertise and diversity of the board.

Among the 38 outside directors at the five major financial holding companies, 27 will see their terms end this month. While some will be reappointed, many will be replaced by new individuals. Notably, Woori Financial has chosen to replace more than half of its outside directors, signaling a significant change.

[Anchor] Could you provide more details on the new individuals being brought in by each financial holding company?

[Reporter] Certainly. At KB Financial, six out of seven outside directors' terms are ending. To replace Kwon Sun-joo, former Industrial Bank of Korea president, and Oh Kyu-taek, Chung-Ang University professor, they've nominated Cha Eun-young, an economics professor at Ewha Womans University, and Kim Sun-yeop, CEO of Lee Jung Accounting Firm. Professor Cha has extensive experience in economic and financial advisory roles, while Kim is a certified public accountant in both Korea and the United States.

Shinhan Financial has recruited Jeon Myo-sang, head of business planning at SmartNews Japan, who is a Japanese certified public accountant with experience in accounting and finance. They've also nominated Yang In-jib, CEO of Anicom and an AI and big data expert, as an outside director candidate. With these appointments, Shinhan Financial has increased its ratio of female outside directors to 45%.

Woori Financial has made the most significant changes, replacing four out of seven outside directors. The new members include Lee Young-seop, a professor at Seoul National University's Graduate School of International Studies; Lee Kang-haeng, former vice chairman of Korea Investment Financial Group; Kim Young-hoon, former CEO of Daou Technology; and Kim Choon-soo, former CEO of Eugene Corp. They've particularly focused on strengthening internal controls by replacing all audit committee members and expanding the risk management committee.

Hana Financial opted for minimal changes, replacing only one out of five outside directors whose terms are expiring. The newly recommended candidate, Seo Young-soo, is a risk expert who previously served as the head of credit review at Standard Chartered Bank Korea.

NH Financial is also in the process of selecting new outside directors, with four out of six current directors' terms ending. Board chairman Kim Byung-hwa and director Gil Jae-wook will remain, while four others - Seo Eun-sook, Lee Yun-seok, Lee Jong-hwa, and Ha Kyung-ja - are expected to be replaced.

These changes are seen as a response to the financial authorities' directive to strengthen internal controls.

[Anchor] The financial authorities are also emphasizing board restructuring, aren't they?

[Reporter] Yes, financial authorities are continuously calling for enhanced independence and internal control functions of financial holding company boards.

Particularly with the introduction of the "responsibility structure diagram" this year, executives' responsibilities for preventing financial incidents have been significantly strengthened. As a result, this upcoming shareholders' meeting is expected to address not only board restructuring for enhanced internal controls but also shareholder return policies and CEO reappointment issues.

Additionally, as the financial authorities have amended the Financial Company Governance Act, the establishment of an "internal control committee" within the board has become mandatory. Accordingly, the five major financial holding companies are preparing responsibility structure diagrams for strengthening internal controls, which will be reported at this shareholders' meeting.

However, it remains to be seen whether these reforms will completely free financial holding companies from the "rubber stamp" controversy. While they emphasize increased expertise and diversity through the replacement of outside directors, the actual enhancement of independence and oversight functions needs to be observed over time.

(Yonhap Infomax Financial Department, Seul Gi Yoon)

※This content is from the "Economic ON" program aired on Yonhap News TV on March 12 at 4 PM. (Featuring: Seul Gi Yoon, Yonhap Infomax reporter, Hosted by: Min Jae Lee)

sgyoon@yna.co.kr

(End)

Seul Gi Yoon sgyoon@yna.co.kr