Financial Holding Companies Suffering from External Pressure... Controversy over 'New Government-Controlled Finance'

Excessive Intervention Noted in Private Financial Firms' Detailed Management Strategies
Including De Facto CEO Selection Issues

[Asia Economy Reporter Kangwook Cho] Since the inauguration of the Moon Jae-in administration, financial holding companies have been struggling with external pressures, sparking growing controversy over the so-called 'new government-controlled finance.' Amid an increasingly challenging business environment, the government has shown signs of directly intervening in the detailed management strategies of private financial firms, even attempting to influence the selection of chief executive officers (CEOs), leading to criticisms of excessive interference. In particular, there are criticisms that the supervisory authorities consistently respond to problems by simply removing the CEOs of financial holding companies, using this as a means to evade responsibility for their own negligence in oversight.

According to the financial sector on the 6th, seven financial company CEOs have either stepped down or faced the risk of doing so since the Moon administration began. This is due to the domestic financial sector being swept up in a 'recruitment corruption' frenzy starting from the end of 2017. A sentiment emerged that if preferential treatment was given in hiring, the head of the institution should bear direct legal responsibility. The government authorities launched a high-intensity investigation into recruitment corruption, which spread throughout the entire financial sector.

As a result, Sung Se-hwan, former chairman of BNK Financial Group, and Park In-gyu, former chairman of DGB Financial Group, stepped down in 2017 and 2018 respectively. Lee Kwang-gu, former president of Woori Bank, who was classified as a pro-government figure during the Park Geun-hye administration, also relinquished his position just six months into his reappointment due to pressure from financial authorities over recruitment corruption.

Kim Yong-hwan, former chairman of NongHyup Financial Group, was subjected to a search and seizure of his home and office by prosecutors in 2017 over allegations of recruitment solicitation but was cleared of charges. However, despite being a strong candidate for reappointment, Kim suddenly withdrew his candidacy just hours before the interview for the next chairman in the following year, raising questions. At that time, Kim Kwang-soo, former head of the Financial Intelligence Unit (FIU), who became the sole candidate, smoothly assumed the chairman position. He has been mentioned as a financial sector leader from the early days of the Moon administration, including being considered for the Financial Services Commission chairman and the Financial Supervisory Service chief.

Last month, Cho Yong-byeong, chairman of Shinhan Financial Group, who was indicted on recruitment corruption charges, was sentenced in the first trial to six months in prison with a two-year suspended sentence, narrowly avoiding the worst-case scenario of 'imprisonment.' Although he can now seek reappointment as chairman, Cho expressed his intention to undergo a fair legal judgment again through an appeal.

Recently, Sohn Tae-seung, chairman of Woori Financial Group and president of Woori Bank, and Ham Young-joo, vice chairman of Hana Financial Group, received heavy disciplinary actions from the Financial Supervisory Service related to the overseas interest rate-linked derivative-linked fund (DLF) scandal. Due to Sohn's position issue, Woori Financial Group has had to reconsider not only the chairman position but also the bank president candidate selection process from scratch, raising concerns about management gaps caused by governance risks. Ham, who was one of the leading candidates for the next chairman, can complete his remaining term but is now unable to challenge for the next chairman position. He previously served as Hana Bank president from 2015 to 2019 but voluntarily resigned due to recruitment corruption risks.

Especially since the inauguration of Yoon Seok-heon as head of the Financial Supervisory Service, regulatory tightening has been emphasized, increasing the management burden on the financial sector. In fact, Yoon revived the comprehensive inspection system for financial companies, which had been abolished, after four years amid criticism of 'taming the financial sector,' and pushed for governance improvements including the introduction of worker-recommended directors (labor directors). Large state-run banks such as IBK Industrial Bank and KDB Industrial Bank have consecutively introduced or are in the process of introducing union-recommended director systems, expanding controversies over infringement on management autonomy. This has led to criticisms that financial authorities are effectively intervening in the CEO selection process.

Professor Sung Tae-yoon of Yonsei University's Department of Economics pointed out, "If an incident causes losses to a company, it is appropriate for shareholders or investors to raise issues rather than the financial authorities directly replacing the CEO. Currently, it is practically the same as intervening in the CEO selection process, and if this repeats, issues of government control are inevitable."

There are also criticisms that having inspection authority and disciplinary power within the same organization is problematic.

Professor Yoon Chang-hyun of the University of Seoul's Department of Business Administration said, "It is said that Korea is the only country where CEOs are punished over employee-related issues," and added, "The sanctions related to the DLF incident reflect anti-business sentiment, which is problematic as it further fuels consumer distrust in banks."

This content was produced with the assistance of AI translation services.