After Moon Administration's Inception, Intensified External Pressure... Controversy Over 'New State-Controlled Finance' (Comprehensive)

Concerns Raised Over Excessive Intervention 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 'new government-controlled finance.' Amid an already 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), drawing criticism for excessive interference. In particular, there are criticisms that the supervisory authorities consistently respond to problems by simply forcing financial holding company CEOs to step down, seemingly using this as a means to evade responsibility for their own supervisory negligence.

According to the financial sector on the 6th, seven financial company CEOs have either stepped down or faced the threat of removal 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 requests but was later 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 since the early days of the Moon administration, including being considered for the roles of Financial Services Commission chairman and Financial Supervisory Service chief. Additionally, 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 eligible for reappointment, Cho expressed his intention to seek a fair legal judgment again through an appeal.

Recently, Son Tae-seung, chairman of Woori Financial Group and president of Woori Bank, and Ham Young-joo, vice chairman of Hana Financial Group, faced heavy disciplinary actions from the Financial Supervisory Service related to the overseas interest rate-linked derivative-linked fund (DLF) scandal. They now stand at a crossroads of whether to forgo reappointment or to contest and proceed with reappointment. Due to Son’s position issue, Woori Financial Group has had to reconsider not only the holding company 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 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 Financial Supervisory Service chief Yoon Seok-heon, regulatory tightening has been emphasized, increasing the management burden on the financial sector. In fact, despite criticism of 'taming the financial sector,' Yoon revived the comprehensive inspection system for financial companies, which had been abolished, after four years. He also emphasized plans to improve governance and introduce a worker-recommended director system (labor director system). Already, unions of large state-run banks such as IBK Industrial Bank and KDB Industrial Bank have consecutively pushed for the union-recommended director system, raising concerns about infringement on management autonomy. Consequently, there are 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 the issue rather than the financial authorities directly replacing the CEO. Currently, it is practically equivalent to intervening in the CEO selection process, and if this repeats, issues of government control are inevitable."

There are also criticisms that having both inspection authority and disciplinary power within a single organization is problematic.

Professor Kim Sang-bong of Hansung University’s Department of Economics said, "It is problematic that the Financial Supervisory Service inspects itself and judges itself, especially since the criteria for disciplinary actions are ambiguous. Regarding the recent DLF incomplete sales scandal, there should be clear standards for how the level of discipline is determined. The governance law is still pending, and although they say they are disciplining the CEO, there is no clear standard explaining why."

He added, "Since the Financial Supervisory Service is also a private institution, the government should take this opportunity to change the system as promised in its pledge to improve the financial supervisory system, such as limiting the FSS’s role to consumer protection."

Concerns have also been raised that punishments undermining trust in banks could increase consumer distrust, potentially endangering the future of the banking industry.

Professor Yoon Chang-hyun of the Department of Business Administration at the University of Seoul pointed out, "Korea is the only country that punishes CEOs over internal employee matters, even abroad. The sanctions related to the DLF scandal reflect anti-business sentiment, which is problematic as it fosters consumer distrust toward banks."

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