[Financial New Paradigm ESG] Innovation through Transparent Governance... "Proactive Risk Response"

Despite the COVID-19 Stock Market Crash
Companies with Excellent Governance Show Strong Stock Loss Defense

Financial Groups Establish Various Institutional Measures for Shareholder Rights Protection, Boards, and Audit Bodies

[Asia Economy Reporter Oh Hyung-gil] In the first quarter of last year, many companies' stock prices plummeted due to the novel coronavirus disease (COVID-19) crisis. However, some companies managed to defend their stock prices well despite the unexpected crisis. Their common factor was ‘Governance’.

According to research by the Korea Corporate Governance Service (KCGS), the average loss rate of 331 companies with relatively weak corporate governance was 10.7%, while the loss rate of 337 companies with excellent governance was only 6.07%. This shows that improvements in governance have a significant impact not only on companies but also on shareholders and the capital market.

Corporate ‘Environmental, Social, and Governance (ESG)’ is gaining attention as a new management strategy in the post-COVID era. In particular, excellent governance is considered the most fundamental element for appropriate risk management, including an overall decision-making system that can control other risks, and the allocation of authority and responsibility.

Financial groups that have put ESG management at the forefront are also establishing various institutional measures related to governance. They evaluate shareholder rights protection, board operation, and audit body independence, and have detailed implementation plans for the board of directors, audit committees, and executive nomination committees.

Domestic financial groups’ governance is recognized externally for its excellence. Last year, KCGS evaluated 908 listed companies and selected SG First Bank as the top governance company and Shinhan Financial Group as the best company.

KCGS evaluates governance through four categories: shareholder rights protection, board of directors, audit bodies, and disclosure. Shareholder rights protection includes evaluation of the protection and convenience of exercising shareholder rights, ownership structure, distribution of management profits, and transactions with affiliates. The board is evaluated based on its composition and operation, board evaluation and compensation, and committees within the board. The audit body is assessed on its composition, operation, and disclosure level.

Financial Groups Building Transparent Governance

Shinhan Financial Group is establishing a stable responsible management system based on active board activities. A sound culture of discussion has been established within the board, and communication between the board and management is evaluated as smooth.

Since 2015, Shinhan has played the highest decision-making role in group ESG management through the ‘Social Responsibility Management Committee,’ a subcommittee within the board, the first among financial holding companies.

To secure independence, an outside director chairs the board. The Outside Director Candidate Recommendation Committee and the Governance and Chairman Recommendation Committee exclude the CEO chairman from their membership.

KB Financial Group also aims to ‘spread transparent corporate governance’ by enhancing stakeholder trust through transparent information disclosure and promoting a healthy governance culture. It is also active in utilizing the ‘Stewardship Code.’

Six affiliates, including KB Kookmin Bank, apply the Stewardship Code to encourage the development of investee companies and strengthen their role in ensuring the medium- to long-term benefits of customer assets. They have established conflict of interest prevention policies and ensured through internal control regulations and compliance manuals that investors’ interests take precedence over those of the company, shareholders, and executives.

Hana Financial Group has also adopted ethical and compliance management as core management principles for sustainable management. In 2019, it became the first in the financial sector to simultaneously acquire international standard certifications for compliance and anti-corruption management systems, establishing a global-level compliance and anti-corruption management system.

Governance Shaken by Government Intervention

In the past, financial groups were greatly shaken by governance risks. Looking at the paths taken by financial holding companies such as the Shinhan incident in 2010 and the KB incident in 2014, they were not free from governance issues.

Last year, criticism of financial groups’ governance arose due to the ‘self-renewal’ issue of holding company chairmen. KB Financial Group Chairman Yoon Jong-kyu succeeded in a third term, and Shinhan Financial Group Chairman Cho Yong-byeong also succeeded in renewal. Hana Financial Group Chairman Kim Jung-tae is in his third term, and Woori Financial Group Chairman Sohn Tae-seung is also in renewal. NH Nonghyup Financial Group Chairman Sohn Byung-hwan was appointed chairman after serving as a bank president.

The political and financial authorities pointed out the need for measures to prevent the negative effects of long-term rule due to the strong governance power of financial holding company chairmen. Yoon Seok-heon, Governor of the Financial Supervisory Service, strongly agreed at last year’s National Assembly audit that “there is criticism that the responsibilities and powers of chairmen are not proportional,” and argued that strong regulation of self-renewal is necessary.

Government intervention in finance also shakes financial groups’ governance policies. At the end of last year, financial authorities put the brakes on dividend increases promoted by financial holding companies as part of shareholder return policies. The authorities pressured financial groups to secure loss absorption capacity by confirming dividend cuts in preparation for the COVID-19 aftermath, while shareholders insisted that financial holding companies should increase dividend payout ratios as they achieved record profits.

The cumulative net profit of the four major financial holding companies in the third quarter of last year reached 9 trillion won, a 15.1% increase from the same period the previous year. Provisions approached 3 trillion won, increasing by 1.2 trillion won from the previous year. The Financial Supervisory Service and banks are reportedly negotiating dividend reduction plans, adjusting payout ratios to around 15?25%.

Legislative Flood of Strengthened Financial Group Supervision and Regulation

The three fair economy laws?Commercial Act, Fair Trade Act, and Financial Complex Corporate Group Supervision Act?passed the National Assembly last year. The amendment to the Commercial Act includes the introduction of a multiple derivative lawsuit system, separate election of audit committee members, and implementation of electronic voting.

Also, according to the amendment to the Fair Trade Act, the scope of regulation on private interest appropriation is expanded to affiliates in which the controlling family holds 20% or more shares, regardless of whether they are listed or unlisted companies, and subsidiaries in which these companies hold more than 50% of shares.

The Financial Complex Corporate Group Supervision Act designates companies with combined assets exceeding 5 trillion won operating two or more financial businesses as ‘financial complex corporate groups,’ requiring them to establish risk management systems and manage the soundness of the entire group. Six companies, including Samsung, Hyundai Motor, Hanwha, Mirae Asset, Kyobo, and DB, are included.

During the 20th National Assembly, a total of 36 bills related to governance improvement were submitted. Thirteen were amendments to the Commercial Act, and eleven were related to the Monopoly Regulation and Fair Trade Act (Fair Trade Act), the largest numbers.

Ahn Yura, a researcher at KCGS, said, “Prohibitions on issuing new shares for treasury stock, introduction of multiple derivative lawsuits, electronic or written voting systems, strengthened monitoring of corporate group control, and enhanced fiduciary responsibility of the National Pension Service have been repeatedly submitted to this National Assembly as well,” and predicted, “Similar amendment bills will continue in the future.”

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