Internal Control Failures and Glass Ceiling... Financial Sector's Governance Without Innovation

Low Efforts to Improve ESG Core 'Governance'
Internal Control and Management Transparency Still 'Hold Back'

[Asia Economy Reporters Kim Hyo-jin and Song Seung-seop] The relatively low evaluations of major domestic financial companies in the ‘G’ (Governance) sector of ESG (Environmental, Social, Governance) are interpreted as a lack of efforts to enhance management transparency and rationality.

Experts generally agree that true ‘ESG management’ remains elusive unless persistent issues related to management systems?such as internal control defects, lack of female executives, and opaque board operations?are improved in financial companies.

◆Poor Internal Control Holds Back ESG=When the Korea Corporate Governance Service (KCGS) evaluates the ESG management status of major financial companies, a key focus is whether the internal control function operates properly. Unlike other companies, if a financial company’s internal control is poor or malfunctions, the capital gathered from financial consumers is directly damaged, leading to a collapse of trust in the financial industry itself.

This is supported by the fact that Hana Bank, Woori Bank, and IBK Industrial Bank of Korea, which caused controversy due to the Lime and Discovery private fund scandals, received only a B grade in governance.

Earlier, the court’s criticism of banks’ internal control issues in a trial concerning the financial authorities’ severe disciplinary actions against bank presidents for incomplete fund sales is interpreted in the same context.

At that time, the court ruled, "The relaxation of financial regulations means privatization or internalization of regulations through strengthening internal controls, and the internal control of financial companies must be strengthened proportionally to the degree of external regulatory relaxation." It also pointed out that "the internal control culture has not been properly established in domestic financial institutions."

The court further stated, "There have often been cases where financial institutions, disregarding the rights and interests of depositors and other financial consumers, pursue only performance or where management makes decisions driven by greed, yet effective autonomous internal control measures to restrain such greed have not functioned properly."

◆Glass Ceiling and Board Opacity Persist=Another measure of governance advancement, female participation in management, remains sluggish. As of the end of last year, among 117 executives at the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?only 8 (6.83%) were women. Among 33 registered executives, only 2 were women, and among 84 non-registered executives, only 6 were women.

A financial industry insider said, "Financial institutions such as banks require a much more open and rational management structure compared to other sectors, but in reality, many are trapped in very conservative organizational cultures," adding, "The ‘glass ceiling’ blocking women’s advancement is stronger here than in any other sector."

Opaque board operations are also cited as a factor hindering governance improvement in financial companies. Even IBK Industrial Bank of Korea, a government-owned bank, discloses board meeting minutes through the public institution management information system ‘Alio’ but keeps all details such as agenda items proposed by each director, votes, and remarks confidential, which is seen as a reflection of this culture.

Global scholars and experts emphasize that governance is the most important among ESG factors. Michael Sheren, Senior Advisor at the Bank of England (BOE), said at the 10th 2021 Seoul Asia Financial Forum hosted by Asia Economy in the first half of this year, "Harvey Weinstein treated employees and customers abusively and committed wrongdoing, and although the board knew about it, they took no action, ultimately leading to the company’s bankruptcy and the stock becoming worthless."

This means that in a governance environment where a company’s CEO cannot demonstrate leadership?like the famous producer Harvey Weinstein who triggered the MeToo movement?it is difficult for other sectors such as Environment (E) or Social (S) to be effective.

Professor Kim Dae-jong of Sejong University’s Department of Business Administration criticized, "Inside and outside directors of financial companies act as rubber stamps that approve 99% of proposals once submitted. Since their reappointment depends on it, they continue to agree without opposition according to the bank’s wishes." He also emphasized, "Considering that accidents in financial institutions have occurred recently, internal control standards for ethical management need to be stricter."

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