The Shadow of the Financial Industry's ESG Craze... Where Has Governance (G) Improvement Gone? (Comprehensive)

Hana, Woori, and IBK Bank Governance Ratings 'B'
Potential Shareholder Value Damage Due to Non-Financial Risks
23 Major Insurance and Securities Firms Also Listed
Poor Efforts to Improve Core ESG Governance
Internal Control and Management Transparency Still 'Holding Back'

[Asia Economy Reporters Kim Hyo-jin and Song Seung-seop] Despite the ESG (Environmental, Social, and Governance) craze among major financial companies, the 'G' sector received failing grades. Experts point out that improvements are needed not only in visible areas like 'E' and 'S' but also in enhancing board transparency and diversity, and establishing thorough internal control standards. In particular, the general consensus among experts is that true ESG management remains elusive unless persistent issues related to management systems in financial companies are resolved.

According to the Korea Corporate Governance Service (KCGS) on the 1st, among the leading affiliates of the five major financial groups?KB, Shinhan, Hana, Woori, and NH Nonghyup?many companies received a B grade in the governance category this year. A B grade is classified as 'average' but indicates a stage where shareholder value could be impaired due to non-financial risks. Efforts are also needed to establish a sustainable management system, including governance. Unlike holding companies that received high grades, these companies received relatively poor report cards.

Among the five major banks, Hana Bank and Woori Bank received only B grades. Hana Bank dropped one level from B+ last year. IBK Industrial Bank of Korea, which was B+ last year, also fell to a B grade this year.

Notably, many major insurance companies and securities firms were listed with B grades. Twenty-three financial companies, including Heungkuk Fire & Marine Insurance, Heungkuk, AIA, ABL, KDB Life Insurance, and Shinhan, DB Financial Investment, Eugene, Mirae Asset, Kiwoom, and eBest Investment & Securities, received B grades. Additionally, eight companies such as Yuhwa, Buguk, and Hanyang Securities received C grades, while four companies including Sangsangin Securities, Q Capital, Leaders Technology Investment, and Mason Capital received the lowest D grade.

KCGS announces ESG ratings annually to promote sustainable management of companies and assist capital market participants in investment decision-making. The ratings are divided into seven levels: S, A+, A, B+, B, C, and D. Although evaluations are originally conducted only for listed companies, in the case of financial companies, even unlisted firms are separately evaluated for governance. The governance evaluation factors for listed companies include shareholder rights protection, board of directors, audit organizations, and information disclosure. Financial companies are additionally examined on CEO, compensation, risk management, and internal control items.

Poor Internal Controls 'Trip Up' Governance, Boardroom Glass Ceiling and Opacity Persist

The Korea Corporate Governance Service (KCGS) pays special attention to whether internal control functions operate properly when evaluating the ESG management status of major financial companies. Unlike other companies, if internal control functions in financial companies are poor or malfunction, the capital raised 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 poor private fund incidents, received only B grades in governance. Earlier, the court criticized the banks' internal control issues in a trial concerning the financial authorities' severe disciplinary actions against bank presidents related to incomplete fund sales, which is interpreted in the same context.

At that time, the court ruled, "The relaxation of financial regulations means the privatization or internalization of regulations through strengthening internal controls, and the internal controls 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 disregard the rights and interests of depositors and other financial consumers, pursue only performance, or where management makes decisions driven by greed, but effective autonomous internal control measures to restrain such greed have not functioned properly."

Another measure of governance advancement, women's participation in management, also remains sluggish. As of the end of last year, among 117 executives of 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 unregistered 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 industries, but in reality, many are trapped in very conservative organizational cultures," adding, "The 'glass ceiling' blocking women's advancement is stronger than in any other industry."

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 agenda items presented by each director, voting results, and remarks confidential, which is seen as a reflection of this culture.

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

Meanwhile, the five major financial holding companies all received grades of A or higher in both individual ESG categories and comprehensive evaluations this year. KB Financial and Shinhan Financial both achieved A+ grades in all categories. K Bank, SC First Bank, KB Kookmin Card, and Hyundai Capital recorded A+ in individual governance ratings.

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