[Inside Chodong] What Kind of Outside Director Will You Become?

Outside directors can be broadly divided into three categories. The first is the ‘rubber stamp,’ which has held an absolute majority for 24 years since the introduction of the outside director system in 1998. In Korea, the board of directors still approves proposals at a rate exceeding 99%. The original mission of outside directors to monitor and supervise has long been lost. Enron, the infamous American company involved in a massive corporate fraud scandal, assembled a top-notch outside director group of about ten prominent figures, but they failed to prevent accounting fraud and did not even recognize the whistleblower’s emergence, leading to debates about the uselessness of outside directors.

The second category is the ‘livelihood type.’ This refers to cases where being an outside director becomes a means of earning income after retirement. Under current commercial law, one can hold such a position for up to six years and even serve at two companies simultaneously. As it has become harder to recruit outside directors, compensation has risen to a reasonably satisfactory level. However, unlike the consistent rubber stamps who initially volunteered to be ‘yes-men,’ livelihood-type directors with high aspirations often lose their positions. They are branded as obstacles to company decision-making and quietly removed from reappointment lists. Even livelihood-type directors, who must avoid standing out, eventually become rubber stamps.

The last category is what management sees as the ‘thorn in the side.’ The Korea Hydro & Nuclear Power (KHNP) board, recently at the center of controversy, is an example of outside directors acting as balanced checkers, showing the direction outside directors should take. The role of the board chair, held by an outside director to guarantee independence, functioned properly, and a small number of voices emphasizing expertise united to gain influence. When management’s attempts at persuasion and pressure failed to shake them, the company had to postpone agenda items twice. Management’s misjudgment in underestimating outside directors as mere rubber stamps also played a part. Voices invoking political regimes are self-contradictory and deny the outside director system itself.

The rebellion of KHNP’s outside directors has its limits, and the answer is already set. Once the unusually rapid replacement of outside directors concludes in a month or two, it is clear that the agenda to build a dry storage facility for spent nuclear fuel at the Kori Nuclear Power Plant will pass. However, the current controversy does not stem from opposition to building the facility. It is a matter of prioritizing the roadmap for a high-level permanent disposal facility, which has remained stagnant for over 40 years, and seeking a more refined social consensus. KHNP faces significant risks in making decisions involving trillions of won in investments, including compensation for local residents, based on a single plan.

In the report published every two years by the Asian Corporate Governance Association (AGGA), which evaluates corporate governance systems and practices in major Asian countries, Korea has ranked in the lower tier (9th out of 12 countries) for three consecutive times with an overall score of 52.9%. AGGA particularly highlighted the need for a revolutionary strengthening of public consultation procedures in legislative policy-making and the process of collecting opinions during legislative notices as areas for improvement in Korea.

The final puzzle piece in the globally significant ESG (Environmental, Social, and Governance) management is governance (G). Among these, a crucial factor is whether the board of directors functions properly. Management must make responsible decisions through rational judgment, and the board, centered on outside directors, must maximize independence and expertise to supervise management. The balance must not tip to one side. We hope that the thorn in the side, with a keen sense of balance, will raise more serious voices within the board. /Kim Hyewon, Deputy Head of the Economic Department

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