[Chatham House Roundtable] Government Control or Self-Regulation? The Bizarre Governance of Financial Holding Companies

Ownerless Financial Companies, CEO Positions Hold Absolute Power
Board Fills Allies to Dig 'Trenches' and Often Self-Approve 3-4 Consecutive Terms
Strengthen Eligibility Screening and Eradicate Factional Culture
Parachute Appointments and Government Control Reappear with Regime Changes, Causing Eyesores
Officials Shed Uniforms to Pose as Civilians, But Government Forces Remain Government Forces

Editor's Note
Our newspaper's economic and financial think tank, the 'Asia Economy Chatham House Roundtable,' held an in-depth discussion on the 9th at the Lotte Hotel in Sogong-dong, Jung-gu, Seoul, under the theme "Government Control or Self-Rule? The Curious Case of Financial Holding Companies' Governance." Attendees included former Korea University Visiting Professor Dongwon Kim, former Vice President of the Korea Institute of Finance Jaeha Park, former Director of Hana Financial Management Research Institute Hyunki Bae, former President of Shinhan Financial Group Sanghoon Shin, and former Blue House Economic Secretary Won-dong Cho (in alphabetical order). They unanimously agreed that "It is problematic for financial holding company CEOs to fill the board with allies and then self-renew their terms," and "Equally disgraceful is government control that ousts CEOs and parachutes in replacements every time the administration changes just because they dislike them."

To end such controversies, many diagnosed that the advancement of governance is necessary, which requires a threefold harmony of systems, culture, and restraint of power. There were also calls for fundamental reforms to reduce the authority of financial holding company chairpersons and impose responsibilities on them.

The Asia Economy Chatham House Roundtable follows the 'Chatham House Rule,' where the list of participants is disclosed but individual remarks are anonymized. Below is the full transcript of the discussion.

◆ Moderator = Jungjae Lee, Director and Editorial Advisor of Asia Economy Economic Media School

Thank you for coming early this morning despite the difficulties. Today’s discussion is about the governance issues of financial holding companies, a topic of public interest. From a reporting perspective, this has become somewhat burdensome. Originally, this roundtable was planned due to growing criticism of financial holding company CEOs’ self-renewals, but now criticism of government control (官治) has become even stronger. Please find a balanced viewpoint. All of you are experts and have firsthand experience, so I believe this will be a lively discussion.

On the 9th, participants are taking a photo before the discussion at the 2nd Asia Economy Chatham House Roundtable titled "Government Control or Self-Regulation, the Wonderland of Financial Holding Company Governance," held at Lotte Hotel in Jung-gu, Seoul. From the left: Lee Jeong-jae, Director and Editorial Advisor of Asia Economy Economic Media School; Cho Won-dong, former Chief Economic Secretary to the President; Kim Dong-won, former Visiting Professor at Korea University; Shin Sang-hoon, former President of Shinhan Financial Group; Park Jae-ha, former Vice President of Korea Institute of Finance; Bae Hyun-gi, former Director of Hana Financial Management Research Institute. Photo by Kang Jin-hyung aymsdream@

To Prevent Financial Holding Company Chairpersons’ Self-Renewal, the 'Trenches' of Friendly Boards Must Be Eliminated First

The origin of the financial holding company CEO issue began with NH Nonghyup Financial Group. It was expected that former Chairman Byun Byeonghwan would be reappointed, but Lee Seokjun, a former State Affairs Coordination Office chief from President Yoon Seok-yeol’s campaign, became chairman instead. Next was Shinhan Financial Group. Former outside director Byun Yangho said that Chairman Cho Yong-byeong gave no proper explanation when he decided not to pursue a third term and retire, which led him to resign early from the outside director position out of frustration. When asked if there was pressure from authorities, he gave no answer. Then, at Woori Financial Group, a controversy arose between Financial Supervisory Service (FSS) Governor Lee Bokhyun and Chairman Son Tae-seung over administrative lawsuits related to Lime Asset Management, leading to Chairman Son’s resignation on the 18th of last month.

Recently, Asia Economy published an interesting article. According to the report on the 30th, 70% of CEOs have disciplinary records from authorities. On March 5th, 75% of outside directors of the five major financial holding companies will be replaced. To quote the media, "The trenches built by financial holding company CEOs are being completely overturned."

After that, former Financial Services Commission Chairman Lim Jong-ryong was appointed as the new chairman of Woori Financial Group. What does this mean? I think it means that the 'governance establishment' we pursued through bank privatization and other reforms has ultimately failed. Of course, Woori Financial says "there was no external pressure." Then, is it self-claimed external pressure, or did Woori Financial itself do this for reform? This remains a mystery. The core issue we need to discuss is why such suspicions of government control, an outdated suspicion, still arise.

Because of the external effects financial institutions have, it is natural for the government to supervise financial companies. But the problem is the unclear distinction between normal supervisory functions and improper personnel intervention. This problem always occurs right after regime changes and then disappears.

As you know, there is a famous maxim in the financial world: "Never, ever fight the government troops (官軍)." There is a similar saying in the City of London. It seems to be a global commonality. But why is there no controversy over government control in the UK, but there is in Korea? That is the problem.

Globally, there is a rule called the 'fit-and-proper test' regarding personnel matters such as CEO or board composition. The UK Financial Conduct Authority (FCA) requires financial institutions to report even the pre-process of how they conducted the fit-and-proper test. If you appoint someone like Mr. Kim as CEO, you must report who, when, where, what, how, and why they were selected.

Don't fight the government troops. But what if, like in Woori Financial’s case, the government troops take off their uniforms and enter as civilians? Does taking off the uniform make them civilians? Even if they take off the uniform and return, government troops remain government troops. The reason why improper personnel interventions frequently arise is because of incompetence. A true master strikes without leaving a wound. Government control is the same. The masterful government control leaves no trace.

Ultimately, in my view, the core problem is a backward supervisory system. If the fit-and-proper test system is established, clumsy government control will leave traces. The Financial Services Commission emphasized governance advancement plans in last month’s work report, and the president said "OK, do it that way," so now government control will leave traces. This is a good thing.

One question remains: Why have we not properly implemented the fit-and-proper test until now? Is it because our financial authorities are ignorant or unaware? I think it is because ambiguous and vague supervisory regulations were convenient for the authorities. According to our supervisory regulations, financial institutions must report immediately after appointing CEOs, etc. There is no reason to intervene in the appointment. But after the appointment, they raise issues. If an undesirable person is appointed, they threaten to hold them accountable or say the appointment was wrong, wielding the 'government control' sword. In contrast, in the UK, all fit-and-proper tests are conducted 'prior.' Only after the fit-and-proper test is completed can the board recommend and the shareholders elect.

Is government control the only problem? Self-renewal is also a big issue. CEOs build trenches with close allies and often serve three or even four terms. This cannot be solved by supervisory regulations alone. Regulations are necessary conditions but not sufficient. During the 2008 financial crisis, there was controversy in Wall Street that boards became 'rotary clubs,' meaning social clubs. Financial holding companies have more board activities than others. The more active the board, the stronger the trenches protecting the CEO. The financial authorities should pay attention to this.

Why is this? Because the 'arm’s length principle' is broken. The arm’s length principle?support but no interference?is a basic taboo and norm for outside directors. But in reality, outside directors receive generous salaries and cars. The more they get along with the CEO, the harder it is to maintain the arm’s length principle.

On the 9th, participants are sharing their opinions at the 2nd Asia Economy Chatham House Roundtable titled "Government Control or Self-Regulation, The Wonderland of Financial Holding Company Governance" held at Lotte Hotel in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

I also once opposed as an outside director and have regretted it ever since. Perhaps due to our homogeneous society, those who oppose are not forgiven. Leaving a record of opposition in the board is strongly disliked. They say, "Why do you do that to someone you see often?" or "Why are you doing this?" If you don’t want to be ostracized, you compromise. You give up thinking, "It won’t help even if I oppose."

When I said fit-and-proper tests are necessary but not sufficient, it is because unless the arm’s length principle is established, financial company boards are likely to become the CEO’s aides. The arm’s length principle is a matter of use, not form. It is a matter of behavior and culture, not system. I think financial holding company boards allowing CEOs to serve three or four terms is a matter of use and relationships. Since the arm’s length principle is not accepted in our society, boards tend to act as CEO trenches.

Alternatively, they form factions and fight fiercely. There was such a case in a bank in the past. Everyone becomes one faction forming a rotary club, or they split into two factions fighting. This is ultimately a matter of professionalism and culture of directors, not something that can be regulated by supervisory rules.

What is needed first is to establish the fit-and-proper test. Once established, government control will become very difficult. The appointment process will be transparent, making it hard for boards to become rotary clubs or factions. The supervisory authorities must look into whether a bank has faction problems. They need to supervise not only the appointment process but also whether the board functions properly. They must continuously demand the arm’s length principle be established. I think this is the answer.

FSS Claims "No Involvement," but Behind the Scenes Says "Don’t Take That Person, Take This One"

I will share an experience. When a bank tries to recruit a standing auditor from the Financial Supervisory Service (FSS), the FSS officially says, "We never interfere in personnel matters." But when you try to bring someone, they say, "Ah, that person is a bit problematic." They claim no involvement but there is an 'invisible hand.' If you ask, "How about bringing this executive?" they say, "Bring this person instead." There are people lined up inside the FSS waiting to leave. The president and government say not to interfere in private company personnel, and the FSS pretends not to interfere. But eventually, they contact you personally, saying, "Isn’t this person better than that one?" Such things are probably still happening behind the scenes.

Actually, banks prefer director-level officials from the FSS rather than executives. Executives sit and make calls to former subordinates, which the authorities dislike as 'giving orders.' Director-level officials, on the other hand, work diligently, visiting people to explain and understand field opinions, building brotherly relationships. From the bank’s perspective, a grade-2 director is much better for this reason.

You mentioned former outside director Byun Yangho of Shinhan Financial Group. He was the one who spoke out the most.

Perhaps because he was from the government.

I think he did very well. He was the sole dissenter during Shinhan Financial’s rights offering last year. Even Lee Yoon-jae, an outside director and former presidential office economic secretary, did not oppose. When conducting a rights offering, you ask existing shareholders whether they will participate; if not, you allocate to a third party. But that did not happen. That’s why Shinhan’s stock price started to fall. Moreover, the friendly Hong Kong private equity fund increased outside directors by adding two more people. It’s obvious the CEO is engaging in politics to protect himself.

I want to mention former Sogang University Professor Kim Byung-joo as a model outside director. No matter how much he drank the night before, when he sat at the meeting, he spoke bluntly. Honestly, I don’t know if people really want to be outside directors or if professors’ main job is being outside directors. The term of outside directors also needs adjustment. Currently, the term is 2 years plus 1, 1, 1, 1 years. Because of that extra 1 year, they keep watching the CEO. Whether 2 plus 2 or 2 plus 1, the term should be fixed. Then they won’t watch the CEO. When I was chairman of Foundation K, I set the board term to 2 years, renewable once for 2 years, total 4 years. I also changed the chairman to a single term. I changed the articles of association. Then I was accused of privatization and other nonsense.

The financial holding company chairpersons recently had terms like 3 years + 3 years + 3 years, totaling 9 years if reappointed three times. Meanwhile, subsidiary presidents or bank presidents have terms like 2 years + 1 year. That’s very wrong. They say it’s to control the organization efficiently, but I think it’s very wrong.

Then what would be better?

I think just follow the Commercial Act. The term of outside directors is too long. Honestly, I don’t think all professors are experts. Some bring their juniors into the board when they quit. Woori Bank has a controlling shareholder system. Initially, it seemed ideal to have controlling shareholders each nominate an outside director. But it turned out controlling shareholders all own financial companies.

So they dare not speak to the FSS. Moreover, controlling shareholders need support from the bank. The picture looks good but the actual effect is not good. We need to think deeply about governance. What is the answer? I don’t know, but outside directors should not be too biased toward the side they belong to. But that’s the problem; it’s hard not to be.

On the 9th, participants are sharing their opinions at the 2nd Asia Economy Chatham House Roundtable titled "Government Control or Self-Regulation, The Curious Case of Financial Holding Companies' Governance," held at Lotte Hotel in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

President’s Mention of 'Stewardship Code' Is Good, but Financial Companies Say "Just Lobby the Voting Bodies"

I fully agree with the presentation. The core seems to be shadow management. Governance-related matters should be as transparent as possible, but shadow regulation is the problem. The mismatch between authority and responsibility?if managed by system, it’s not government control, and government control is problematic because it is shadowy. Someone exercised power but no one knows who, only rumors. Those who say they did, those who say they didn’t, no one takes responsibility. The fit-and-proper test was avoided due to such burdens. It became a serious issue during the global financial crisis. Both advanced and developing countries conduct fit-and-proper tests. For example, when sending a representative to Hana Financial Indonesia, they wait six months and even take exams by the local supervisory authority. Some fail and return. Same in Hong Kong, the US, etc.

I also served as an outside director in Indonesia and had to interview with the supervisory authority.

In the UK, they conduct pre-interviews for CEOs, key executives, board chairs, and outside directors. There is no problem in the UK. The fit-and-proper test works well. They supervise and interview not only at appointment but regularly. If operated by system, there is no problem. Whether financial companies or holding companies, checks and balances must always work in society and organizations. CEOs have full management authority, but their judgment is not always right, so multiple checks must function. That is the system.

I opposed the enactment of the Financial Company Governance Act, arguing it should not be done by law. But after the law was enacted, it became a 'cover.' The law is quite loose, with no active requirements, only passive ones, so just complying with the law is enough. The law requires compliance with outside director term rules and external evaluations, but it is formal and easy. All financial holding companies submit governance reports scoring 100 points. Self-renewals and shadow government control all pass legally. The law was made but caused regression. The law is followed but its purpose is not fulfilled.

The important thing is how to make checks and balances work. When making systems, we must consider how they will operate or be abused. Systems alone are not enough. First, internal management must be good; second, supervisory authorities must monitor well; third, the market must recognize it. The media’s role is also important. The market should reflect this in stock prices. No single party or authority can do it alone.

The president mentioned the 'Stewardship Code' during the Financial Services Commission’s work report. I fully agreed when it was introduced. Will it work? Shinhan, Hana, and KB Financial Groups have over 70% foreign shareholders, but they have no interest in domestic governance. The National Pension Service’s voting rights committee exists, but it is unclear if they exercise voting rights transparently and objectively. Sometimes they oppose on government orders, and if people don’t pay attention, they wonder, "Why did they support (or oppose) that agenda?" So the role of voting advisory bodies is important, but there are few such bodies. Foreign shareholders rely on ISS (Institutional Shareholder Services), and domestically there are only a few like the Korea Corporate Governance Service and Daishin Economic Research Institute. So they think, "We can just lobby the voting advisory bodies." They lobby heavily on sensitive issues like bank interests or personnel. They turn these bodies friendly. Checks and balances cannot work. The advisory bodies have few staff, often one or two cover all domestic companies. They say they explain but actually lobby. Sensitive matters pass or reappointments succeed smoothly. Relationships are relationships, but during lobbying, all relationships are mobilized, including people who cannot refuse. I think this structure makes checks and balances difficult.

Most Outside Directors Are Former Government Officials or Professors; Need More Diversity Including Businesspeople

Regarding outside directors, I compared many overseas cases while working at a financial holding company. The biggest difference is that most outside directors here are former government officials or professors. Other countries have many businesspeople as outside directors, but here they cannot due to conflict of interest rules. The pool of outside directors is too limited. So diversity is low, and the device of outside directors, which should properly check and balance, does not work well.

I thought Shinhan’s case was the best. There was a dispersed but clear voice from Korean-Japanese shareholders who appointed outside directors and had a clear succession plan. You could see who would succeed next, and governance was stable. So before the 'Shinhan incident,' I thought our holding companies should follow Shinhan’s example. But later, other issues arose even within Shinhan. On the other hand, KB Financial Group had very strong outside directors, which sometimes shook CEO governance. Former government officials continued to come down as well.

Seeing these various cases, I think it’s not easy, but the answer lies in the difficulty. Different companies have different governance, which is the answer. Some may have internal CEOs, others external. The five major financial holding companies should have different governance. Depending on whether major shareholders are concentrated or dispersed, governance should differ, and communication with the market and authorities should be appropriate.

Government Influence on KB Financial Outside Director Nominations: "I’m Just the Chair, I Can’t Intervene"

As mentioned earlier, until last year, self-renewal was the issue, but after the year-end, government control became the issue. Governance is a broad topic, so let’s narrow it down to CEO appointments. Looking at the history of financial company CEO appointments from liberation to the 2000s, the government used to write names on envelopes like 'Shinhan Bank President So-and-so.' Due to the huge harm, there were calls for financial autonomy. In the late 1970s, after an economic crisis, a financial reform plan was made to privatize and allow autonomous appointment of bank presidents. But in the 1980s, with the three lows boom, it was reversed.

In the late 1980s, when I returned from studying abroad and joined the Financial Research Institute, the US pushed for partial opening and autonomy of our financial market due to trade surpluses. We created a financial reform blueprint and underwent US verification. The core was how to appoint CEOs autonomously, but no concrete plan was made.

Before the foreign exchange crisis, financial reform discussions heated up, emphasizing governance advancement starting with banks. At that time, non-standing directors, not outside directors, were introduced. From 1995 to 1997, I worked on governance advancement, and the foreign exchange crisis highlighted governance issues. A task force was formed. After 2000, outside director-centered governance advancement was established. CEOs were appointed through boards. The current system’s foundation appeared in the 2000s and has lasted over 20 years.

Did it work well? No. The government keeps changing the system but results are poor. There are differences in advancement levels among banks. Some say boards are too strong, but even KB Financial Group is fine. If the board were too strong, problems like Woori Financial wouldn’t occur. The government controlled or the president shook things internally, or the board was used as a tool for privatization. The foundation of governance is outside directors’ independence.

I think how outside directors are selected is most important. The government seems to treat outside director positions as 'cakes' to be distributed. If they treat it as appointments and say "You go here, you go there," how can outside directors be independent? They watch the president or the government that appointed them.

Selecting CEOs through outside directors is not the best but the second best. The problem is operation. How to operate? The key is independence. Outside directors should select CEOs based on their expertise and conscience without watching anyone. But they don’t. I was on the board during the Shinhan incident, and the board did not function. The board should have taken control and resolved the issue, but everyone watched someone’s eyes. If Shinhan was like this, what about other financial companies?

Ultimately, the most important thing in CEO appointments is board independence. Without it, nothing works. How to maintain board independence? Prevent 'intervention.' KB Financial practically maintains independence. I was chair of KB Financial’s outside director nomination committee. Even Chairman Yoon Jong-kyu did not know who the candidates were until I told him. KB Financial divides candidates into seven fields like finance, accounting, consumer protection, and circulates about 30 candidates to some experts and unknown external experts. It’s a huge waste of time and cost. Then they sum scores simply and submit the top eight candidates to the board. Directors score them based on their judgment. The top four emerge, and no one knows who will be selected. Unexpected candidates often appear. So the chairman is quite nervous about who will be outside directors. The government once contacted me to intervene, but I said, "No, it’s impossible by system. I’m just the chair." That’s how to prevent intervention. If operated like this, it works. Outside directors can keep their independence by following the well-designed system with conscience. Independent directors select CEOs well.

Looking at Woori Financial, that was how KB Financial did it in the past. The CEO appointment date is fixed, and they wait until then. Suddenly, when the game starts, anyone can apply. They rush to search firms or headhunters for candidate lists. Then chaos ensues, and all kinds of backing are mobilized. So there is no predictability. I was a director at Shinhan Bank and KB Financial Group. KB Financial had a crisis before Chairman Yoon came and then he put much effort and money into governance. At least that system is managed regularly. I hope other financial companies try that. KB Financial maintains a CEO candidate pool, updating it twice a year. Internal candidates include vice presidents and subsidiary presidents, and external candidates are renewed. They get lists from headhunters and vote to maintain the pool. They select from about 20 candidates. If a random candidate comes in due to regime change, is that acceptable? I think this is a representative case of shaky governance.

I think CEO candidates should be managed continuously. If candidates are managed continuously, outside directors cannot be unaware of new candidates. They report and evaluate annually. Candidates may change. Sometimes accepted candidates are replaced. That’s why continuous management is important. Selecting from this pool maintains stability and reduces external influence. This may not be the best but the second best.

On the other hand, I think internal influence is more important. Even if Chairman Yoon doesn’t know who outside directors are, he builds relationships with them. That is a personal matter. It depends on outside directors’ conscience and expertise in selecting CEOs for the organization.

"Excluding Former Government Officials from NH Chair Lim Jong-ryong Is Excessive"

Another issue is government control. Lim Jong-ryong became chairman of Woori Financial Group. Excluding him just because he is a former government official, or insisting that only former government officials should come when the organization is shaken, both are excessive. Looking at the real sector, failing companies don’t always choose executives from Samsung but not from the Ministry of Trade, Industry and Energy. Excessive media focus on government control is not good. It should become natural for former government officials to be candidates. But the culture of inserting government officials when things get strange should disappear.

Fit-and-proper tests are not a big deal. Qualified people, not so-called 'crazy' ones, should be presidents. When I visited the UK, the legal system is common law. If someone is judged fit to be president, they are; if not, they aren’t. But we have a civil law system, so it must be defined by law. Therefore, I also think fit-and-proper tests are necessary but not sufficient. Good CEOs cannot be guaranteed by fit-and-proper tests alone. We should not rely solely on them. Ultimately, we should maintain the current governance system, which is not the best but the second best, and operate it skillfully. Also, every regime should recognize the 'limited nature of regimes' and refrain from excessive personnel intervention that shakes financial companies. Government control has failed for decades. If the regime intervenes in personnel, bank employees ignore the president and instead lobby the FSS or Financial Services Commission. That’s why governance was changed. It is a system built after much thought, so it should be operated well.

Financial Holding Company Chairpersons More Powerful Than Presidents, But Bear No Responsibility

Was current Chairman Yoon Jong-kyu ranked first during KB Financial’s chairperson nomination?

I was the chair of the outside director nomination committee then, so I know. Yoon was naturally ranked first. But that is based on scores. When staff summed scores and said who was first, we were anxious because we had no way to know. If you don’t do this well, the president controls internally or the FSS externally shakes things.

My concern is different. Why are the four financial emperors called emperors? Why is the financial holding company chairperson called an emperor? Of course, they earn a lot, but they bear no responsibility. It is personal power. They have great personnel authority and advertising rights over the group. (Discussant B: "At that time, they ran full-page ads three times a week, spending 50 billion won a year.") Then they can control the media. This is like the personal political activity of the holding company chairperson. Where else in society does such absolute power exist?

Better than the president.

Better than the president. They are praised everywhere. Would a political party leader be like this? The power is too great. But they bear no responsibility. Chairman Son Tae-seung was responsible as a bank president but not as a financial holding company chairperson. I have never heard of holding company executives or chairpersons being sanctioned by the FSS. (Holding company executives are not subject to supervision.)

Why were financial holding companies created? The purpose was universal banking. Since breaking legal boundaries was difficult, they created holding companies to enable universal banking. For that, they needed personnel authority and information. Information means customer data from banks. For example, if you do card business, you know how corporate working capital flows. Investment companies provide direct financing and consulting. M&A is possible. They gather customer information to build group-level strategies. Of course, responsibility follows. Since personal financial information is involved, responsibility arises. That’s why financial holding companies were created.

But after creating holding companies, conflicts arose between holding companies and banks, like at Woori Bank. Also, privacy protection has become so strict that it is almost impossible to cross the threshold. Managing financial and related IT systems at holding companies has become nearly impossible. That’s why holding company CEOs or executives bear no responsibility. But personnel authority remains. Lobbying power remains. What appears under this system is political factions. Earlier, outside directors were called rotary clubs, but they are political factions. They inevitably become political factions for chairperson reappointment. Absolute power with authority but no responsibility attracts many candidates. The pie is too big.

I think if financial holding companies are created, they should be given responsibility matching their authority or reduce the pie. But now, I think there is little room to add responsibility under the current system. I doubt whether universal banking is appropriate under the current system. So the conclusion is to reduce the pie. The holding company should be made like an audit or supervisory committee. For example, not a financial holding company chairperson but a supervisory committee chairperson. I don’t know if it should be full-time or non-standing. But the supervisory chairperson should not exercise personnel authority full-time. Personnel should be entrusted to heads of subsidiaries or organizations. The supervisory chairperson only observes whether they do well and holds them accountable if not. I don’t know why the financial holding company chairperson should continue to have the four emperor status. The 'arm’s length principle' discussed today is very difficult to observe culturally and habitually. I think either reduce the pie or assign responsibility matching authority.

FSS Weak When Sanctioning, Strong When Interfering Where Not Needed

The FSS chairman is trying to assert authority, but something is wrong. The basic condition to solve this problem is to give the market confidence that the government will never interfere. Then banks will manage themselves. From my experience, the FSS is too weak where it is really needed. (Regarding overseas interest rate-linked derivative-linked securities, the FSS sued Woori Bank.) This would never happen in the UK. When authority should be asserted, they are weak; when they shouldn’t intervene, they do. Our supervision is still backward. The FSS must be strong. In the UK, when FCA officials resign, they join the private sector the next day. They submit resignation in the morning and join in the afternoon. That’s fine. It’s a matter of personal evaluation: "Did you lobby?" "Did you do something wrong?" Here, they tell you to wait 3 years before joining the private sector. That’s ridiculous. The supervisory agency is the problem. The market must trust no interference, and when sanctions are needed, they must be strict. But when they should intervene, they are weak and go to court. That’s nonsense. When they shouldn’t intervene, they do.

I have attended several sanction hearings, and the problem is that committee members say nothing. They follow fixed rules. Sometimes, when a prosecutor’s advisor says a word, the atmosphere changes. I have seen people saved from death situations. Lee Chang-gu was really unfairly treated, but after one comment from the supervisor, he was saved.

I served on the sanction committee for over a year and a half. It’s like a trial. The records are 100 pages long. External committee members cannot read thoroughly (and don’t try). So if there is no big issue, they just follow the FSS’s instructions.

Board Chair Appoints His Junior and Self-Renews, Financial Holding Company Chair Stronger Than FSS

Looking at Woori, Shinhan, and fund incidents, I wonder if the board has no responsibility. Aren’t all matters reported to the financial holding company? Whether the product is appropriate, what the risks are.

They report only to the bank board, not the holding company, right?

They have a matrix organization, so all reports are made. If the chairman says he didn’t receive the report, that’s a lie. If the conclusion is that the product was sold well, the chairman praises the subsidiary bank or securities company. It’s contradictory. I think financial holding company directors and outside directors are partly responsible and should be given more responsibility to care and think, "If something goes wrong, it will be serious." Many care now, but more responsibility is needed.

When CEOs build trenches with their allies to allow three or four terms, what did the FSS do? The problem was Hana Bank. The FSS pressured Chairman Kim Jung-tae to step down but gave up. At that time, Kim Jung-tae, a high school classmate of President Moon Jae-in, was stronger than the FSS.

Honestly, among ourselves, the board chair appointing his school senior or junior and doing this is why it doesn’t work. Self-renewal like that is unacceptable.

The issue of reducing the pie held by financial holding company chairpersons is very important. The FSS recognizes this. The biggest pie the chair holds is personnel authority. The personnel authority of subsidiaries and executives. Nominally, subsidiary presidents have personnel authority, but the chair exercises it. For example, when appointing the KB Kookmin Card president, the chair asks the board to decide, but how would the board know the person? Ultimately, they pick the person the chair chooses. This causes disputes among directors. Hana Financial is unified, but KB Financial has frequent disputes between the chair and directors. But when the chair persuades and explains, the directors follow. There seems to be no realistic way to reduce the chair’s huge pie. The FSS knows this and proposes supplements, but they don’t work.

Before holding companies, banks had subsidiaries. When holding companies were created, bank presidents became chairpersons. Previously, there was a bank president with securities and insurance under them; now it’s the holding company. The bank president became the chairperson. The chair’s authority can be reduced, but power does not go elsewhere. Power dispersion is harder than expected.

I don’t understand why holding company chairpersons are not held responsible. The chair presides over sales meetings. Holding companies have a business unit (BU) structure, a matrix organization, all connected. Holding companies have corporate centers and shared service centers; the former handles strategy, finance, risk, the latter IT. The BU heads are appointed by the chair. The chair presides over sales meetings. Responsibility should be assigned to the chair. Formally, responsibility is assigned to the vice president or bank president, but that is formalism. Actually, the chair should be responsible because all reports go to the chair. They just don’t sign. So the chair should bear real responsibility.

They don’t bear responsibility in court. They say, "I gave the vice president authority." That’s nonsense. Our legal system is too rigid. The responsibility and authority reduction of the chairperson is key.

Previously, when a big accident happened, the chair would say "I’m sorry" regardless of responsibility. Nowadays, I don’t know why. The board receives overall business reports and plans. The chair announces "I will increase shareholder value." If promises are broken, they should be dismissed or retire, but they just continue. Look at the US. Disney changed CEOs last year. They just fired him without consulting and sent him home because he spent too much responding late to the OTT market. Two years ago, they called him back. We never see that.

Like Punishing Chaebols, Financial Holding Company Chairs Should Be Held Responsible for Influencing Company Decisions

In the US, Goldman Sachs Chairman David Solomon fired many people but cut his own salary by 40% and admitted mistakes, promising to do better. We don’t see that. Systems are important, but checks and balances to operate them properly are needed. Carrots and sticks must go together. For example, impose real management responsibility so that chairpersons are held accountable. Chaebol second-generation heirs fear the board system most. Whether or not they are directors, if they influence company decisions, they are held responsible. Many chaebol CEOs have suffered because of this and are careful. We should either impose responsibility or reduce the pie so that checks and balances work internally.

I was the bank board chair during the Shinhan incident. I was young and principled then. The audit committee chair was Lee Kyu-min, former editor-in-chief of Dong-A Ilbo. He insisted on principle, so the bank managed well. I thought journalists were better than professors. But Shinhan Financial Group’s board was different. They only watched the chair. They knew the problem but did nothing. I was shocked and felt frustrated.

The board is so unfair. I was sued by the bank before indictment or investigation, but the board suspended my duties. Chairman Cho Yong-byeong was acquitted in the second trial despite hiring irregularities, applying the presumption of innocence. But I was suspended before indictment. You know what board tyranny is. The board followed the chair’s words then.

The board system is loosely made but doesn’t work in emergencies. External independence may work, but how to deal with internal chair control? That’s the worst moral hazard.

Fixing outside director terms to prevent reappointment would be better.

KB’s term is 5 years; others are 6. I think 5 years is still long. Leaving before getting too close to management is better for both.

<Discussant B> Former outside director Choi Young-hwi served only twice and declared opposition to a third term from the start. I think such people are a model for outside directors.

Isn’t Chairman Son Tae-seung of Woori Financial similar? He was expected to serve a third term, trenches were built, and he was determined to leave. Who could stop him? The FSS challenged him, saying he was responsible for the Lime incident. At first, he seemed to accept but then said, "I did it before; why not now?" The Lime incident happened under the previous government, right? Responsibility is strange. The bank was made to pay 100% compensation. Then minority shareholders have no reason to sue. Complaints and lawsuits trigger investigations, but none happened. The bank paid everything. Chairman Son could say, "I did nothing wrong; the FSS told me to pay. Why fire me?" The new FSS chairman says, "This is strange," but the FSS is guilty and cannot overturn it. Chairman Son resigned at the deadline after digging trenches. The new chairman nomination committee cut all former executives opposing him from the long list and suddenly added his people to the short list. This is like a regent’s role.

Chairman Lim Jong-ryong Proved Management Ability by Acquiring Woori Investment & Securities; Why Only Talk About Government Control?

Chairman Lim stepped in amid this situation. Whether self- or other-nominated, he has private sector experience. He was chairman of NH Nonghyup Financial Group. Woori Financial has fallen to fourth place in the industry. Why? Because it cut off its own arm. The core was selling Woori Investment & Securities. If Woori Financial had done well, it should have transferred Woori Bank’s investment part to Woori Investment & Securities to grow it for universal banking. But it didn’t. Instead, it sold Woori Investment & Securities to improve performance numbers. Who bought it? NH Nonghyup Financial Group under Chairman Lim. He can make such strategic decisions. The NH Nonghyup board consists entirely of Nonghyup Central Association directors. He persuaded them that this was necessary for financial holding companies. Why talk only about government control and not this? I don’t understand.

Japan has an unwritten rule against three terms. When approaching the sixth year, they step down as counselors voluntarily. National policy banks alternate between private and government leadership. The Bank of Japan does this. We should have an unwritten rule like, "Why try for a third term? If you stray, you’re done." Two terms are enough. I oppose Chairman Cho Yong-byeong’s third term regardless of feelings. I think Shinhan Financial Group will settle on reappointment without special reasons. Others should avoid three terms.

There is a bill to limit terms. The Democratic Party proposed a three-term ban, but it fizzled out. I’m unsure about legal regulation, but I agree three terms are too much. For example, if I’m chair and executive A is smart but difficult, I won’t assign him to a key position. Then A will be sidelined, but he may be a necessary talent. If the chair serves six years, A may return. But if nine years, A is out for ten years. Even a rare talent is out. CEOs staying too long is mostly negative.

There was such discussion and bill proposal early in the previous government. I opposed it then because it didn’t fit global standards. But my view changed. Three terms are problematic. Good cases usually have two terms. Bad cases come from long tenure.

Is a three-term ban necessary?

It should be an unwritten rule. The holding company system started as a paper company for IR and policy but has become too bloated.

For an unwritten rule, society must value reputation and honor, like politics. Until that improves, it’s difficult.

Shinhan Financial Group tries to recruit an external president for its securities subsidiary. No one wants to go. They can’t even control their department heads, and the holding company interferes. Why go? The salary is only slightly higher but responsibility is greater. They say, "Why go there?"

I was an outside director at a Woori Financial subsidiary. Woori Financial was under the trust control of the Deposit Insurance Corporation for many years because the government was the major shareholder. So they do the same to subsidiaries. They don’t realize they are the government. They learned management from the Deposit Insurance Corporation.

Should we shake the holding company system itself? Holding companies were created for universal banking, removing barriers to share information and provide customized finance. But now, it’s time to question whether this system is right. Is it hard to revert?

Yes

The holding company organization has become very bloated. Returning to basics, we could reduce the financial holding company’s organization. Many people advance through personnel lines or holding companies. Whether good or bad, holding companies have strengthened. So authority is high but responsibility is low.

FSS Governor Lee Bokhyun’s "Direct Communication with Boards" Is Good, But Must Not Become a Spoils System

I think the core is personnel authority. Shinhan and Hana Financial have holding company brands. Subsidiaries pay brand fees to the holding company. That’s the holding company’s source. But KB Financial is opposite. The bank owns the brand. Changing to a holding company would cause huge taxes, so the holding company pays the bank. So the holding company has no money. The only thing left is personnel authority. Personnel is everything. Woori Bank and Hana Bank had disputes between president and chair, but when the chair promoted juniors, order was established.

Personnel authority is important and concentrated in the chair. If the chair has no personnel authority, what then? Why have a holding company? Someone must balance power. The board should do it primarily, but they have limits.

Therefore, the FSS’s authority must always stand as the last bastion. They should not interfere unnecessarily but intervene firmly where needed. Financial companies must always be wary of the FSS. It’s not right for chairpersons to belittle the FSS like in the previous administration.

Shinhan Financial is a good example. When Chairman Cho Yong-byeong was appointed, stock price and asset value fell before his third term. It also fell for KB and Hana Financial. Should the board leave this? I think the board should change the CEO before the third term discussion even arises, like Disney in the US. Such cases strengthen board authority and proper activity.

FSS Governor Lee said he will create a communication channel with the board chair and meet directors. That’s possible and not bad. But it should stop there. It’s dangerous if financial holding company outside director seats become spoils when regimes change. If outside director seats become political spoils, much will be lost. We must be careful. In the previous administration, they tried to change CEOs, but the board had appointment authority, so there was no way. They didn’t even put the regime’s preferred candidates on the board. So they said to change outside directors. But some companies can do this, others cannot. From the financial holding company chair’s perspective, they are not fools. Changing outside directors to suit the government is like putting a knife to one’s own neck. So they politely say, "Can’t I go to a subsidiary board instead?" This is important, but the biggest problem is boards acting like the chair’s subordinates. The opposite problem is the government appointing all personnel. The core is the board’s self-purification and independence.

Thank you for the passionate discussion over a long time. We hope this will provide good policy suggestions to financial authorities and financial holding companies.

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