[2023 Financial Forum] Professor Kwon Jong-ho "The Outside Director System is Advanced Country Type, but Operation is Developing Country Type"

Excessive Expectations for Outside Directors, Legally Enforced
More Former Politicians Than Expertise and Independence
Many Means to Attack Management Rights, Few to Defend

Professor Kwon Jong-ho of Konkuk University School of Law is attending the "12th Seoul Asia Financial Forum" held on the 25th at the Chosun Hotel in Jung-gu, Seoul, presenting on the topic "Problems and Innovation Tasks of Corporate Governance in Korea from a Legal Perspective." Photo by Kang Jin-hyung aymsdream@

Professor Kwon Jong-ho of Konkuk University Law School stated on the 25th regarding the domestic outside director system, "Regulations related to outside directors should be rationalized so that professionals, including those from the business sector, can actively participate as outside directors."

Professor Kwon made this remark during a presentation titled "Problems and Innovation Tasks of Corporate Governance in Korea from a Legal Perspective" at the 12th Seoul Asia Financial Forum held at the Westin Chosun Hotel in Jung-gu, Seoul. He said, "The system is modeled after advanced countries, but its operation is backward."

Regarding the domestic outside director system, Professor Kwon first noted, "There are not many countries that mandate outside directors by law rather than through self-regulation like Korea. Large listed companies with total assets exceeding 2 trillion won are legally required to appoint outside directors, who must constitute more than half of the board."

He pointed out that due to Korea's weak human resource base when the system was introduced, many outside directors whose professionalism and independence are questionable have been produced. Since there was no systematic pool of outside director candidates, bureaucrats, professors, and legal professionals who met the legal requirements but were somewhat detached from professionalism and independence were massively appointed as outside directors.

He said, "During the foreign exchange crisis, the International Monetary Fund (IMF) demanded the introduction of the outside director system, but at that time, there were no talents with the capacity and expertise to serve as outside directors. Because it was legally mandated, the requirements were met, but outside directors lacking professionalism and independence were produced. In the case of the United States, for example in financial companies, boards are mainly composed of financial experts, legal experts, and industry veterans."

Especially recently, with the spread of the Stewardship Code and Environmental, Social, and Governance (ESG) issues, the proportion of outside directors has attracted attention, reaching up to 49%. However, Professor Kwon pointed out that many outside directors in the financial sector are still former bureaucrats or influenced by political circles. He said, "There are even articles titled 'Outside directors as spoils of the regime,' indicating that the practice of appointing pro-government figures has intensified," adding, "It has become difficult for legal regulations that strengthen requirements through laws to be effective anymore."

Accordingly, Professor Kwon argued that through rationalization of related regulations, professionals such as those from the business sector should be able to demonstrate their expertise and independence as outside directors. He stated, "We should not only strengthen the requirements for outside directors but also rationalize regulations so that those with expertise can actively enter as outside directors," emphasizing, "It is especially necessary to recognize the seriousness of political interference in economic issues."

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