[Inside Chodong] Why Bank CEOs Must Be Held Accountable

"It wasn't like this before." This is a phrase often heard from senior public officials who have served in financial authorities for decades. They say this in response to incidents such as embezzlement at Gyeongnam Bank, identity theft at Daegu Bank, and insider information leaks at Kookmin Bank. Why do they recall the latte era? It is definitely not because bank employees were more honest back then. Even more than ten years ago, when inflation was much lower, financial accidents involving hundreds of billions of won were not uncommon. The change in attitude lies with the CEOs of financial companies. The response of financial holding company chairpersons or bank presidents to problems has changed 180 degrees. The current atmosphere is "I didn't know. Let's have the court decide if I am truly responsible," whereas the past attitude was "Even if I didn't know, I will take moral responsibility and step down."

Looking at the 21st century alone, there have been a series of voluntary resignations by financial company CEOs. In 2003, Wi Sung-bok, president of Choheung Bank, resigned over a 67 billion won trade finance fraud; in 2009, Hwang Young-ki, chairman of KB Financial Group, stepped down due to a 1 trillion won derivative investment loss; in 2014, Kim Jong-jun, president of Hana Bank, resigned over KT ENS bad loans, and Lee Geon-ho, president of Kookmin Bank, stepped down over embezzlement of 10 billion won from the National Housing Fund. Overseas cases were even more severe. In 2016, Wells Fargo Bank in the U.S. saw its CEO resign and the entire board re-elected following the scandal involving 2 million ghost accounts.

"A single corruption incident is a deviation, but repeated corruption stems from personal connections." "Bank sales departments prioritize performance above all and postpone responsibility." A financial authority official who has uncovered bank misconduct over several years points out that the reason internal controls collapse is due to a flawed organizational culture. However, this does not change simply because employees are arrested or their department heads are dismissed. While some individuals in the organization can be removed, deeply rooted perceptions within the organization cannot be easily altered. This means it is difficult to guarantee that the same accidents will not happen again. The CEO's role is to change the management environment. If CEOs are given a free pass, it will inevitably end with scapegoating.

Financial accidents cause three types of damage to banks. First is compensation for investment losses. This is the most direct and largest loss. Domestic banks suffered a blow to their performance after the private equity fund mis-selling scandal, returning up to 80% of the principal investment. Second is stock price decline. When the reputation of a bank, which is based on trust, is damaged, its stock price falls. This was evident in the case of Woori Bank, which experienced a 7 billion won embezzlement incident last year. Woori Financial Group's stock price hit an all-time high in April last year but plummeted after the incident in July. Although the chairman changed, the stock price has remained stagnant for a year. Third is the loss of long-term profit-generating ability. When a major accident is detected, authorities significantly strengthen inspections and restrict the bank's business activities. Naturally, the bank's long-term vision takes a backseat.

Internal control in banks is achieved through identifying causes, prescribing remedies, and company-wide execution. Analysis and prescription should be done by the CEO together with employees and by listening to their opinions, but the CEO's weight is different in execution. The CEO must lead execution more than anyone else. Investigating the incident and creating a recurrence prevention manual is not the CEO's entire role. No matter how correct the analysis and prescription are, if execution is not properly carried out, it is all for nothing. That is why the CEO is important. The financial authorities blocked the retreat by stating that "CEOs must be held responsible for organizational, long-term, repetitive, or widespread problems" (amendment to the Financial Company Governance Act). The phrase "Desperate times call for desperate measures" remains effective even after 400 years.

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