FSS: Consulting on Responsibility Structure Charts for 71 Financial Firms Reveals Multiple Shortcomings

18 Financial Holding Companies and Banks, 53 Investment and Insurance Firms Receive Preliminary Consulting
Further Support Planned Through Briefings and Additional Inspections

The Financial Supervisory Service announced that it had completed preliminary consulting on responsibility structure charts for 71 domestic financial companies. The agency explained that the consulting revealed several shortcomings and recommended improvements.

On May 26, the Financial Supervisory Service stated that, following the enforcement of the revised Act on Corporate Governance of Financial Companies in July last year, it had completed preliminary consulting on responsibility structure charts for 18 financial holding companies and banks, as well as 53 large-scale investment firms and insurance companies.

The key point of the revised act is that financial companies must introduce a responsibility structure chart that allocates internal control responsibilities to each executive, and that executives listed on the chart are required to fulfill their internal control management duties.

The preliminary consulting revealed various deficiencies and recommendations, and the agency disclosed several representative cases.

First, in the case of some investment firms and insurance companies (eight companies) that have appointed co-CEOs, there was concern about practical confusion due to the lack of clear standards for the allocation of responsibilities among CEOs under the Corporate Governance Act. Some financial companies allocated responsibilities only to the business areas overseen by each co-CEO, while others either assigned responsibilities solely to one party depending on the nature of the responsibility, or distributed them to all (mixed allocation), resulting in differences in allocation standards among companies.

The Financial Supervisory Service pointed out that, when operating a co-CEO system, it is desirable to allocate responsibilities based on the nature and scope of the duties, taking into account the roles and authorities of each co-CEO and the intent of the responsibility structure chart system.

In addition, in many companies, one person holds both the CEO and the board chair positions, creating potential conflicts of interest. Unlike financial holding companies and banks, among the 53 large-scale investment firms and insurance companies, 25 companies (47.1%) have a CEO who also serves as the board chair. Although such dual roles are not prohibited by the Corporate Governance Act, there were concerns that the checks and balances intended by the introduction of the responsibility structure chart might not function effectively.

The Financial Supervisory Service emphasized that, if such dual roles are maintained, effective internal control mechanisms must be established to ensure that the principles of checks and balances operate as intended with the responsibility structure chart.

Furthermore, a significant number of investment firms and insurance companies assigned substantial internal control responsibilities for their respective business areas to lower-level executives (such as division heads), rather than to higher-level executives (such as department heads) who receive reports and exercise decision-making authority. This raised concerns that internal controls might not function effectively. When the responsibilities of higher- and lower-level executives overlap, it is necessary to allocate responsibilities to higher-level executives to ensure effective internal control.

Additionally, there were cases where the allocation of responsibilities to key executives was omitted. Some companies automatically excluded non-executive directors from responsibility allocation, failed to allocate responsibilities because certain executives lacked decision-making authority, or reduced the scope of certain executives' responsibilities compared to what was stated in the business report. The agency recommended correcting these issues.

A Financial Supervisory Service official stated, "Since the internal control system based on responsibility structure charts is still in its early stages, it will take considerable time for the new system to be operated effectively," and added, "Going forward, we will systematically manage and support the stable establishment of the new system by checking preparation status, providing support, holding briefings, and monitoring operational practices according to the implementation schedule for each sector."

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