Lee Chan-jin, governor of the Financial Supervisory Service, summoned the chairmen of South Korea's financial holding companies for a fresh warning on chief executive succession, just eight days after publicly criticizing the process as inadequate. Industry officials say financial authorities are stepping up their intervention in personnel decisions ahead of a large round of appointments across the sector at year-end.
At a meeting on the 23rd with the chairmen of the country's eight bank holding companies and the head of the Korea Federation of Banks, Lee said the process for selecting chief executives, who are accountable for a financial company's soundness, internal controls and consumer protection, "must not be captured by particular factions or personal ties, and must instead screen for the right person transparently, fairly and on the basis of ability." It was his second such meeting in nine months, following talks with holding company chairmen last December at which he raised governance concerns.
Lee called on the groups to set out specific standards and procedures for succession, covering the selection of candidate pools as well as vetting, evaluation and record-keeping. He also demanded that the committees that recommend candidates for the top jobs at subsidiaries be guaranteed a substantive role in nominating and choosing chief executives, in line with the intent of the Act on Corporate Governance of Financial Companies. That means providing ample information on the standing pool of candidates and actively reflecting the views of members of the executive nomination committees.
With an estimated 70-odd chief executives at major financial holding company affiliates due to see their terms expire at the end of this year, Lee's repeated emphasis on succession has raised concerns in the financial industry that management autonomy could be infringed. His remarks are read as pressure to replace chief executives regardless of earnings performance or continuity of management. Some also argue that excessive regulation of subsidiary chief executive appointments would make accountable management difficult, given that holding company chairmen answer for the performance of the entire group.
Under pressure from regulators, the holding companies are revising their procedures for appointing subsidiary chief executives. BNK Financial Group has drawn up changes that require succession procedures at all subsidiaries to begin three months before a chief executive's term expires. Shinhan Financial Group has also expanded the role of its nomination committees as it begins succession procedures for the heads of 12 subsidiaries whose terms end this year.
The FSS increased pressure on the holding companies the same day by raising scrutiny of bidding for local government treasury accounts and reviewing financial misconduct cases in the banking sector. The regulator said it would examine whether the banks closely analyzed the impact on their soundness and profitability of the incentive payments to local governments made during recent bidding for treasury account business. It also plans to review the adequacy of evaluation and compensation systems and whether organizational incentives played a role in cases involving fraud by outsiders rather than employees and misconduct at overseas branches.
"We have to draw up next year's business plans, but uncertainty has grown enormously because of the unexpected possibility of changes at the chief executive level," one financial industry official said.
