A financial holding company chairman seeking a second or later term extension must win approval from at least three-fourths of the voting rights present at the shareholders' meeting. Currently a simple majority suffices. The CEO nomination committee will be filled entirely with independent directors.
The government and the Democratic Party of Korea held a party-government consultation on the 12th and presented a "plan to improve the governance of financial companies." It is the result of discussions on how to prevent CEOs from granting themselves extensions and "building trenches," which have continued since the presidential work report last December. Financial authorities formed a "governance advancement task force (TF)" in January this year to refine the plan.
Voting requirements rise in stages according to the number of extensions. CEOs of bank holding companies are appointed at the shareholders' meeting. The threshold for the nomination committee to recommend a CEO rises from a majority of members present to at least two-thirds of all members. This matches the standard for recommending audit committee members. A candidate for extension will be recommended only if at least three-fourths agree.
The shareholders' meeting threshold rises as well. For an initial appointment, as now, a majority of voting rights present and at least one-fourth of total issued shares must approve. For a first extension, at least two-thirds of voting rights present and one-third of total issued shares are required. For a second or later extension, the thresholds rise to at least three-fourths and at least one-half, respectively.
The "legal ban on a third term," which had been under review, was dropped from the final plan. A financial authority official explained that there were opinions that it did not match international standards and was excessive from a constitutional standpoint, including freedom of occupational choice. After discussion, opinion converged on strengthening voting requirements as preferable.
There is also a view that the actual checking effect may not be large, because approval rates at shareholders' meetings for chairmen's extensions were already high. Woori Financial Chairman Lim Jong-ryong, who won an extension in March this year, received 99.3% approval, and Shinhan Financial Chairman Jin Ok-dong received 88.0%. Former KB Financial Chairman Yoon Jong-kyu's approval rate was 98.9% at his 2017 extension and 97.3% at his third term in 2020.
A financial authority official said that of 15 shareholder meeting cases reviewed, 3 had approval rates below 75%. The official also pointed out that at the nomination committee stage before the shareholders' meeting, opposition from just one or two members makes it difficult to recommend a candidate. The authorities' position is that if stronger nomination committee independence is combined with higher voting requirements, the evaluation will become very strict.
The CEO evaluation system will also be overhauled. Evaluation requirements and detailed criteria will be made more specific, and non-financial factors such as financial accidents and social controversies including sanctions will be reflected. Arbitrarily changing criteria midway through the process will be prohibited, and disclosure of evaluation results will be strengthened.
The start of the succession process will be brought forward. The process must begin six months before the term expires, or at least three months before the date the final candidate is chosen. The measure is meant to allow ample time for vetting. A standing pool of candidates will be managed systematically, and external candidates will be guaranteed preparation time.
A sitting CEO may not attend the nomination committee that recommends independent directors and audit committee members. Rules will be put in place to prevent a sitting CEO from exerting undue influence over the succession of the next CEO, and a basis for sanctions against violations will be newly created. Contact with nomination committee members during the succession process must be disclosed.
The accountability of the nomination committee will also be raised. When convening the shareholders' meeting, the reasons for recommending a candidate must be accompanied by written confirmations from all nomination committee members. The nomination committee chair will explain the reasons for the recommendation directly to shareholders. A responsibility structure map for the operation of the nomination committee will apply to the chair.
The independent director system will be extended to all financial companies. Listed financial companies will receive independent director candidates recommended by shareholders holding a certain stake or more. Indicators for evaluating independent directors' oversight of management will be supplemented, and disclosure of detailed activities will be expanded.
The burden on institutional investors such as pension funds will be eased. Until now, when pension funds got involved in decision-making, controversy arose over interference with management control. Going forward, authorities will provide an official interpretation that candidate recommendations made at a financial company's request, not only to the board but also through the nomination committee, shareholder meetings or website postings, are not made for the "purpose of influencing management control" under the Financial Investment Services and Capital Markets Act. The same applies when a financial company asks for a recommendation while stating that the recommended candidate will be included in the nomination committee's list.
Performance pay practices will also become more transparent. A "clawback" will be introduced to recover performance pay already paid if intentional misconduct or gross negligence causes losses to the company. Until now, shareholders' meetings approved only the total pay for directors, and the board set individual pay. In the future, "Say-on-Pay" will be applied to listed financial companies with assets of 2 trillion won or more, which must explain and report per-executive pay plans to the shareholders' meeting.
The Financial Services Commission will prepare an amendment to the "Governance Act" containing the plan within the year and push for swift legislation. The stewardship code will also be revised. Revisions to subordinate regulations and best practices will be handled by a working-level TF made up of the Financial Supervisory Service, related agencies and private experts.
Kwon Chil-seung, chair of the Democratic Party's policy committee, explained the intent of the plan: "This plan is meant to let the market, including the board and shareholders, effectively check management, and to establish the principle that performance is rewarded and losses carry responsibility." He added, "Transparent governance will raise the competitiveness of the financial industry a notch."
In this regard, Financial Services Commission Chairman Lee Eok-won said, "As interest and expectations on governance as a whole have grown following the Commercial Act revision, we need to secure accountability and transparency befitting the public nature of financial companies." He went on to stress, "We will push ahead without a hitch with amendments to laws and subordinate regulations and the overhaul of best practices so that this plan does not end as a one-off measure."