Financial holding company governance structure improvement plan delayed in release, policy momentum weakened

The proposal to improve the governance structure of financial holding companies by the financial authorities is also unlikely to be rolled out within April, which has weakened the policy momentum for reforming the closed-off CEO appointment system in the financial sector more than expected.

According to a report on the 26th by the financial authorities, the Financial Commission and the Financial Supervisory Service have not yet decided the final timeline for announcing the governance-structure improvement proposal for financial holding companies. It is understood that the authorities had previously been working on institutional adjustments centered on the CEO appointment process for financial holding companies, strengthening the independence of the board of directors, and reforming the performance-based compensation system. More recently, they have focused on measures to strengthen the independence of the executive candidate recommendation committee. Since the executive candidate recommendation committee is a core body that screens candidates for the next CEO or external directors, this move reflects the following problem awareness: if the committee is led too heavily by individuals closely connected to management, the entire governance structure could become closed.

The discussion of this improvement proposal was formally launched after President Lee Jae-myung, in his December last year Financial Commission work report, pointed out the alleged practice of “corrupt insider circles” surrounding the habitual reappointment of the chairman of financial holding companies. To that end, the Financial Commission and the Financial Supervisory Service formed a working group in January this year and set a goal of producing an improvement proposal by March. However, a release preview had been announced in mid-April last month, but was canceled on that day; the expected release in April appears to have been postponed again. Explanations from within and outside the authorities suggest that the situation in the Middle East has kept high oil prices and high exchange rates persistent, raising the priority of economic response issues, and that the chairman of the Financial Commission’s overseas travel schedule overlapped with related work, leading to a delay in the release date.

Regarding policy content, there are also many considerations on the authorities’ side. Because they must both align with the president’s problem awareness about reducing internal closedness in the financial sector and avoid attracting criticism of “government-controlled finance” that could arise if the government interferes excessively in personnel decisions at private financial companies. Currently, the key options under consideration are: for CEOs seeking reappointment, requiring that they must be approved by a special resolution at a shareholders’ meeting, thereby raising the threshold for regaining trust; rather than imposing a uniform limit on the terms of external directors, strengthening the preparation and disclosure of meeting records so that the market can verify the independence of the board. In particular, how to strengthen the review and recommendation functions of the executive candidate recommendation committee—so that it can screen external director candidates with potential risks of conflicts of interest with management—is being discussed as the core issue in the final stage.

The longer the release is delayed, the lower the practical effectiveness of the institutional improvements may be. At last month’s shareholders’ meeting, the chairman of the financial holding company was confirmed for reappointment with approval rates of 99.3%, 88.0%, and 91.9% respectively. This month, the financial holding company also launched an executive candidate recommendation committee for the incoming chairman, preparing for the expiration of the chairman’s term due in November. The authorities had also attempted to release the proposal around the time just before the shareholders’ meeting season, aiming to increase the pressure effect of governance-structure improvements, which is related to the above timetable. However, with the institutional release delayed, the actual personnel appointment procedures at major financial holding companies are, to a large extent, still carried out in the same way as before.

The authorities’ subsequent actions also appear to be slowing down accordingly. The director of the Financial Supervisory Service, who was originally scheduled to hold a discussion meeting with the chairperson of the board of financial holding companies on the 22nd, has had that schedule postponed indefinitely due to factors such as the delay in releasing the improvement proposal. The market believes that even if the final proposal is issued, the more likely direction is to enhance procedural transparency and board accountability rather than to carry out strict, direct regulation. This trend suggests that, in the future, the key criterion for success or failure in appointing CEOs at financial holding companies may not be formal independence, but whether the system can actually function as effective checks and balances.