중앙데일리

Who are outside company directors?

They are directors whose primary jobs are not at companies they govern.

Mar 10,2009
It is no surprise that the Financial Supervisory Service conducts crackdowns on financial service companies. That’s its job as the country’s chief financial watchdog. Nonetheless, the FSS became a hot issue when it conducted a special investigation into three leading financial service groups Feb. 4?11.

The three were KB Financial Group, which controls the nation’s biggest lender, Kookmin Bank; Shinhan Financial Group, which has the No. 2 lender, Shinhan Bank; and Hana Financial Group, which controls the fourth-biggest lender, Hana Bank. The investigation caught the attention of not only bankers but other businesspeople as well because the targets of the investigation were outside directors of the three groups.

In the investigation, the FSS checked whether the directors were working as executives of other companies at the same time, and - if so - whether such directors led the financial service groups to provide sweetheart loans to the directors’ own companies.

It was the first time that the FSS had investigated financial service groups over such matters. The FSS plans to order financial service groups that have outside directors with potential conflicts of interest to correct their practices. Further, the FSS is considering reforming the outside director system, if it concludes that the system itself has inherent problems.

Though the recent FSS action focused on outside directors of financial groups who may influence lending, outside directors have been criticized for other issues as well. Some companies’ outside directors have been blamed for being “amenable rubber stamps,” as they vote for every management-proposed issue at board meetings.

On the other hand, some outside directors are criticized for just the opposite reason. They are accused of exercising excessive authority at board meetings, becoming the “hidden de-facto chief executive officer.” Faced with such controversy, the government has attempted several times to reform the outside director system. It has come up empty- handed each time.

This leads to some simple questions: What are outside directors? What do they do? Are they so important that the government and the financial watchdog agency needs to intervene in their business?

A corporation is governed by a board of directors. The directors hold regular and special meetings to decide the most important undertakings of the companies. The board is divided into two groups - inside directors and outside directors.

A company’s inside directors work for the company and, in most cases, are executives of the company. On the other hand, outside directors are not company employees, but they have the same authority and responsibility as inside directors. If a decision made at a board meeting brings about a significant problem in the management of the company, outside directors have just as much legal responsibility as inside directors.

But why do companies need outside directors and why are inside directors not enough? To answer that, we need to look at history. In the 1997?98 Asian financial crisis, many Korean companies went bankrupt and many workers lost their jobs. In such a situation, domestic and foreign experts began to point out that loose management of companies was one reason for the financial collapse.

They said directors from outside the companies were needed for good management. They said it is difficult for inside directors to see the real conditions at their companies with enough detachment to prevent loose management by chief executive officers.

Accordingly, the outside director system was introduced in Korea in early 1998. To facilitate the system, the Korea Exchange changed its regulations. Under the new system, any company that lists its shares on the benchmark Kospi stock index is required to fill at least one quarter of its board with outside directors.

In 1999, the regulation was further tightened, so companies among the listed companies and financial service companies with assets above 2 trillion won ($1.2 billion) have to fill at least half of their board with outside directors.

You might think this outside director system sounds effective. But, as you know, even good tools can be abused, and this system is no exception.

Many companies appointed as outside directors people who were acquainted with the biggest shareholders or top executive officers of the companies or from those who had worked for the companies in the past. How can such outside directors do their oversight jobs well?

Many companies also select former government officials, lawyers and professors as their outside directors. According to the Financial Supervisory Service, businessmen account for 38 percent of outside directors of the country’s 100 biggest companies in terms of aggregate value of listed shares. Professors represent 30 percent, lawyers 14 percent, and former government officials 6 percent.

Some say that certain companies replace their outside directors with those who are close to the new leadership whenever there is a change in administration.

Posco, the world’s fourth-biggest steelmaker, and KT, the country’s top landline telecommunication service provider, recently reshuffled their boards, appointing members who had worked in the Lee Myung-bak administration’s transition team.

Despite some criticism and demands for reform, the outside director system is gradually settling into the Korean corporate culture. There are many positive cases where a company’s transparent management and improved corporate governance are due to the outside director system. This has, in turn, led to increasing the company’s share price on the stock market. Seeing this, many companies are trying to make good use of the outside director system.

Meanwhile, you might be wonder ing how much outside directors are paid. According to the Financial Supervisory Service, outside directors of Hyundai Motor Co., the country’s biggest automaker, got the highest pay among local companies’ outside directors last year. They were paid 87 million won a year, on average. SK Telecom, Korea’s biggest mobile telecommunications service provider, and LG Electronics, the nation’s second-biggest electronics maker, are paying more than 70 million won per year to each of their outside directors.

In most listed companies, the annual pay for outside directors is at least 30 million won, businessmen say. Such pay is high when you consider that many outside directors have their own jobs and only work part-time as outside directors. Because of this, many business people compete fiercely for these positions.

*The FSS is considering reforming the board director system.

By Kim Joon-hyun JoongAng Ilbo [symoon@joongang.co.kr]



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