Finance’s structural problems

The Kookmin Bank situation is getting worse. The Financial Supervisory Service has conducted intensive inspections, and KB Financial Group’s chairman-designate has resigned.

Recently, KB leaked the report on the FSS inspection, and authorities say they will file for an investigation into violations of the agency’s supervisory rights, an unprecedented move. It is too unseemly for the largest civilian bank in Korea and supervisory authorities to fight like this. It’s closer to wrestling in the mud than a mature disagreement, and we are concerned that it may hurt international trust in Korean finance.

The supervisory authorities are primarily responsible for the situation. The agency’s targeting of Kookmin Bank cannot even be explained by the phrase “finance ruled by authorities.” After all, that term is used when the government interferes with civilian issues in order to reach a policy goal.

Still, one could say that KB provided the reason the situation got so out of hand. According to reports, there were many problems with KB Chief Executive Kang Chung-won and outside directors. It appears the group was so close that they could even be called a back-scratching alliance. Kang needed the help of outside directors who had the right to nominate a new executive, and the outside directors wanted to install a person who would listen to their demands without hesitation as chairman.

The whole purpose of outside directors - that they are able to exercise importance in corporate decision-making - seems to have disappeared in this process. There are even rumors that the outside directors are heavyweights at KB. The situation reminds me of the 1997 Kia Motors incident when labor and management failed to examine their business management mistakes but stuck together, calling themselves a “people’s company.” In other words, it feels as if KB is replaying the typical actions of a “company with no owner.” In this case, the solution must be finding an “owner.” Creating a corporate structure with an owner is the way to prevent a similar situation in the future. This is also why we opposed the separation of banking and commerce.

If this is too difficult, we must find a second solution. A corporate structure that prevents ethical hazards in the relationships between bank chairmen and outside directors needs to be instituted. The matter of transparency has to be dealt with, too, such as by requiring public disclosure of relationships between banks and outside directors.

The lesson learned from the KB situation is that an improved corporate structure is urgently needed if Korea ever hopes to give birth to a “Samsung Electronics of finance.”