Reform outside director system

Outside board directors are unaffiliated individuals who participate in corporate management and policy making. Since 1998, listed companies have been required to seat more than one outside director on their boards as a check on executive management and to protect the rights of shareholders. Outside directors must interfere when the chief executive directs and operates the company into harm’s way. They must be outspoken on wrong corporate practices. But this is in theory. In reality, they serve more as cheerleaders than watchdogs.

The online public disclosure service by the Financial Supervisory Service publicizes boards meetings, including details on who attended and said what. Of 2,685 agenda items reviewed in board meetings of the country’s 100 largest listed companies last year, just four were rejected due to opposition from outside directors. Of 466 outside directors, only 46 threw opinions other than approval. In other words, nine out of 10 did no more than nod their heads in meetings.

Without hesitation, they endorsed special bonuses for executives, rights offerings in affiliates, corporate bond issuance, business deals with partners, and investments in other companies, even though the issues demand scrutiny. If that’s the reality at the country’s 100 largest corporate names, like Samsung Electronics and Hyundai Motor, we hardly need to look into board affairs of smaller companies.

The operation of outside directorship is flawed from hiring. Outside board members in theory should be nominated by an interim committee and approved at shareholders’ meetings. But in reality, they are named by the largest shareholders, chairman or chief executive. They are mostly their acquaintances and are lawyers, professors, corporate executives and retired government officials. They are paid as much as 100 million won ($94,500) a year. The money would be well spent if their presence enhanced transparency. But we cannot expect such contributions from acquaintances and friends of board members. Many don’t even attend the board meetings.

Others say outside directors can’t object to board decisions because of their cozy relationships with shareholders and chief executives. Many are also unfamiliar with the corporate world and lack the expertise to oppose policies. The current outside board system is more or less useless. The system should be revamped starting with the recruitment process. Owners and CEOs must first change their mind-set and hire people who can really benefit the company.