Confession of an outside directorMy life is in ruins because of my previous gig as an outside director of Daewoo Shipbuilding & Marine Engineering (DSME), which is currently being accused of such wrongdoings as accounting fraud and embezzlement. One of the biggest shipyards in the world has turned out to be nothing but an illusion, a lie. Separate ledgers were kept to hide multi-billion-dollar losses.
Management orchestrated the scam, but outside directors are regarded as being part of the same flock. I will be included in any class action suit. I got into this mess for accepting an outside director’s position once. I hope people can learn a lesson from my case so that no one falls into the same trap as I did.
I served as an outside director for DSME between 2012 and 2013, when former Chief Executive Ko Jae-ho, who has been arrested for accounting fraud, was heading the company. As is now well known, the company cooked its books to record 2.7 trillion won ($2.45 billion) in operating profit and 5.7 trillion won in net assets for three years from 2012. The company’s accountant claims it was a “miscalculation in estimation,” while the prosecution sees it as outright window-dressing. If fraud is confirmed, the repercussions could be enormous. People could serve long terms in jail and be obliged to pay fines of millions or billions of dollars. The company, in fact, may go down.
Lawsuits have been piling up. Minority shareholders have filed eight damage suits demanding 30 billion won. Senior executives have been sued, and the next target could be outside directors. Legal fees have already reached 3.6 billion won, and the court battles have only begun.
Government institutions have filed large lawsuits: the National Pension fund for 48.9 billion won, the Teachers Pension for 14.7 billion won, and the Government Employees’ Pension for 7.3 billion won. They also blame outside directors for failing to keep an eye on what was going on.
Given the gravity of the case, the court could levy maximum penalties. If they do that to me, I won’t be able to come up with the money even if I sell all my assets. My friends try to console me by saying the target list won’t reach me, but I cannot be sure. Courts have gotten tougher on outside directors. There are several precedents from the Supreme Court saying liability lies with outside directors just as much as with executives.
The shipbuilder has insurance for liability cases targeting its executives. Maximum coverage is 30 billion won. The rest is up to the individual or the company. I received compensation of about 60 million won per year or over 100 million won at the most for two years of service. I could be asked to pay 10 to 20 times that sum.
It is true that I may not have fulfilled the role as a corporate watchdog 100 percent. But I was told the outside director was a figurehead. According to a study of board meetings of 180 companies under the top 30 conglomerates, outside directors gave a vote of approval to 99.6 percent of motions. They were all hired to cheer for management. Uncovering accounting fraud is not an easy thing to do. Even professional accountants cannot spot a deception if the management systematically hides it. How could I have possibly learned the truth behind the documents they handed out at meetings held once a month?
Some may ask what I was doing there in the first place with such little expertise. Of the outside directors hired after DSME went under the management of state-run Korea Development Bank, 60 percent came from the government and legislature. They all took the same route, landing with parachutes provided by the presidential office or some other high-level connection.
Outside directors were institutionalized to keep watch over reckless management at chaebols after the Asian financial crisis in the late 1990s. But they quickly evolved into rewards for politicians or bureaucrats for their loyalty or their service to help the governing power in some way. The company appoints a third of the directors, the Financial Services Commission another third, and the presidential office the final third. The person with the most proven loyalty is given the CEO position in a state-run entity — with its fat salary — and auditing jobs or outside director positions are handed out to those with less clout.
About 50 public entities will replace their CEOs by the end of the year. A great number of outside directors will be replaced. There is already a long line of hopefuls waiting for such plum positions.
They must ask themselves first: Are they really eligible? Or are they willing to play the role of management’s puppet? They should think carefully. What they dreamed of as an effortless feathering of their post-retirement nest could actually ruin them.
JoongAng Ilbo, Aug. 11, Page 30
*The author is an editorial writer of the JoongAng Ilbo.