Outside directors have important role they're not playing

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Outside directors have important role they're not playing

Outside directors have an important role in public companies, preventing management from making whatever decision it wants. This is particularly true for companies controlled by founding families, as is so common among Korean chaebol.
 
Korean law requires every company with assets more than 2 trillion won to have half of their board seats filled with non-employees.
 
But not all outside directors take seriously their roles as custodians of corporate governance. 
 
Last year, 277 subsidiaries of conglomerates had board members vote on 6,716 agenda items, according to CEO Score, a website that analyzes business reports of listed companies. Among them, 99.5 percent were passed with unopposed. Only 33 agenda items, which comprised the other 0.5 percent, saw outside directors cast an opposing vote or abstain.  
 
Outside directors at subsidiaries of Hyundai Motor, Posco, GS and Hyundai Heavy Industries Groups, in particular, said yes in every single vote. At Samsung subsidiaries, three agenda items were met with an opposing opinion from outside directors. SK had two; LG had one; Lotte had two; and Hanwha three.
 
“At a time in which environment, social and governance (ESG) is rising as a big business theme, the responsibility of outside directors and company boards to keep a check on top management is becoming ever more important,” said CEO Score CEO Park Ju-geun. “And yet, they still seem to be playing the role of rubber stamps.”
 
Outside directors became mandatory under Korean business law in 1998 as a way to increase transparency of corporate governance. The timing was hardly coincidental: scores of local companies were in a state of collapse due to the Asian financial crisis, which exposed deep problems in the ways Korean companies were run.  
 
Professionals in their respective fields, non-executive directors were supposed to provide balance on boards to opinions of management, which in Korean conglomerates is usually controlled by members of the founding family.
 
But as the data suggests, their performances are falling short, calling into question the whole point of having them.  
 
“Unlike the United States where outside directors are expected to offer advice and monitor corporate activities, the role expected in Korea is to serve as lobbyists or engage in maintaining government relations,” said Lee Su-won, head of the responsible investment team at the Korea Corporate Governance Service think tank.
 
In order to be appointed an outside director, one has to be recommended as a candidate by a committee in which more than half of the members are other outside directors. Then, the appointment is put to a vote at a shareholder’s meeting.  
 
In reality, many outside directors are hand picked by top executives and members of the controlling family. They are often professors or retired public officials, not professionals in economics or the industry of the company in question. 
 
A lot have backgrounds in the public sector. Some are judges or prosecutors, who could come in handy when the company faces legal problems.  
 
A study by research firm Mono Research last year revealed 39 percent of outside directors at Korean companies were retired public officials. That was the most popular background by profession. Professors followed, with 33 percent.  
 
Being an outside director brings prestige and not a bad paycheck. A non-executive director at a conglomerate last year received an average annual wage of 50 million won, according to headhunting firm Unico Search. By industry, electronics companies offered the highest pay at 68 million won on average.
 
Last year, the Korean government put a limit on the duration of service for outside directors: a maximum of six years in one company, nine including service for an affiliate. The intention was to prevent individuals from building long-term relations with executives or owners. At the 277 conglomerate subsidiaries CEO Score studied, 84 outside executives will be replaced this year, slightly higher than last year’s 76.
 
The problem with the limit, however, is that it makes the search for outside directors with the right experience or expertise difficult.  
 
A survey by the Korean Federation of Industries (FKI), a business lobbying group, revealed more than half of respondents said they feared a shortage of outside directors due to the term limits. Among the largest firms with assets more than 2 trillion won, 58 percent said the pool was already small as it is.
 
“The larger a company is, the harder it is to find an outside director that has the professional experience and competence to serve on the board,” said Yoo Hwan-ik, head of the FKI’s industrial research division.  
 
“Companies today need a certain degree of freedom to improve corporate governance. The term limits seem excessive and need to be relaxed.”
 
BY KANG BYUNG-CHUL  [song.kyoungson@joongang.co.kr]
 
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