Watchmen? Just rubber stamps

Koh Hyun-kohn

The author is the executive editor of the JoongAng Ilbo.

The inclusion of outside directors on a corporate management board was institutionalized in February 1998 after South Korea went under an international bailout on the brink of national default from the currency and foreign debt crisis. It was a part of the country’s shift toward incorporating transparency and accountability for large stakeholders and managers under the recommendation of the International Monetary Fund (IMF) in return for the rescue package. Under the Korean Commerce Act, a listed company must seat outside experts in its board according to its asset scale. They serve as the opposition in a private company. Since it was an IMF order, the mandate became a serious matter.

In September that year, the JoongAng Ilbo reported on the board wrestling among internal and outside board members, citing an example where a company’s move to rescue a subsidiary in financial strain fell through in the face of the opposition from outside directors due to the potential damage to shareholders’ interests. Such a scene is rare in Korean boardrooms these days. Among the 100 top companies, the ratio of outside directors vetoing a management decision stopped at 0.4 percent last year. Instead of watchmen, they have become rubber stamps.

Outside directors had not always been paid so generously. Some even were offered the position without any regular pay. Big companies like Samsung, LG and Hyundai Motor gave them an average of 2 million won ($1,500) monthly as an allowance for their activities. Steelmaker Posco gave out 500,000 won per person for traffic expenses when they attended the monthly board meeting. In annual terms, that would amount to 6 million won. Today, an outside director on average receives 105 million won a year. Even considering the difference in currency valuation, the stretch is humongous. Thirteen big companies like Samsung Electronics, SK and SK Telecom pay their outside directors more than 100 million won. For such a generous check, it hardly can be a second job.

The extraordinary position is being dominated by university professors who previously argued for independent directors to contain reckless management. Seoul National University (SNU) in March 1998 allowed its faculty to serve as outside directors on the condition that they are not paid by companies. The dual role had been condoned on modest terms. Today, 215, or 9.4 percent of its full-time professors, act as outside directors. They are well paid, of course. They are mandated to put up some of their outside income as donation to the university. SNU collected 3.5 billion won from them over the last four years to further advance the top university. Outside directorship is a win-win arrangement for both the university and professors. The first job government officials look for upon resigning or retiring from public office is outside board members. There is no better post-retirement security.

Due to the surge in demand, companies can choose outside board members for their liking. They prefer those who are less picky. Extra points go to those who can lobby for the company — or defend against the government’s pressure. Professors, retired government officials, and law practitioners make up the bulk. Of 457 outside directors on the boards of 100 top companies, 42 percent are professors, 19 percent businessmen, 15 percent retired bureaucrats, and 13 percent lawyers. Professors are most favored in financial holding companies of KB, Hana, Woori and Shinhan. Among their 50 outside members, 36 are professors.

The composition is entirely different in the United States, which was first to adopt outside directors in 1956. Up to 90 percent of outside directors are professional entrepreneurs with abundant business experience. Some companies recruit CEOs of rivaling companies. There is not a single professor in the boards of half of American listed companies. Although later reversed, the board of OpenAI stunned the market with its decision to fire its CEO Sam Altman, the co-founder and guru behind the AI startup’s blockbuster ChatGPT. Elon Musk and Steve Jobs also had to endure a disgraceful boot from the companies they had founded. Such actions are unimaginable in Korean boardrooms.

Outside directorship is most abused by former state-owned and — currently ownerless — companies like Posco, KT, KT&G, and financial holding companies. Although there may be slight differences, a rule of thumb in the industry goes like this: The chair picks a close person in the seat that comes with the best possible compensations. The outside director repays the generosity by helping the chairman extend his term. The chair, upon securing an extra term, extends the term for outside directors. When the time comes for the chair to resign, outside directors seek to seat someone who can secure their board title. It can be dubbed a “boardroom cartel of convenience.” Such abnormality is one of the factors for “Korea Discount” (undervaluation of Korean stocks).

Posco Holdings is under police investigation for its board’s luxurious binge in Canada last August. During the weeklong schedule, a board meeting was held just once. Most of the time, board members flew on private choppers to tour and play golf, spending as much as 680 million won — charged to Posco’s subsidiaries. Chairman Choi Jeong-woo had been working on his third term. On the trip were seven outside board members who had a say in appointing the next chair. They didn’t apologize or step down. Nowhere was the humble and hard-working spirit championed by its founding president Park Tae-joon. A company founded by the Japanese funds for wartime and colonial reparation must not squander its money that way. Investigators must hold them accountable for any possible damage to the company. The next Posco chair must fix the abnormality in the boardroom first.

March is the season of general shareholders’ meetings for companies settling their accounts in December. It is also a big day for outside directors. The eligibility of the role requires professionalism, independence and morality. The candidates who are hoping for a seat in March must seriously ask themselves if they are really qualified.