The more a bank holding CEO is reappointed, the more difficult the decisions become... All members of Lim Chu-wi become independent directors (comprehensive)

(Seoul = Yonhap News) Reporters Bae Young-kyung, Kim Ji-yeon, and Kang Ryu-na = As the number of reappointments of bank holding company CEOs increases, the requirements for voting at the executive candidate recommendation committee and general shareholders' meeting become more stringent.

To prevent the CEO from exercising undue influence in the management succession process, the CEO candidate recommendation committee is comprised entirely of independent directors. To strengthen the independence of independent directors, the external candidate recommendation route will be expanded, and an authoritative interpretation will be presented to encourage the participation of institutional investors such as the National Pension Service.

The government and the Democratic Party of Korea held a party-government council meeting on the morning of the 12th and announced measures to improve the governance structure of financial companies. It has been about 11 months since President Lee Jae-myung pointed out the 'corrupt inner circle' problem in a business report last December.

◇ As the number of consecutive terms increases, the ‘decision threshold’ increases… From the second term onwards, 75% approval is required.

In the future, when appointing a CEO of a bank holding company, the voting requirements of shareholders and the appointment committee will become more stringent.

Bank holding companies have a dispersed shareholder structure without a controlling shareholder, so there are limits to the ability of individual shareholders to check management. Accordingly, the purpose is to prevent the construction of a trench by strengthening the control of shareholders and the management committee.

Under the current regulations, the Appointment Committee recommends the CEO with the approval of a majority of the members present, but from now on, it will recommend the CEO with the approval of more than two-thirds of the total number of members from the first appointment. This is in accordance with the recommendation of the audit committee. When reappointing a second term, a recommendation must be made with the approval of at least three-quarters of the votes.

In the case of the general shareholders' meeting, the first appointment is made with the approval of a majority of the voting rights present and more than one-fourth of the total number of issued shares. For the first reappointment, the approval must be obtained from more than two-thirds of the voting rights present and more than one-third of the total number of issued shares. For reappointments of two or more terms, the approval must be obtained from more than three-quarters of the voting rights present and more than one-half of the total number of issued shares.

CEO evaluation requirements are specified to reflect non-financial factors, including social controversies such as financial accidents and sanctions. In addition, if you want to change the evaluation requirements after the start of the succession process, you must go through a preliminary evaluation of adequacy by the selection committee, making arbitrary changes impossible.

In addition, it was decided to secure sufficient verification time by starting the succession process early, such as at least 3 months before the final candidate selection date or 6 months before the end of the term.

We create a fair competitive environment by providing early notification to external candidates for the CEO when the long list is confirmed or giving them a preparation period of at least one month after the short list is confirmed.

In addition, bank holding companies, etc., must reasonably prepare and disclose compensation standards to be applied when appointing former CEOs or executives as advisors.

In addition, the Financial Services Commission confirmed the tendency for bank holding CEOs to increase their advertising expenses in the third year of their term, and decided to disclose the amount of advertising expenses to encourage them to refrain from excessive advertising expenses for reappointment.

◇ ‘We will prevent trench construction’… CEO Lim Chu-wi consists of all independent directors

In order to strengthen the independence and responsibility of the selection committee, the selection committee recommending CEO candidates should be comprised entirely of independent directors. Currently, the appointment committee may also include executive directors and non-executive directors.

The current CEO is also prohibited from attending the appointment committee, which recommends independent directors and audit committee members.

If the current CEO contacts a member of the appointment committee during the management succession process, a disclosure obligation arises. In addition, if the CEO is unfairly involved in the management succession process of the next CEO by the Appointment Committee, new status sanctions such as a request for dismissal, suspension from office within 6 months, and warning will be established.

The chairman of the selection committee must directly explain the reasons for recommending candidates to shareholders, and the accountability structure related to the operation of the selection committee will also apply.

In addition, an independent director system will be introduced to all financial companies. A system will be introduced to recommend independent director candidates from shareholders holding a certain number of shares or more of listed financial companies, and a clear authoritative interpretation will pave the way for institutional investors and others to actively utilize this system.

Specifically, it was decided to clarify the interpretation of the scope of independent director candidate recommendations by institutional investors that do not fall under the 'purpose of influencing management rights'.

◇ Recovery of performance bonuses paid in case of intentional or gross negligence... Individual executive remuneration report to general shareholders’ meeting

Measures have also been put in place to prevent financial executives from pursuing excessive risk in management.

If a loss is caused to the company due to intent or gross negligence, or if the financial statements that serve as the basis for determining the performance fee are corrected, a 'clawback' system will be introduced to reclaim the performance fee already paid.

Currently, financial companies are deferring more than 40% of performance fees for more than 3 years, but in the future, the minimum deferred payment ratio and period will be expanded to 50% and 5 years, respectively.

A mechanism will also be established for shareholders to consider the appropriateness of compensation for individual directors.

In the future, listed financial companies with assets exceeding KRW 2 trillion will be required to explain and report the compensation plan for individual executives at a general meeting of shareholders. Until now, only the total remuneration of directors has been approved at the general shareholders' meeting, and individual remuneration has been determined by the board of directors.

The plan announced on this day is reflected in governance-related laws and best practice amendments. The Financial Services Commission plans to prepare an amendment to the Governance Act that includes this improvement plan within the year.

The governance amendment bill was announced 11 months after President Lee Jae-myung strongly pointed out problems with the governance of financial institutions in December last year. At the time, President Lee pointed out, "Due to the problem of so-called government finance, the government told us not to get directly involved, so we did not, but if we left it alone, a corrupt 'inner circle' was created, and a small number of people will continue to exercise control as they please."

Jeon Yo-seop, head of the Financial Policy Bureau of the Financial Services Commission, explained the reason why the announcement was later than expected during the pre-briefing the previous day, saying, "Although the draft was prepared in March, there were many opinions, especially regarding the issue of limiting CEO reappointments. The delay was due to discussing and reflecting the various opinions of the party during the party-government consultation process in the second half of the year."

In addition, when it was pointed out that the '75% approval rate for 3 consecutive terms' is a low threshold in a situation where there have already been successive cases of successful reappointment with approval rates in the 80-90% range at general shareholders' meetings, he said, "In addition to procedures such as securing the independence of independent directors and appointment committees, the voting requirements for appointment committees and shareholders' general meetings are strengthened, so it can be seen that they are subject to very strict evaluation."

Even if the shareholders' general meeting voting requirement for reappointment of the holding chairman is increased to 3/4, the approval rate for the appointment is mostly over 90%, which is low in effectiveness. The Financial Services Commission said, "In the past 10 years, there were 3 cases out of 14 where the approval rate for the appointment or reappointment of the chairman of the four major bank holding companies was less than 2/3. Among these, 2 cases of reappointment will not meet the 2/3 approval requirement if this improvement plan is applied." I answered.

He said, “If the strengthening of voting requirements and the improvement of the appointment committee and independent director system are combined, we expect that effective control of shareholders and independent directors related to CEO reappointment will be achieved.”

Meanwhile, in a back-briefing after the party-government council, Director Jeon Yo-seop said regarding the recovery of the holding company's performance bonus and severance pay, "Performance pay means that performance compensation can be recovered if the performance is paid incorrectly," and explained that severance pay was not a subject of discussion, saying, "There is no (content) regarding severance pay under the governance law system."