Improving Shareholders’ Value
A significant change is coming recently over major conglomerates’ non-executive director operation policy. Outside directors have been criticized so far for being a yes man instead of performing their role to improve shareholder value by monitoring and keeping management in check. Accordingly, businesses are making a move to strengthen the independence of non-executive directors.
A case in point is Samsung Group. Samsung Electronics Co. decided to eliminate the right of internal directors to recommend external directors at the board meeting held right after the annual general meeting last month. This is part of its plans to reinforce the independence of non-executive directors and improve transparency of directorate operation through this. A chairman of the board of directors should not belong to any six committees under the control, including management commission.
Samsung C&T Corporation also introduced the external director nominating committee, which consists of only outside directors, this year. Samsung Group has become the first to make a change in the related policy among top 10 business groups. Such a move is expected to bring about change in other firms in the future. SK Hynix Inc. shows a notable change. The company announced on March 29 that it would adopt the “senior outside director system” that can call an external director board meeting consisting of only outside directors. This is to secure the independence of non-executive directors in the board of directors and reflect various outside opinions in company policy. SK Hynix has become the second to introduce the senior outside director system in the non-financial industry after SK Corporation C&C, the holding company of SK Group. In addition, Hyosung Group changed its rules in July last year so that an external director can represent the external director recommendation committee for the board of directors.
However, there are still a lot of areas that they need to improve. Conglomerates still force outside directors to act as a protector of their management this year. This has been an endemic problem here. They still prefer pro-government figures or ex-government and judicial officials for their external directors. In particular, businesses and investment banks greatly influenced by the government prefer officials closely related to the government.
KT Corporation appointed Lee Kang-chul, former senior secretary to the President for Civic and Social Agenda under the Office of the President during the Roh administration, and Kim Dae-yoo, former senior secretary to the President for Economic Policy, as its external directors this year. The company has been recruiting outside directors that fits the tendency of newgovernment whenever there is a change in political power. It’s the same story at POSCO Group. POSCO newly appointed Kim Sung-jin, former president of Hankyong National University, as its outside director this year. Kim served as secretary to the President for Industrial Policy, director of the Small and Medium Business Administration and minister of Fisheries and Oceans during the Roh administration. Pro-government figures are gaining power in the investment banking industry as well. Shinhan Financial Group appointed Park Byung-dae, professor of Sungkyunkwan University School of Law, as a new non-executive director at the shareholders’ meeting in March. Park was a contemporary with President Moon Jae-in at the Judicial Research and Training Institute. KB Financial Group also appointed Attorney Chung Koo-hwan, who served as head of consumer dispute resolution at the Korea Consumer Agency during the Roh administration, and Professor SunwooSeok-ho of Hongik University, who is a Kyunggi High School classmate with presidential chief policy adviser Jang Ha-sung, as its new external directors.
Former officials from the three authorities – the Financial Supervisory Service, National Tax Service and Prosecution – still has a high ratio of non-executive directors. According to the data from Daishin Governance Research Institute, former officials from the three authorities accounted for 35.4 percent of the total number of outside directors appointed by 111 listed companies under top 30 business groups at the shareholders’ meeting this year, up 3.6 percent points from 31.8 percent in 2016. Notably, Lotte Group’s external directors are all former officials from the three authorities. Experts raise concerns that businesses’ preference for former officials from the authorities will lead to diversity and expertise of outside directors, resulting in lower shareholder value.