South Korea's financial authorities have begun a sweeping overhaul of corporate governance in the financial sector. They plan to prepare measures to improve overall governance, including CEO selection procedures, by March. Tension is also rising at financial holding companies ahead of March annual shareholder meetings.

The Financial Services Commission on Jan. 16 held the first meeting of a governance advancement task force led by Vice Chairman Kwon Dae-young and attended by the Financial Supervisory Service, research institutes and experts from academia and the legal community to discuss the direction of reforms to governance制度. The FSC plans to gather expert opinions through the task force and produce reform measures by March. It also plans to pursue revisions to the Act on Corporate Governance of Financial Companies if necessary.

Kwon raised strong concerns about governance in the financial sector. "Bank holding companies have repeatedly faced controversy over closed processes and entrenchment in chairmen appointments and reappointments due to structural characteristics of dispersed ownership," he said. "They failed to meet public expectations by settling for a share-the-spoils governance structure and repeating outdated sales practices centered on net interest margins," he added.

Based on that view, the FSC presented four key directions for reform: improving the independence and diversity of boards, building transparent management succession programs, establishing a reasonable performance-based pay system, and fixing unreasonable practices.

To address opacity in CEO selection, the plan is to create an open and competitive succession program that "anyone can accept". On CEO reappointments, a frequent source of controversy, the authorities will focus on strengthening shareholder control mechanisms so shareholders can provide meaningful checks.

The role of boards will also be strengthened. The FSC plans to raise the independence of outside director selection processes and expand diversity in board composition so boards can perform their oversight role free from management influence. Overhauling pay systems is also a key task. To prevent consumer harm from short-term performance incentives, the authorities plan to link pay to long-term performance and boost the effectiveness of clawback rules that reclaim bonuses already paid if problems occur.

Kwon said governance reform must not end as a declaration. "Market demands are high and there is not much time to wait only for financial companies' self-correction efforts," he said. "We will quickly institutionalize and codify improvement tasks based on the FSS's inspection results," he added. "Without governance reform, it will be difficult for the financial sector's productive and inclusive finance to produce results," he said. "I hope the launch of this task force becomes an opportunity to lay the foundation for a major shift in finance," he added.

The FSC plans to closely review overseas cases and expert opinions during the task force's work, then finalize and announce an effective set of governance reforms.

Financial holding companies on edge as special inspection looms

As financial authorities signal a special inspection of governance across financial holding companies, the firms are also moving to respond ahead of March shareholder meetings. The inspection will cover CEO selection procedures, pay systems and overall board operations, but the area drawing the most attention from financial holding companies is the outside director system. That is because board independence and the appropriateness of board composition are the starting point for governance discussions.

BNK Financial Group, which has frequently faced friction in CEO succession, was the first to put improving the outside director system forward as a key task in governance reform. BNK Financial Group on Jan. 15 held a shareholder meeting and said it would pursue governance improvements and strengthen outside director independence.

Its main measures include formally introducing a public shareholder recommendation system for outside directors, efforts to make a majority of outside directors shareholder-recommended directors, forming the executive candidate recommendation committee with all outside directors, and accepting public recommendations for outside director candidates through the company's website.

Candidates recommended through the public process will be screened by the executive candidate recommendation committee for expertise and independence while respecting shareholder views. The committee will then decide whether to place them on the shareholder meeting agenda and disclose the results transparently. iM Financial Group also joined the similar move, saying it would introduce a system for recommending preliminary outside director candidates.

A BNK Financial Group official said, "We will also actively move to adopt improvement measures that will be prepared by the task force and become the starting point of governance innovation."

Recent personnel changes at JB Financial Group are also seen as showing market sensitivity to governance, especially the relationship between the board and management. JB Financial Group recently saw Vice Chairman Baek Jong-il resign for "personal reasons", prompting various interpretations.

Baek, who became group vice chairman right after completing his term as head of Jeonbuk Bank, had been at the center of controversy over building an inner circle aligned with JB Financial Chairman Kim Ki-hong's term. Some interpreted the move as the succession structure for Kim, whose term ends in March 2028, being effectively settled as an internal candidate. That has led to analysis that the early resignation aimed to block the spread of such controversy. JB Financial also previously revived the vice chairman position that it had abolished in 2023.

In the case of Shinhan Financial Group, there is precedent for receiving criticism from financial authorities over its outside director evaluation methods. Authorities said Shinhan Financial relied only on surveys without using objective indicators such as external evaluation agencies in the evaluation process, and gave all those evaluated grades above the reappointment threshold, reducing the effectiveness of the evaluation. This has led to observations that the outside director system is likely to be a major target in the current governance inspection.

Financial holding companies are known to be reviewing plans to reflect, starting from this year's shareholder meetings, improvements cited by authorities, including staggering outside director terms, addressing an overconcentration of professors, disclosing recommendation channels and increasing the number of outside directors. The financial sector also says 23 of the 32 outside directors at the four major financial holding companies face terms ending in March, making changes in outside director composition the biggest variable at the shareholder meetings.

FSC Vice Chairman Kwon Dae-young said, "A fair and transparent governance structure is core capital of financial companies." "We will reform outdated sales practices and unreasonable governance structures to match the public's standards," he said.