Korean financial groups frustrated over growing bureaucratic control

Major players face mounting pressure ahead of shareholders' meetings

By Lee Min-hyung

Korea's major financial companies stand at a critical crossroads ahead of their regular shareholders' meetings this month, facing mounting political pressure to drastically reform their governance structures.

This poses a serious dilemma for leading financial holding firms, such as KB, Shinhan, Hana, Woori and NongHyup, even after they chalked up record earnings on steep rate hikes. A total of 30 out of 38 outside directors at the five financial institutions finish their terms around the end of March.

They are widely expected to conduct major shake-ups of their boards of directors, abiding by escalating political pressure from President Yoon Suk Yeol and his administration, who have voiced complaints over banks' profit structures and their conservative governance systems.

"It is a problem that outside directors stay on the board for a long period of time simply due to their intimacy with top management," Financial Supervisory Service (FSS) Governor Lee Bok-hyun said last month.

In response, the financial firms are displaying a willingness to reshuffle their board members.

KB Financial Group recommended three new independent directors who will replace three incumbent ones whose terms end this month. The lender's board consists of seven outside directors and six of them finish their terms after the upcoming shareholders' meeting on March 24.

Shinhan Financial Group decided to downsize the number of independent directors from 12 to nine and the agenda will also be put up for vote during its shareholders' meeting on March 23. But some lenders oppose the reshuffle of outside directors. Hana Financial Group's eight independent directors end their terms late this month, but the company decided to reappoint six of them.

But officials at banking groups expressed frustration over the adamant stance of financial watchdogs.

"Financial firms make public specific and convincing reasons for the appointment of independent directors and most of them are experts who can give us advice from the viewpoint of outsiders," an official at a financial holding firm said. "It is regrettable that watchdogs perceive them as officials linked to financial firms' top management. They do not have experience working at affiliates of the banking groups nor do they lack expertise in their field."

Financial firms are also under growing pressure to increase their shareholder returns following demands by Align Partners, a Seoul-based activist fund, which sent an official statement to seven listed banking groups here.

Align Partners has urged the financial holding firms to increase their dividend offerings and draw up mid- to long-term shareholder return policies. Most leading banking groups also reacted quickly, announcing a series of shareholder-friendly decisions, including buybacks of their own shares.

The activist fund welcomed the enhanced shareholder return measures announced by major financial firms.

"Leaders of the top financial holding companies responded sincerely to our request and we are satisfied with their latest decisions," Align Partners CEO Lee Chang-hwan said. Even if Align Partners does not have immediate plans to take further issue with their governance structures, the government and watchdogs can do so due to their regulatory authority, he added.

Despite the agile response, financial firms are still receiving flak from watchdogs for their huge reliance on the loan-deposit margin. Authorities have stepped up criticism, saying that banks have generated "way too much" interest profit simply due to the rate hike cycle.

They also said banks and other financial institutions should come up with measures give more of their revenues back to society and urged them to stop providing hefty bonuses to employees and executives at a time when most households are suffering from mounting debt burdens.

Economists said such intervention by watchdogs is reasonable, as financial holding firms with banking affiliates have public obligations, even though they are classified as private companies.

"Banks are given monopolistic power, as they are authorized to receive savings deposits from the public," Sung Tae-yoon, a professor of economics at Yonsei University, said. "The government gives banks a license to do so and that is why they can generate massive revenues. Against that backdrop, it appears reasonable for watchdogs and the government to play a supervisory role and intervene in banks' business practices."

Global investment banks said lenders becoming more aware of demands by activist funds is a move in the right direction.

"The Korean stock market has displayed a pattern of the so-called Korea discount ― a term referring to local stocks' undervaluation against their global peers ― due to low dividend rates," a report released by Goldman Sachs said. But investors will now be able to seek fresh opportunities here, as more companies are moving to improve their governance structures in line with suggestions by local activist funds and retail investors, according to the report.