Newsletter | November 2015, Issue 3
	BANKING
	Beyond Banks & Stricter Measures – Korea’s New Corporate Governance Law of Financial Companies
	At the plenary session on July 6, 2015, the Korean National Assembly passed the Act on the Corporate Governance of Financial Companies (“Corporate Governance Act”).  The statute was promulgated on July 31, 2015, and will become effective next summer (on August 1, 2016).
	The Corporate Governance Act provides for uniform and systematic regulation of corporate governance matters for all financial companies (both banks and non-banks).  The enactment of the Corporate Governance Act is in line with the Financial Services Commission’s (“FSC”) December 2014 adoption of the Model Rules on the Corporate Governance of Financial Companies.
	The law’s most significant departure from existing regulations is that it sets forth a system for reviewing the qualification of major shareholders of non-bank financial companies, such as securities and insurance companies.
	Key points of the Corporate Governance Act are discussed below.
	1. Scope of Application
	A. Generally, the Corporate Governance Act will apply to domestic financial institutions. B. For Korea branch offices of foreign financial companies, only certain selected provisions will apply, including qualification requirements for officers, and provisions relating to internal control and risk management. C. Exceptions The Corporate Governance Presidential Decree will provide for exceptions to the governance requirements under the Corporate Governance Act, taking into account various factors, such as the asset size, and types of financial businesses. Thus, depending on the Presidential Decree, the scope of applicability could vary greatly.
	2. Key Changes
	Stricter Qualification Requirements for Outside Directors and Officer Recommendation Procedures.
	A. The disqualification criteria for outside directors will be expanded, and positive qualification requirements will be introduced. Changes purporting to allow outside directors to lead the organization have been introduced. Operation of the officer recommendation committee has been introduced – requirements include: - The officer recommendation committee must be comprised of at least three members, and the majority must be comprised of outside directors.
	Board of Directors Driven by Outside Directors, and Greater Power of the Board.
	A. A majority of the board of directors must consist of outside directors1; Exceptions - However, certain financial companies (to be specified in the Presidential Decree) will only be required to have 1/4 or more of the total number of directors be comprised of outside directors. B. The rights and obligations of the board are prescribed with grater specificity. The Corporate Governance Act specifies the matters that must be subject to deliberation and resolution of the board of directors. It also states that the same must be provided for in the articles of incorporation.
	Preparation and Disclosure of Internal Regulation on Corporate Governance.
	A. Companies must prepare and disclose internal regulations on corporate governance that provide for the principles and procedures of corporate governance, including: Organization and operation of the board of directors; Establishment of committees within the board; Officer performance evaluation; and Management succession.
	Audit Committee Driven by Outside Directors, and Stricter Qualification Requirements and Appointment Procedure for Audit Committee Members.
	A. The audit committee must be comprised of at least three directors, at least 2/3 of whom must be outside directors. B. With the necessary changes having been made, the qualification requirements for outside directors will apply to audit committee members who are not outside directors. To enhance his/her independence, at least one outside director who is on the audit committee must be separately approved by a general meeting of shareholders.
	Improvement to the Risk Management and Remuneration System.
	A. Financial companies will be required to have: Risk management standards that allow them to timely identify, evaluate, monitor, and control risk from various transactions; and A risk management committee; and A risk management officer. B. Additionally, the financial companies will be required to have a remuneration committee. This committee is to deliberate and resolve various matters, including the determination and payment method for remuneration. While a certain minimum percentage of remuneration will be linked to performance, the payment of the performance bonus will be deferred for a certain period of time.
	Introduction of a Regular Review System for Qualification of Controlling Shareholders.
	A. The FSC will conduct a regular review on the qualification of controlling shareholders who are “individuals.” If the controlling shareholder of a financial company is a legal entity (and not an individual), the Corporate Governance Act will identify and regulate the one largest investor (i.e., individual) of the largest shareholder of the financial company. If the qualification requirements are not satisfied, the FSC may take corrective measures against that person.  Depending on the severity of the violation, the FSC may restrict the exercise of the individual’s voting rights (in excess of a certain threshold). B. The exact qualifications of a controlling shareholder for financial companies, and the frequency of the FSC’s regular review have not yet been announced. C. This requirement does not apply to banks and mutual savings banks, since they already have a periodic qualification review system in place.
	1 Currently, the number of outside directors on the board differs for each financial industry
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	Sang Hwan Lee shlee@kimchang.com Hak Jin LEE hakjin.lee@kimchang.com
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