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Newsletter | October 2016, Issue 3
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BANKING
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New Enforcement and Supervisory Regulation for Enhanced Corporate Governance Take Effect
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On March 17, 2016, the FSC (in line with its promulgation) announced a proposed Enforcement Decree of the Act on Corporate Governance of Financial Companies (the “Corporate Governance Act”), designed to implement a uniform and systematic framework in regulating corporate governance of financial companies (the “Decree”). On April 28, 2016, the FSC issued the proposed Regulations Regarding the Supervision of Corporate Governance of Financial Companies (the “Regulations”).
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Both the Decree and the Regulations became effective as of August 1, 2016, along with the Corporate Governance Act. We now have in effect several regulatory measures concerning corporate governance of financial companies, including (among other things) detailed guidelines and standards on director qualifications, composition of the board of directors, and internal control of financial companies.
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We analyze below four notable changes:
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| 1. |
Biennial Review of Largest Shareholder – Scope Expanded
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Before: Under the previous regulatory regime, only banks, financial holding companies, and savings banks were subject to a biennial review of their largest shareholder (whether that shareholder is an individual or a corporate entity).
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Now: Under the Corporate Governance Act, however, the individual who is either directly or indirectly the largest shareholder of other financial companies (such as insurance companies, financial investment companies (i.e., securities firms and asset management companies), and specialized credit financial companies) are now also subject to biennial review.
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Specifically, the Decree and Regulations prescribe qualifications for the largest shareholding individual of financial companies (including the requirement that the individual shall not have received a criminal fine or greater penalty for violating any financial law or regulation, the Punishment of Tax Evaders Act, and/or the Monopoly Regulation and Fair Trade Act within the past five years).
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The Decree and Regulations also grant the FSC the authority to order a restriction upon exercising that individual’s voting rights beyond a 10% of the individual’s shareholding in a financial company for severe violations of the prescribed qualifications (e.g., the largest shareholder or special related person of an insolvent financial company, whose banking transactions are suspended due to an insolvency in the past five years).
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| 2. |
Director Limitations Expanded
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Before: Under the previous regulatory regime, a person who was expected to represent the interest of a company that manages the assets of a financial company or its subsidiary was prohibited from becoming a director of a bank or financial holding company.
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Now: The Decree and Regulations expand the application of this restriction to directors of all financial companies.
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In addition, the Decree and Regulations impose greater limitations on outside directors holding concurrent positions, and also limit the term of directorship to 6 years (or an aggregate of 9 years, in the case of holding directorships at various subsidiaries of a financial company).
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| 3. |
Composition of Board of Directors, Public Disclosure Requirements, Etc.
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The Decree and Regulations require financial companies with total assets of KRW 5 trillion or more to have at least three (and in any event, a majority) of its board of directors, and at least 2/3 of its audit committee members consist of outside directors.
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Also, all financial companies must publicly disclose their internal regulations concerning corporate governance. Specifically, in terms of the composition, authority, and management of its board of directors, and all financial companies must prepare a “management succession program”, setting forth the principles of management succession for the CEO, qualifications for the succeeding CEO, and the recommendation procedures for qualified candidates.
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| 4. |
Performance-based Incentive Regulations Expanded
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Under the Decree and Regulations, financial companies with total assets of KRW 5 trillion (for savings banks, the threshold is KRW 700 billion) or more must provide performance-based incentives that takes into account various factors, such as job characteristics, level of responsibilities of their directors and employees, and whether the work constitutes investment activities, instead of applying a “one-size-fits-all” performance-based incentive scheme to all directors and employees.
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In addition, the Decree and Regulations require a certain percentage of the performance-based incentives for directors and financial investment personnel to be subject to deferrals over at least a three-year period.
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Back to Main Page
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If you have any questions regarding this article, please contact below:
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