On November 29, 2022, the Financial Services Commission (“FSC”) unveiled the results of interim discussions that the “Task Force for Improvement of Internal Control System in the Financial Sector” (“Internal Control System Improvement T/F”) has had with respect to measures to ensure the effective operation of internal control, and announced its plan to improve the system in a way to strengthen the internal control responsibilities of the representative director, the board of directors, and officers of the financial companies.
Even though all financial companies have an internal control system established and in operation pursuant to the Act on Corporate Governance of Financial Companies, the level of internal control varies greatly from company to company. In particular, concerns and reflections on internal control of the financial sector have recently been raised due to a series of financial incidents such as sales with misrepresentation and large-scale embezzlement. Accordingly, the FSC and the Financial Supervisory Service (“FSS”) have been seeking ways to improve the internal control system through the Internal Control System Improvement T/F. As a result, the FSC and the FSS announced that they had discussed the following three measures specifically intended to improve the internal control system, by concurring in the opinion that the most urgent task is to strengthen the ultimate responsibility for internal control assumed by the representative director, the board of directors, and relevant officers having control authority which significantly affects the organizational culture and performance.
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The FSC plans to impose the most comprehensive internal control management obligation on the representative director as the general manager of internal control, along with the obligation to take appropriate measures to prevent financial incidents. However, the scope of such responsibility will be limited to “serious financial incidents” that can have social repercussions or serious impacts on the soundness of consumers and financial companies. If the representative director has established a regulation or system that is reasonably expected to prevent and detect such financial incidents, and managed the relevant system to function properly, then he/she will be deemed to have faithfully fulfilled his/her obligation to take measures and will thus have the representative director’s responsibility reduced or exempted.
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The FSC plans to stipulate the board of directors’ obligations to monitor and supervise internal control activities, thereby requiring the board of directors of a financial company to supervise the management’s internal control management. More specifically, the board of directors will be granted the authority to supervise the representative director’s internal control management and require him/her to report the status of complying with the internal control-related obligations.
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With the perception that internal control is one organic “system,” the roles and responsibilities of each officer will be clarified so that all officers can fulfill their duties for internal control. Accordingly, officers will take the roles and responsibilities for preventing financial incidents other than “serious financial incidents”, and each officer will be required to be directly responsible for the management and supervision of internal control, instead of delegating or transferring his/her roles and responsibilities to any other person who is not an officer.
The FSC stated that the purpose of this proposed improvement was to encourage financial companies to accept internal control as a management strategy and an organizational culture, not as a regulation. The FSC also stated that it would finalize the details of the improvement and come up with proposals for amendment of relevant laws and regulations after the Internal Control System Improvement T/F’s review of legal aspects and collection of opinions from the industry.
Even regarding the non-financial companies, the Korean Supreme Court’s precedents have consistently emphasized the directors’ obligations to monitor internal control and expand/operate a reasonable information reporting and internal control system (Link). Recently, in Japan, the first instance court rendered a decision in the shareholders’ derivative lawsuit against the management of Tokyo Electric Power Company with respect to the Fukushima nuclear accident, ordering the former management to pay a significant amount of compensatory damages (JPY 13.321 trillion (equivalent to around KRW 126.9 trillion)) to the company for breaching their obligation to control and monitor the safety of the nuclear power plants (Link). In future disputes over a non-financial company’s liability for damages arising from its directors’ breach of obligations, courts may refer to the aforementioned cases and policies regarding the directors’ obligations intended to comply with internal control requirements when interpreting the relevant case in the context of the Commercial Code, etc. Further, as there have been a number of instances where the directives under the Act on Corporate Governance of Financial Companies, such as the separate election of directors for audit committee members, were subsequently introduced to the Commercial Code and applied to general, non-financial listed companies, it is vital to keep a close eye on the possibility that the foregoing measures to strengthen the internal control and monitoring obligations of a financial company’s directors may be extended to general, non-financial companies through the enactment thereof.
