On March 15, 2018, the Korean Financial Services Commission (“FSC”) announced proposed amendments (collectively, the “Amendment”) to the Act on Corporate Governance of Financial Companies (“Corporate Governance Act”), including the related Enforcement Decree (“Enforcement Decree”) and Supervisory Regulations on Corporate Governance of Financial Companies (“Regulations”).  The Amendment is expected to become effective in the third quarter of 2018.

The Amendment is an extension of regulatory efforts to strengthen the corporate governance of financial companies since the implementation of the Corporate Governance Act in August 2016.

Highlights of Key Changes:

1. Strengthened eligibility review for majority shareholders

Under the shareholder review system, certain shareholders of financial institutions in Korea are subject to a periodic review by the FSC on the soundness of the management of the institution.  

The Amendment expands the scope of the review to include not only the single largest investor, but also the shareholders of the subsidiary that are specially related parties to the single largest investor.  Disqualification factors were also added to include violations of the Korean Act on the Aggravated Punishment, Etc. for Specific Economic Crimes, which may result in imprisonment. 

2. Transparency in CEO succession

The Amendment requires companies to stipulate in the internal governance regulations, qualifications and standards for selecting CEO candidates and obligations to provide shareholders with regular reports on CEO candidate assessments. 

3. Independence of outside directors

In addition, the CEO/representative director is not allowed to participate on the executive candidate recommendation committee for outside directors and audit committee members.  Outside directors shall be staggered and must go through an external evaluation when serving consecutive terms. 

4. Independence of the audit function

The Amendment prohibits full-time auditors/audit committee members from serving more than six years in the same financial institution.  Further, audit committee members shall be guaranteed at least a two-year term, and they shall be prohibited from holding a concurrent position on a different committee within the board of directors (with the exception of the remuneration committee).

5. Tighter regulation on remuneration 

The remuneration of executives and employees who earn a performance-based salary of a predetermined amount must be disclosed through an annual report on the remuneration system.  The Amendment also provides that the remuneration committee may independently determine the scope of employees who are to be subject to deferred payment (i.e., employees in roles where short-term performance-based pay could result in excessive risk-taking) and publicly disclose such details through the annual report on the remuneration system. 

Significance:

The Amendment strengthens regulations that will impact foreign financial institutions operating in Korea.  Accordingly, we advise businesses to prepare in advance for the changing regulatory environment.