The National Assembly passed the proposed amendment to the Act on Corporate Governance of Financial Companies (the “Corporate Governance Act”) for strengthening the internal control management responsibilities for directors of financial companies, etc., during its plenary session on December 8, 2023 (Link). In addition, on December 12, 2023, the Financial Supervisory Service (the “FSS”) announced the “best practices for the governance of bank holding companies and banks (collectively, “banks”).”
This is in line with the recent Supreme Court precedent (Link), which emphasized monitoring responsibilities for directors of financial companies, by imposing obligations to introduce and operate a reasonable information reporting system and internal control system. In addition, the FSS has announced best practices for the appointment of outside directors, operation of the board of directors, and succession of CEOs of financial companies like banks. This has implications regarding the recent controversy over the process of appointing the CEO of a company with the governance structure of distributed ownership. Moreover, it may serve as a reference for general listed companies even if they are not financial companies, with regard to the independence of, and support for, activities by outside directors and the fair and transparent operation of the board of directors.
Given that the improvements in major corporate governance provisions under the Commercial Act, such as the separate election system for audit committee members, were first introduced in the Corporate Governance Act, and later incorporated via amendments to the Commercial Act, the above-mentioned measures including (i) strengthening the internal control management responsibilities of financial company directors, (ii) the appointment of outside directors of financial companies, and (iii) the introduction of best practices for the operation of the board of directors and succession of CEOs may be further applied to general listed companies. Key details of the adoption of relevant regulations are as follows:
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1. |
Strengthening Internal Control Management Responsibilities by Amending the Corporate Governance Act |
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① |
Introduction of responsibilities map It requires financial companies to set up and operate an internal control system on their own in accordance with their own characteristics and changes in management-related circumstances, and clarifies in advance the scope and details of the work subject to internal control that each officer is responsible for through the responsibilities map. CEOs must establish a responsibilities map and submit it to the financial authorities after deliberation and resolution by the board of directors. Financial companies are obligated to verify whether their executives have the necessary expertise, honesty, credibility, etc., to perform their duties. |
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② |
Executive officers of financial companies are obligated to manage internal control at all times Executive officers included in the responsibilities map must manage internal control for the work they are responsible for, by regularly monitoring the appropriateness of the standards for internal control, officers and employees’ compliance with the standards, and the operation of the standards. The CEO, as the top overseer of internal control, is responsible for establishing a company-wide internal control system, and supervising each officer’s internal control activities. |
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③ |
Strengthening the role of the board of directors for internal control Matters regarding internal control and risk management have been added to the matters subject to deliberation and resolution by the board of directors. An internal control committee has been established as a subcommittee within the board of directors. |
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④ |
Imposition of sanctions on the status of executive officers who fail to comply with their internal control management responsibilities Any officer who fails to comply with his/her internal control management responsibilities will be subject to sanctions on the personal status. The sanctions are imposed for negligence in compliance with the new internal control management responsibilities, which is the relevant officer’s own responsibility. |
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2. |
Introduction of Best Practices for Corporate Governance of Banks, Etc. |
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① |
Organization and system dedicated to supporting outside directors An organization dedicated to supporting outside directors has been established under the board of directors, and the board of directors is required to engage in the appointment and dismissal of the general manager and performance evaluation. |
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② |
Appointment of CEOs and succession of management A fair and transparent succession plan covering the regular management and development of the candidate group for the selection of the final successor, needs to be established and operated. To ensure a fair and careful evaluation of candidates, the management succession process must be commenced early, and the methods for evaluating and verifying the candidates have been be diversified. |
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③ |
Securing collective consistency and independence in the composition of the board of directors A management system to ensure the collective consistency, such as the Board Skill Matrix, is required to be established. In particular, recommendation channels for outside director candidates have been diversified, appropriate term policies have been prepared, and the process for verifying qualifications such as independence and expertise for the appointment of outside directors has been strengthened. |
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④ |
Evaluation system of the board of directors and outside directors The objectivity and fairness of the evaluation of the board of directors and outside directors has been enhanced, and the evaluation results are linked to the reappointment of outside directors. |
