The Financial Supervisory Service (FSS) has reported that while the governance structure of South Korean banks has seen institutional improvements, instances of formal and circumstantial practices remain prevalent. This finding was shared during a workshop on internal controls held on June 29 at the FSS headquarters in Yeouido, Seoul.
Approximately 170 participants, including internal control officials from eight bank holding companies and 20 banks, attended the workshop, which focused on the results of a special inspection of bank governance.
The FSS noted that since the establishment of best practices for governance in 2023, the appearance of governance in the banking sector has improved. However, it also highlighted that these improvements have been exploited for purposes such as entrenching management.
Key deficiencies identified include insufficient verification of independence in the selection process for outside directors and cases where the final selections were heavily influenced by internal recommendations. Concerns were also raised about boards of directors that favor the CEO's interests participating in the CEO succession process, leading to a passive and formal operation of the board that undermines its oversight function.
Additionally, the procedures for CEO succession and the performance-based compensation system were scrutinized. The FSS pointed out instances where succession procedures were altered to benefit the current CEO, and where the management of candidate evaluation records and the minutes of the executive nomination committee were inadequate. Conflicts of interest were also noted, particularly when compensation committee members participated in decisions regarding their own pay.
In January, financial authorities launched a Task Force for Governance Advancement to discuss measures to strengthen board authority and responsibility, enhance controls over CEO appointments and reappointments, and rationalize performance-based compensation operations.
During the workshop, the necessity of internal controls in light of AI implementation was also discussed. Kwak Beom-jun, the FSS's deputy director in charge of banking, emphasized the need for internal controls and governance structures that can proactively prevent and manage the unpredictable risks associated with AI technology.
The FSS also shared findings related to the misuse of business loans and compliance with personal debtor protection laws. It highlighted deficiencies such as the omission of post-loan inspections, inadequate checks on the use of funds, improper housing auction applications, and violations of limits on collection contact frequency, urging banks to strengthen their internal controls.
* This article has been translated by AI.
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