South Korea’s government and ruling Democratic Party have agreed to pursue tighter rules for choosing and reappointing leaders of bank holding companies, including higher voting thresholds and a greater role for independent directors.
The package, announced after a meeting in Seoul on 12 November, is intended to reduce the influence an incumbent chief executive can have over the choice of a successor or their own reappointment. The measures are proposals, not changes already in force. The financial regulator plans to prepare amendments to the relevant governance law by the end of the year.
A central change would require committees recommending chief executives to be composed entirely of independent directors. For bank holding companies with dispersed ownership and no controlling shareholder, the plan also sets a higher bar for a committee to recommend a candidate.
Two stages of approval
Under the proposal, an initial recommendation would need the support of at least two-thirds of the committee’s full membership. A recommendation for an incumbent to serve another term would need at least three-quarters of the full committee. At present, a recommendation can pass with a majority of the members present.
The difference between members present and the full membership matters. If a director is absent, the proposal would still count that place when calculating how many votes are needed. A recommendation at committee level would be one stage of the process, not the final shareholder decision.
Separate thresholds are proposed for shareholders’ meetings. On a chief executive’s first reappointment, the candidate would need at least two-thirds of the voting rights represented at the meeting and support equivalent to at least one-third of all issued shares. For a second or later reappointment, those requirements would rise to three-quarters of the voting rights represented and at least half of issued shares.
The voting threshold for an initial appointment at the shareholders’ meeting would remain the same, although the plan proposes that shareholders vote on the chief executive’s appointment itself. The government has chosen higher approval requirements rather than an outright ban on a third consecutive term. A further term would remain possible if the applicable requirements were met.
Opening the nomination process
The proposed reforms would also change how independent directors are considered. Listed financial companies would be expected to operate a system for receiving recommendations from shareholders who meet a minimum shareholding requirement. The regulator has given an example of the eligibility criteria, but the eventual detail would depend on the measures being developed.
These recommendations concern candidates for independent director posts. They should not be confused with the committee’s separate task of recommending a chief executive. A shareholder’s recommendation would not automatically give a candidate a seat: candidates would still go through the relevant screening and appointment process.
Incumbent chief executives would be barred from attending committees that recommend independent directors and audit committee members. The plan would also prohibit improper involvement in the succession process and require companies to disclose the reason for, and details of, contact between the incumbent and members of the chief executive nomination committee during that process.
Committee chairs would be expected to explain candidate recommendations at shareholders’ meetings, while all committee members would confirm the reasons for their recommendations. Independent directors would also hold meetings without management at least twice a year under the proposals.
Review of existing practices
The package follows a supervisory review of governance practices at eight bank holding companies and discussions by a task force established in January. The regulator said the review identified issues relating to succession, the appointment of outside directors, board oversight and performance-based pay.
Officials also want succession procedures to begin earlier and for outside candidates to have adequate time to prepare. The plan proposes clearer evaluation criteria, including relevant non-financial factors, and more disclosure about how candidates are assessed. Some timing and other numerical details in the regulator’s plan are examples rather than final statutory requirements.
The wider package covers executive pay. Larger listed financial companies would be required to explain individual executive pay plans at shareholders’ meetings, rather than simply presenting a combined limit for directors’ pay. The proposal is for explanation and reporting; it does not establish a binding shareholder vote on each individual pay package.
Another measure would create a basis for recovering performance pay already paid where a company suffers losses through an executive’s intentional conduct or gross negligence, or where the financial statements used to calculate the award are corrected. Changes to deferred pay and disclosure are also planned.
The timetable and final wording remain unresolved. Some measures require legislation, while others involve regulations, guidance or industry practices. The government and party have agreed on the direction of the package, but that agreement does not mean parliament has passed the proposed changes or that financial companies must already apply the new voting thresholds.
