KDI urges outside directors' greater independence

South Korea's outside directors should become more independent in order for them to better control management and protect the rights of all shareholders, a state-run think tank said Wednesday.

The report by the Korea Development Institute showed under the prevailing practice of outside directors being chosen because they know the CEO of a company or major shareholders, there will always be a risk of people failing to check management in an effective manner.

"Many outside directors are from the same region or share school-related backgrounds with top managers of a company," the findings showed.

Because companies exercise considerable control over who sits on the board of directors, those that raise objections to management are replaced more frequently than those that generally approve motions, it added.

"Even in the case where outside directors oppose a motion, people close to the CEO are less likely to be changed than those that do not have such connections," the KDI said.

Of the 62 outside directors that opposed management at least one time during their one-year term, 18, who did not have same backgrounds as the CEO, were replaced. On the other hand, of the 12 that were classified as having ties to top management, none were sacked.

By examining corporate files, there was a tendency by outside directors to not attend board meetings where corporate oversight issues were discussed, it said.

The think tank said that under such circumstances, there is a need to exclude the company's influence from the outside director recommendation panel that picks these people.

A system of recommending multiple candidates for an outside director position can be considered as well, it said. At present, only one person is usually tapped as a candidate with shareholders given no other option.

"If information on the multiple candidates are known in advance, shareholders can better exercise their rights to the fullest by picking the one that is best qualified," the KDI said.

"This could boost the independence of outside directors overall." (Yonhap)