The primary role of outside directors is to act as a check and balance against inside directors. They are expected to monitor their company’s overall management activities, assess the performance of management and prevent its majority shareholder or chief executive officer from always having his own way.
To carry out these responsibilities, an outside director needs to have expertise and experience in corporate management. Hence, in the United States, outside directors are usually chosen from among senior executives from a large company, people with experience in diverse businesses and people with specific professional skills.
Korea introduced an outside director system in 1998 based on the American model. But the way Korean companies operate is different to that of their American counterparts. In Korea, a large majority of outside directors lack business experience, which suggests that they cannot carry out their duties properly.
According to data from the Financial Supervisory Service, 68 of the nation’s top 100 listed companies plan to elect a total of 178 outside directors this month. Of them, professors account for the largest share, 35 percent, followed by former officials from powerful government agencies, who take up 32 percent. Corporate executives come next with about 21 percent.
One reason for the small proportion of businesspeople may be the limited pool of qualified corporate executives in Korea. But corporations’ preference for professors and former government officials suggests that they still regard outside directors as a rubber stamp or a conduit for lobbying.
If corporations expect outside directors to oversee and assess their managerial performance independently and objectively, they should hire people who have no personal connection to executive directors. But this is not the case with Korean companies.
Korean corporations usually select people with personal ties with their majority shareholders or CEOs. Earlier this year, trade unions at commercial banks demanded that they be allowed to recommend outside directors. The unions wanted to break the banks’ practice of hiring outside directors who have ties with management.
Their demand was refused by the banks’ outside director recommendation committees, which were filled with people close to the banks’ executive directors. In many companies, the committees that choose outside directors are controlled by their CEOs.
This suggests that the key to reforming the current outside director system lies in ensuring that CEOs or majority shareholders exercise no influence on selecting outside directors.
