Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 33: Corporate Governance of Banks in Korea

Heungsik Choe and Byungyoon Lee


Heungsik Choe and Byungyoon Lee 33.1 OVERVIEW Since the 1997 Asian financial crisis, Korea has established an outside director system and has been working towards improving corporate governance (Choe and Lee, 2003). The outside director system was implemented in response to the financial crisis of 1997, which was partially the result of inadequate monitoring of majority shareholders and management by the board of directors. After the system was introduced, the Commercial Code and the Securities Exchange Act were amended to ensure that half of the board of large listed companies would be composed of outside directors, and a one-fourth from other listed and KOSDAQ-listed companies. Korean banks followed the same path, as the number of outside directors increased to account for half of the board and more than half of the outside director recommendation committee. After the financial crisis, the outside director system was established in Korean companies and banks, but it has been criticized by some on the grounds that it is not effective from the point of view of shareholder wealth maximization. There have been complaints that lack of independence and relevant expertise have prevented outside directors from carrying out their duties in controlling major shareholders and management effectively. For example, banks competed to increase their assets from 2005 to early 2008, exposing them to larger risks. The boards did not keep their managements in check, which made the boards the target of criticism. Recent criticism of the system has been aimed at outside directors themselves; specifically, that...

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