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[Editorial] Outside directors

Reform needed in corporate governance

March 24, 2016 - 17:41 By 백희연

Former government officials still account for a large share of the outside directors serving on the boards of major corporations. This is not desirable given the role they are expected to play.

A recent survey by CEO Score, a corporate performance evaluation service, showed about 41 percent of the outside directors appointed this year by the listed subsidiaries of the nation’s top 30 business groups were former government officials.

The survey said that compared with last year, the share of ex-government officials dropped slightly, while that of professionals -- including professors and former corporate executives -- made some gains.

The change is welcome, but the proportion of former government officials is still too high, compared to advanced countries. In the United States and Europe, professionals take up more than 80 percent of the board seats set aside for outside directors.

The survey shows that corporations favor ex-government officials from powerful agencies such as Cheong Wa Dae, the prosecution, the National Tax Service, the Finance Ministry and the Financial Supervisory Service.

It is not difficult to guess why corporations tend to fill their boards with ex-government officials who once held powerful posts.

The role corporate owners expect from their outside directors is not that of a watchdog that oversees their management decisions. That is the last thing they want.

Corporate tycoons want the former public officials to use their clout when their businesses get in trouble and need protection. And they also want the ex-officials to help them win government contracts by exercising their influence on incumbent officials.

The outside director system was introduced in the wake of the 1997-98 Asian financial crisis as part of efforts to reform the governance structure of Korean companies.

Outside directors are supposed to provide checks and balances at board meetings to prevent the company owners from making reckless decisions or using corporate funds illegitimately.

Although almost 20 years has passed since Korean companies began to appoint outside directors, no significant change has been made in corporate leaders’ perceptions of the role of outside directors.

As a result, outside directors work as a mere rubber stamp at board meetings without bothering to challenge management decisions. The outside director system should not work this way.