Posted September. 17, 2010 21:49,
A Dong-A Ilbo reporter on May 12, 2005, met Shinhan Financial Group Chairman Ra Eung-chan after suspicion rose over the sudden dismissal of group president Choi Young-hui.
At the time, Choi had a different opinion from the chairman`s on how to consolidate the now-defunct Cho Hung Bank and Shinhan Bank.
When the reporter visited Ra`s home the previous day to ask why Choi was fired, a company employee said, "Please leave. Instead, we`ll help you meet Chairman Ra tomorrow on the condition that you don`t ask about Choi."
Contrary to the reporter`s expectation, Ra had a cheerful look at his office and answered questions with sincerity. When asked why he dismissed Choi, however, Ra kept mum.
The reporter asked the same question several times in a roundabout way, but Ra refused to answer. "My comment could bring about another misunderstanding," he said.
The truth took little time to come out, however. Choi had questioned why Korean shareholders living in Japan yielded huge influence over the company`s management, and this was considered a direct challenge to Ra`s power.
Ra replaced Choi, and those in the financial sector said Choi fell victim to a power struggle.
The latest controversy surrounding Shinhan hardly looks surprising because of what happened in 2005. Shinhan Bank has accused Shinhan Financial President Shin Sang-hoon of embezzlement and inappropriate lending.
More recently, a similar incident occurred at KB Financial Group. After KB Financial Group Chairman Hwang Young-key resigned in September last year, then Kookmin Bank President Kang Chung-won also quit after an unsuccessful attempt to become chairman.
The Korean banking sector is rife with internal power struggles stemming from prolonged one-man rule and government control.
Chronic internal power struggles are caused by a backwards corporate culture in which a bank chief caves in to the temptation of retaining power once he or she takes the helm of an organization with no controlling shareholder. The failure of external directors to prevent CEOs from abusing their power also contributes to the phenomenon of one-man rule.
This is in a stark contrast to the general practice of U.S. financial companies. A typical U.S. financial institution chooses its CEO from among 10-15 candidates after letting them compete against each other and comparing their performances thereafter.
CEOs of U.S. financial companies serve another term only if they show a stellar performance. Despite such a rigorous process, the system showed weaknesses after the global financial crisis broke out, leading financial sectors in advanced economies to conduct vigorous research on succession systems.
The latest crisis of the Shinhan Financial Group will surely result in a full-blown discussion on reforming the governing structure of domestic banks. The incident has given momentum to financial authorities` drive to enact a law on improving the governing structure of financial companies.
What is likely is a measure to strengthen the power of audit committees under the boards of directors of banks so that the committees can check management and make evaluations for major shareholders and executives more stringent.
Power struggles like the one within Shinhan rarely happened before the Asian financial crisis of the late 1990s due to government control led by "MOFIA," referring to former high-ranking officials of the finance ministry.
With bank management gradually shifting from government control to autonomy after the financial crisis, CEOs in the financial sector quit after struggling between government control and autonomous management. They include former Kookmin Bank CEO Kim Jung-tae, former Cho Hung CEO Choi Dong-soo and KB`s Hwang, all of whom resigned after financial authorities imposed heavy punishment on them.
Former and incumbent officials in the finance ministry also complain about MOFIA hardliners, with one saying, "Though their shares account for less than 1 percent, they wield full authority as if they`re the owners. This is one subject for reform."
(With help from Lee Si-yeon, a researcher at the Korea Institute of Finance; Cho Myeong-hyeon, a business management professor at Korea University; Lee Han-deuk, a researcher at LG Economic Research Institute; and Jeon Sung-in, an economics professor at Hongik University)