Samil PwC Warns: Excessive Emphasis on Board Committee Independence May Weaken the Role of Outside Directors

Balancing Independence and Expertise
Cautious of Information Flow Distortion

An analysis has indicated that excessive emphasis on the independence of board committees may actually weaken the practical function of outside (independent) directors by reducing the flow of information provided by inside directors. It is advised that committees should be organized with a balanced consideration of both independence and expertise, depending on each committee’s specific characteristics.

On August 28, Samil PwC Governance Center announced, "Through the 38th edition of 'Governance Focus,' we have published the sixth series of our 'Board Guide,' which contains expert recommendations for boards of directors of Korean companies." In this edition, Professor Kim Hwajin, endowed chair professor at the University of Michigan, contributed an article on the topic of "Committees Within the Board."

The main focus of the article is the composition and operational direction of committees, as well as the role of the audit committee. The article points out that matters delegated by the board to a committee carry the same effect as a board resolution unless overturned by the full board, underscoring the importance of careful committee organization and operation.

Professor Kim stated, "Depending on the nature of the committee, it is necessary to achieve a balanced composition considering independence, expertise, and business understanding." He further explained, "Committees where business insight is crucial should be composed mainly of inside directors, while committees with an oversight function should operate with a higher proportion of outside directors."

Concerns were also raised regarding potential distortions of information that could result from the increased activation of committees centered around outside directors. The reasoning is that as these committees become more active, inside directors—whose formal authority may be diminished—may reduce the amount of information they provide to the board. With less information available, outside directors may become more dependent on the opinions of inside directors, which could paradoxically weaken their capacity for independent judgment.

The article also reiterated the fundamental principle that outside directors should not remain mere watchdogs, but work together with management to enhance corporate value as a unified team. Professor Kim emphasized, "Oversight and monitoring of management is only part of an outside director's role," adding, "While the operation of committees can serve as a tool to enhance independence, it should not result in only formal independence by hindering information sharing."

The audit committee was cited as the most important committee within the board. As a key body responsible for oversight of management and ensuring accounting and disclosure appropriateness, the audit committee in Korea holds even greater authority than its overseas counterparts, as it also possesses statutory audit powers. Professor Kim emphasized that the core mission of the audit committee is to ensure the quality of audit reports, highlighting the importance of committee members with expertise in finance, accounting, and cybersecurity.

Shin Wangon, head of the Samil PwC Governance Center, said, "Board committees within Korean companies are still not sufficiently activated," and added, "Amid a growing trend of expanding roles and responsibilities for boards, how committees are designed and operated will determine future governance competitiveness."

This content was produced with the assistance of AI translation services.