[Governance Reform] Breaking the “Self-Renewal” Cycle: CEO Nomination Committee to Consist Entirely of “Independent Directors”

Incumbent CEOs barred from contacting nomination committee or interfering in succession... Violations may trigger sanctions, including calls for removal

Shareholder and institutional investor nominations of independent director candidates to be exp

Going forward, the committee responsible for recommending CEO candidates will be composed entirely of independent directors, and committee members will be barred from attending resolutions on recommending themselves as executive candidates. The measure is intended to prevent CEOs from influencing the committee and strengthen its independence. The government also plans to prevent sitting CEOs from participating in the appointment of independent directors and expand external channels for recommending candidates, including recommendations from shareholders and institutions, to end the practice of CEOs influencing the committee's composition and operations to secure "self-reappointment."

On November 12, following consultations between the government and the ruling party, the Financial Services Commission and the Financial Supervisory Service announced a set of measures to improve the governance of financial companies.

First, the independence of the committee responsible for recommending CEO candidates will be strengthened. The financial authorities will pursue a legal amendment requiring the committee to consist entirely of independent directors and barring members from attending resolutions on recommending themselves as executive candidates. Until now, committee members could not vote on resolutions to recommend themselves as executive candidates, but they could attend the meetings.

Contacts between sitting CEOs and committee members will also be restricted. Sitting CEOs will be barred from attending committee meetings to recommend independent directors and audit committee members, and from improperly intervening in the CEO succession process. The government plans to introduce sanctions for violations, including ▲ demands for the CEO's dismissal ▲ suspension of duties for up to six months ▲ warnings. It will also require disclosure of the reasons for and details of any contact between a sitting CEO and committee members while the succession process is underway. Violations will be subject to corrective orders, warnings, cautions, and administrative fines against the financial company.

The government also plans to extend the responsibility map, which currently applies only to board chairs, to committee chairs. The aim is to ensure that committee duties, such as recommending executive candidates, do not become mere formalities. Accordingly, the committee's responsibility for vetting CEO and independent director candidates will also be strengthened. A confirmation document bearing the names and seals or signatures of all committee members will have to be attached to the notice convening the shareholders' meeting. When the meeting appoints executives, including the CEO and independent directors, the committee chair will be required to explain the reasons for recommending each candidate in person. Until now, directors have been appointed through votes for or against candidates without sufficient explanation of the reasons for their recommendation.

Jeon Yoseop, director general of the Financial Services Commission's Financial Policy Bureau, said, "There have been cases in which candidate vetting was left to company employees or the board secretariat, while committee members did little more than formally review the results."

A system of independent directors will also be introduced at all financial companies. The system, introduced under the Commercial Act in July 2026, will be extended to all financial companies. However, the proportion of independent directors required under financial governance laws and regulations will remain unchanged. Accordingly, independent directors must account for more than half of the board, with at least three additional members, at large financial companies with assets of 5 trillion won or more. At financial companies with assets of at least 300 billion won but less than 5 trillion won, they must make up at least one-quarter of the board.

A shareholder recommendation system will also be introduced to address the problem of candidates in the standing pool of independent director candidates not being appointed in practice. Specifically, listed financial companies will be required to operate a system through which shareholders can directly recommend candidates for the pool via the board or the company's website. Shareholders who have held at least 0.1% of the company's shares for six months or longer will be eligible to recommend independent directors. The 0.1% ownership threshold was set in consideration of the difficulty of managing the pool on an ongoing basis if it becomes too large. Among the seven financial holding companies, excluding NH NongHyup Financial Group, 1,261 shareholders hold at least 0.1% of shares. If the threshold were lowered to 0.01%, the number of shareholders would rise to 4,884.

Director General Jeon said, "Financial holding companies currently maintain standing pools of independent director candidates, but at two companies, not a single person from the pool was appointed during the actual selection process. To make these pools more effective, sitting CEOs will be barred from participating in the appointment of independent directors, and violations will be subject to personal sanctions at the same level as those currently imposed."

Recommendations of independent director candidates by institutional investors will also be encouraged. Until now, recommendations made at the request of a financial company's board have been interpreted as not falling under the "purpose of influencing management control" as defined by the Capital Markets Act. The Financial Services Commission will clarify this interpretation to ease the burden on institutional investors making recommendations. The aim is to change the practice of institutional investors being reluctant to recommend candidates because voluntary recommendations could be interpreted as an attempt to participate in management. However, where there is an intent to exert influence over management in practice, such as through shareholder proposals or requests to convene an extraordinary shareholders' meeting, the recommendation will be deemed to have the purpose of influencing management control.

Meetings attended only by independent directors will also be made mandatory. The authorities believe that oversight of current management has not been effective because there is no requirement to hold regular meetings attended only by independent directors. Accordingly, companies will be required to hold at least two such meetings a year. Minutes must be prepared and retained, but will be kept confidential to protect business secrets and allow for a free exchange of views.

Measures will also be introduced to ensure that boards perform their oversight and supervisory functions in practice. To prevent minutes from being prepared as a mere formality or amended or omitted after the fact, the required details, including actual remarks, and the deadline for preparing board minutes will be specified. Standards for preparing and retaining verbatim records will also be established.

Support to enhance independent directors' expertise will be expanded. Companies will be required to cover the cost when independent directors seek advice from legal, accounting, or other experts while reviewing agenda items. However, the government plans to allow claims for advisory costs only for certain committees requiring a high level of expertise, such as risk management committees.

Companies will be required to select independent director candidates in light of the expertise represented on their respective boards, while also improving the diversity and expertise of board composition. To this end, companies will be required to use a Board Skill Matrix (BSM) tailored to their characteristics to show the expertise represented on their boards. They must also provide detailed disclosures in their annual corporate governance reports on the size of the pool of independent director candidates, the criteria for determining areas of expertise, and recruitment targets for each area.

The responsibilities of directors at bank holding companies will also be strengthened. Because these companies have a significant impact on the financial system, the management responsibilities of directors involved in major decision-making need to be enhanced. The financial authorities plan to raise the remuneration threshold used under the Commercial Act to determine the scope for reducing directors' liability to their companies for damages.

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