The degradation of the outside director system is all the more lamentable, when considering that the nation introduced it in 1998 in the aftermath of the Asian financial crisis to check wayward chaebol and its top managers

2014-03-10 17:04

Watchdog or lapdog?

When Tongyang Group committed a series of managerial mistakes and wrongdoings in 2012, few of its outside directors tried to oust its chairman, Hyun Jae-hyun. Most of them helped to keep the problems secret or lobbied to defend Korea’s 38th-largest conglomerate and its owner. Had they fulfilled their duty to follow proper checks and balances, some 50,000 individuals might not have seen their investments go up in smoke. 
Tongyang is not an exception but the norm. Which shows how mistaken external directors here are to perceive their role as passive helpers or providers of rubber stamps for management, instead of watching and rectifying bad moves made by the latter.
As the main role of outside directors is to lobby for family-run conglomerates, tycoons choose theirs from among former bureaucrats and politicians, who serve as “protection” from the whirlwind of government reforms.
There is little surprise then that four in every 10 outside directors to be appointed by the nation’s 10 largest chaebol this month are former policymakers, election campaigners, taxmen, trustbusters and politicized professors. According to Chaebul.com, an online market research firm, such business-politics-bureaucracy collusion has even thrived, not declined, in recent years under this nation’s regressive corporate governance.
The degradation of the outside director system is all the more lamentable, when considering that the nation introduced it in 1998 in the aftermath of the Asian financial crisis to check wayward chaebol and its top managers. It is a sad reminder of a proven truth that a system, however good its seeds are, cannot take root and bear fruit if the soil beneath its foundations is poor and corrupt.
It is long past time for Korea to revolutionize that chummy boardroom culture, if for no other reason than to prevent a repeat of the economic crisis.
The nation needs to learn from the examples of advanced countries, which appoint outside directors even from among former executives of rival companies, and those recommended by small shareholders in and outside of the companies. Or the business owners can pick directors among multiple candidates recommended by an independent body.
The government should also revise rules to force these corporate watchdogs to report their decisions and activities, and be held accountable for neglect of duty or misjudgment.
President Park Geun-hye, who pledged to reform the outside director system during campaigns, ought to take action by setting up a blue-ribbon panel under her direct control. The proposed group should overhaul the distorted system, ranging from the perception of the role of outside directors to their selection process and boardroom operations.
Park will even be able to restore her badly damaged reputation caused by breaking campaign promises to pursue chaebol reform and “economic democratization” by reforming the outside director system.
There is a prerequisite for Park to tackle this task, however: She should stop appointing her campaign workers and other cronies as outside directors of state enterprises and public corporations. Nothing could be more contradictory than calling for reform of public companies then filling their boardrooms with unqualified allies.