South Korea's Financial Services Commission announced governance reforms on the 12th targeting financial holding companies' executive compensation practices. The reforms prohibit paying hundreds of millions of KRW annually to retired chairmen serving as advisors without performance evaluations, and require disclosure of advertising expenditures during chairmen's third-year tenure amid succession processes. The measures respond to Financial Supervisory Service findings from a January inspection of 8 bank holdings, which revealed one former chairman received an average 700 million KRW per year over 4 years as an advisor, while another received 400 million KRW annually over 2 years, and advertising spending at one holding company surged from 76 billion KRW in year one to 112.9 billion KRW in year three of a chairman's term.
Financial Services Commission Mandates Advisor Compensation Review and Disclosure
The Financial Services Commission will require compensation committees to review the appropriateness of payments to retired executives appointed as advisors. Financial institutions must establish compensation standards for post-retirement advisory roles and disclose these standards publicly. The reforms mandate that compensation committees deliberate on the adequacy of advisor pay relative to duties performed, or strengthen disclosure requirements for retired executive compensation. Regulators will inspect whether institutions comply with these standards.
Regulators Require Disclosure of Third-Year Advertising Expenditures
Financial holding companies must compare and disclose advertising expenditures in the third year of a chairman's term against spending in the first and second years. Regulators identified a pattern where advertising costs escalate during the third year, coinciding with succession processes. One holding company spent 76 billion KRW on advertising in year one, 76.7 billion KRW in year two, and 112.9 billion KRW in year three. The reforms prohibit excessive advertising spending in the third year without special justification.
Say-on-Pay and Clawback Mechanisms Introduced for Executive Accountability
Large listed financial companies must explain individual executive compensation plans to shareholders at general meetings under a Say-on-Pay framework. When issuing general meeting notices, institutions must attach detailed materials on compensation payment methods, system design and operation, and calculation criteria. The reforms activate clawback provisions allowing recovery of performance-based pay if an executive causes losses to the institution through willful misconduct or gross negligence, or if financial statements underlying performance pay calculations are corrected. Minimum deferral ratios for performance-based compensation increase from 40% to 50%, and deferral periods extend from 3 years to 5 years. Compensation committee members cannot deliberate or vote on matters related to their own performance pay. Institutions must disclose total compensation and total performance pay for senior executives receiving above a certain threshold in annual reports.
Governance Law Amendments Planned Within the Year
The governance reform measures will be reflected in amendments to governance-related laws and best practice guidelines. The Financial Services Commission plans to prepare a governance law amendment incorporating these reforms within the year.
FAQ
What compensation did retired financial executives receive as advisors in South Korea?
According to a Financial Supervisory Service inspection in January of 8 bank holdings, one former chairman received an average 700 million KRW per year over 4 years as an advisor, while another former chairman received 400 million KRW annually over 2 years.
How will South Korea's new clawback rules affect executive pay?
The Financial Services Commission announced clawback provisions on the 12th allowing institutions to recover performance-based pay if an executive causes losses through willful misconduct or gross negligence, or if financial statements used to calculate performance pay are corrected. Minimum deferral ratios increase from 40% to 50%, and deferral periods extend from 3 years to 5 years.
