Korean bank's Corporate Governance plan to win investor recognition

12 January 2004

A major Korean bank has put corporate governance at the heart of its plans to regain investor confidence and achieve a listing on major world stock markets.

KB Kookmin Bank is a bank with ambition. It has set itself the goal of joining the global top 30 list by 2005. It has already made a good start, with capital of $US 25 billion, a listing on the New York Stock Exchange as well as on the Korea Stock Exchange in Seoul, a 25 per cent return on equity last year, and offices in six countries.

What is interesting is that to get to this stage - and to help it move on to the next - KB has followed a precise list of rules considered crucial to enable good corporate governance. The steps it has taken provide a good case study for achieving recognition by hard-nosed investors and ratings agencies.

As KB's own step-by-step plan (shown in figure 1) shows, the process followed was a mixture of solid banking principles and necessary compliance with tough stock exchange requirements, particularly in the United States where the rules of Sarbanes-Oxley apply.

But as other recent examples show, even the toughest rules can be flouted when there is a weak board, or a lack of the proper use of board committees and independent directors, or real transparency.

In fact transparency in management was where KB began its review of corporate governance procedures.

Figure 1

The bank says: "Transparent government should ensure a timely and accurate formulation and disclosure of all the bank's material. This is important in satisfying shareholders and all stakeholders, but also in giving a strong and reliable image to the organisation."

KB conside rs its employees to be important stakeholders, and includes them in information packs.

Asked how it formulated and circulated its mission and vision to staff - an area where in some companies corporate governance has fallen down - KB says it uses a mixture of workshops and consultants, as well as "translating the company's mission and vision into the company's business and action plans".

"They will be posted in electronic bulletin boards and also included in training materials and publications. The management will also select various key performance indicators to evaluate management performance. The results will be posted at the company website and included in the annual report so that the objectives pursued by the management and the bank can be clearly delivered to its shareholders".

This is how KB has dealt with other key aspects of corporate governance.

Financial Reporting

KB says it has established an internal control system that pinpoints even the lowest level of transactions and provides reports for top management. "Thus the chief executive and the chief financial officer can easily identify irregular transaction and control issues".

KB told us this was the result of instituting a painstaking process. "Every branch goes through a daily inspection by a designated member of staff on its balance sheet, profit and loss statement, and payment order slips. Internally some transactions may fall under the criteria of irregular transactions. The inspection department runs a non-stop audit system to pick out any inappropriate transactions.

"The current quality of service is checked every month to make sure that no KB clients are treated unfairly. To improve customer service we also established a special unit dedicated to handling customer complaints."

"At the top level KB's external auditor will study all major transactions during the regular audit and determine whether financial reports are deemed appropriate at a reasonable level. Financial information compiled using this system is announced to the public when the CEO and CFO have signed off on it as a display of confidence on information accuracy" the bank added.

Board Structure and Practice

The bank's 16-member board consists of 12 non-executive directors and just four executive directors. It meets nine times a year. A short list of potential non-executive directors is drawn up by a special advisory committee, which nominates double the number of available seats. Another recommendation committee trawls the list and cuts it back and then its shortened list is put to the vote at a shareholders' meeting, thus ensuring that there is a genuine choice. The same meeting will also appoint the bank's president and executive auditor.

A compensation committee, using strict evaluation criteria, decides compensation for directors. Executive directors are assessed by financial performance and management capability.

At KB the pay package comprises basic salary, a bonus, and share options. Basic pay is expected to cover all expenses - there are no generous expense accounts, a feature of the past, which has been stopped.

Has all this focus on governance improved the bank's bottom line? KB says that it has, and points to increased shareholder satisfaction and its selection by Corporate Governance Service as the best company in Corporate Governance in 2003.

Its swift action in a crisis did its reputation a great deal of good. KB was a major creditor when the trade firm SK Global began to founder under an unsustainable debt burden of $US 7.2 billion. KB's board met and decided to seize any collateral it could and write off any debt that it did not think it would recover. KB agreed to sell off its SK Global loans for 30 cents in the dollar, writing off the 70 per cent remainder at a total cost of $US 264 million.

"We believe that by removing uncertainties we acted in the best interest of our shareholders", said Baek Kwang Ho, deputy general manager at KB.