South Korea Proposes Sweeping Changes to Financial Company Governance After Bank Inspections

Key Takeaways

• Governance Weaknesses Identified: South Korea's FSS found shortcomings in CEO succession procedures, independent director appointments, board oversight and executive compensation during inspections of eight major bank holding companies.
• Stricter CEO Reappointments: Proposed rules would require higher committee and shareholder voting thresholds for bank holding company CEOs seeking consecutive terms, including a three-fourths shareholder majority for a third consecutive reappointment and subsequent terms.
• Greater Board Independence: CEO search committees would consist exclusively of independent directors, with new restrictions on management interference and stronger accountability for succession recommendations.
• Executive Compensation Reform: Minimum bonus deferrals would increase from 40% over three years to 50% over five years, alongside new clawback provisions and expanded compensation disclosures.
• Legislative Changes Planned: The FSC intends to propose amendments to the Act on Corporate Governance of Financial Companies before the end of 2026. The measures have not yet been enacted.

Deep Dive

South Korean regulators have identified weaknesses in how major bank holding companies select their chief executives, appoint independent directors and oversee senior management, prompting a proposed overhaul of corporate governance rules intended to curb executive entrenchment.

The Financial Services Commission (FSC) announced the reforms following inspections of eight major bank holding companies by the Financial Supervisory Service (FSS) earlier this year. The findings raised concerns about the independence of CEO succession procedures, the transparency of director appointments, the effectiveness of board oversight and the administration of executive bonuses.

The proposals would make it considerably harder for bank holding company chief executives to secure repeated reappointments, while giving independent directors and shareholders greater authority over succession decisions. Financial companies would also face longer bonus deferral periods, new clawback requirements and expanded disclosures concerning executive compensation.

The FSC presented the measures at a meeting with the ruling Democratic Party, following months of work by a task force established in January 2026. The group, comprising regulators, researchers, academics and legal professionals, was formed to examine governance problems that had drawn attention during the government's annual work report to the president in December 2025.

A particular concern is the influence incumbent executives can exercise over their own succession. The commission has also questioned whether existing arrangements provide sufficient checks on chief executives who remain in office through successive reappointments.

The problem is especially pronounced at bank holding companies with dispersed ownership, where no single shareholder necessarily has sufficient influence to challenge management. The FSC wants to strengthen the authority of executive search committees and give shareholders a more decisive role in determining who leads these institutions.

Under the proposed rules, CEO search committees would consist entirely of independent directors. Incumbent chief executives would be prohibited from attending committee meetings concerning recommendations for independent directors or audit committee members.

The commission also plans to establish rules and sanctions addressing inappropriate interference in succession proceedings. Financial companies would have to disclose relevant contacts between incumbent CEOs and executive search committees during the selection process.

Committee members would be required to provide confirmation letters explaining their reasons for recommending a candidate when a company announces a general shareholders' meeting. Committee chairs would have to explain those recommendations directly to shareholders and assume formally defined responsibilities for the operation of their committees.

The voting requirements would become substantially more demanding. Currently, executive search committees can recommend CEO candidates through a simple majority of members present. Under the proposals, recommending a candidate would require the support of at least two-thirds of all committee members. Recommending an incumbent chief executive for another term would require a three-fourths majority.

Shareholder approval requirements would also increase with successive reappointments. Under existing rules, chief executives serving as inside directors can be appointed by a simple majority of the voting rights represented at a shareholders' meeting, provided those rights account for at least one-quarter of issued shares.

A second consecutive reappointment would instead require a two-thirds majority, with supporting votes representing at least one-third of issued shares. A third consecutive reappointment, and any subsequent reappointment, would require a three-fourths majority, with supporting votes representing at least half of issued shares.

The stricter thresholds are intended to prevent long-serving bank holding company executives from retaining their positions without broader support from directors and shareholders. The FSC also wants institutions to begin succession planning earlier, allowing more time to assess potential candidates.

Under the proposals, succession proceedings would have to begin at least three months before the selection of a final candidate or six months before the incumbent's term expires. Outside candidates would be given adequate preparation time, while financial companies would be expected to manage their candidate pools more systematically.

CEO evaluation criteria would have to include nonfinancial performance and social impact considerations. Those criteria could not be arbitrarily altered during succession proceedings, and disclosure of evaluation results would be strengthened.

The commission is also seeking changes to practices surrounding executive departures and reappointments. Financial companies would have to establish reasonable compensation standards for former executives appointed to advisory positions and disclose the relevant information.

Advertising expenditures intended to support an incumbent CEO's reappointment would also become subject to public disclosure, with institutions discouraged from excessive spending for that purpose.

Greater Scrutiny of Independent Directors

The proposed reforms would extend beyond succession procedures to the composition and responsibilities of financial company boards. All financial companies would adopt an independent director system. Listed financial companies would also establish procedures allowing shareholders with a qualifying ownership stake to recommend independent director candidates.

Independent directors would be required to hold separate meetings at least twice annually, while performance assessments would place greater emphasis on their effectiveness in overseeing management.

The FSC also intends to strengthen disclosure requirements concerning directors' activities and require financial companies to prepare and maintain accurate board meeting minutes. Additional measures would address board expertise, diversity and accountability.

The changes follow findings from the FSS inspections that identified shortcomings in the ability of boards to exercise effective oversight of chief executives. The commission is also seeking greater participation from pension funds and other institutional investors.

Regulators intend to provide authoritative interpretations supporting the use of independent director nomination arrangements by institutional investors. Guidance under South Korea's stewardship code would be updated to encourage closer scrutiny of board independence and accountability.

The proposals would give shareholders additional means of examining how financial institutions are governed, particularly where dispersed ownership has made effective oversight more difficult.

Executive Compensation Rules Face Tightening

The FSC is proposing longer deferral periods for executive bonuses and new provisions allowing financial companies to recover compensation in specified circumstances. Under existing requirements, financial companies must defer at least 40% of incentive compensation for a minimum of three years. The proposed rules would increase the deferred portion to at least 50% and extend the minimum period to five years.

The commission also intends to introduce clawback requirements covering executives who knowingly or through gross negligence cause losses to their companies. Previously paid bonuses would also be subject to recovery where financial statements used to calculate the compensation were subsequently corrected.

The measures are intended to discourage excessive risk-taking and strengthen accountability for executive decisions whose financial consequences may emerge over several years. Shareholders would also receive more information about individual executive pay.

Currently, shareholders approve the aggregate amount of executive compensation at general meetings, while boards determine individual payments. Under the proposals, listed companies with total assets of at least KRW 2 trillion would have to disclose individual executive compensation packages at general shareholders' meetings to facilitate shareholder scrutiny through a say-on-pay mechanism.

Listed companies would also face expanded disclosure requirements covering individual executives whose annual total compensation exceeds KRW 500 million, along with executives or employees receiving annual bonuses exceeding KRW 300 million.

The FSC intends these changes to provide shareholders with a clearer account of how executive compensation relates to individual responsibilities and performance.

Legislation Expected Before Year-End

The FSC and the ruling Democratic Party agreed at their November 12 meeting to proceed with the legislative steps necessary to implement the reforms. The commission plans to introduce proposed amendments to the Act on Corporate Governance of Financial Companies by the end of 2026. It also intends to revise the stewardship code and pursue additional regulatory changes through its continuing governance task force.

The measures remain proposals and have not yet taken effect. For financial institutions, the proposed requirements would bring substantial changes to succession planning, board oversight, shareholder engagement and executive remuneration.

The reforms would also place greater responsibility on independent directors to explain their recommendations and demonstrate that they are exercising effective oversight of management.

The FSC's findings have raised questions about whether existing governance arrangements provide sufficient independence in executive selection and accountability for management decisions. Its proposed changes would strengthen the formal authority of directors and shareholders while imposing more demanding disclosure and voting requirements.

The commission now intends to translate those measures into legislation, with further regulatory changes expected as the task force continues its work.

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