Transplanting Outside Directors to the Korean Financial Market

Transplanting Outside Directors to the Korean Financial Market

In an effort to recover quickly from the Asian crisis, the Securities andExchange Law of Korea was revised in 1998 to require all publicly tradedcompanies to appoint at least one outside director on their boards. Outsidedirectorship had been totally unknown to Korean business before the crisis andthus provides an interesting opportunity to observe how business practices aretransplanted to a new environment. Using data compiled from annual reports ofKorean financial institutions in 1999-2000, this paper attempts to reveal thelogic behind the outside director network that was being formed for the firsttime in Korea. The analysis finds that, although the legal requirement is beingmet, the real mechanism at work is cooptation by large financial institutionsrather than the originally intended monitoring by outside directors. Unlike theAmerican case where bank centrality has traditionally been predominant, it isnot banks but universities with high legitimacy that are at the center of thenetwork. Family ownership is poisonous because it lowers performance and shutsdown the window to the outside world. The results seem to imply thattransplanting an institutional practice to a new environment with differentcontexts can often lead to modifications that betray the original purpose.

In an effort to recover quickly from the Asian crisis, the Securities andExchange Law of Korea was revised in 1998 to require all publicly tradedcompanies to appoint at least one outside director on their boards. Outsidedirectorship had been totally unknown to Korean business before the crisis andthus provides an interesting opportunity to observe how business practices aretransplanted to a new environment. Using data compiled from annual reports ofKorean financial institutions in 1999-2000, this paper attempts to reveal thelogic behind the outside director network that was being formed for the firsttime in Korea. The analysis finds that, although the legal requirement is beingmet, the real mechanism at work is cooptation by large financial institutionsrather than the originally intended monitoring by outside directors. Unlike theAmerican case where bank centrality has traditionally been predominant, it isnot banks but universities with high legitimacy that are at the center of thenetwork. Family ownership is poisonous because it lowers performance and shutsdown the window to the outside world. The results seem to imply thattransplanting an institutional practice to a new environment with differentcontexts can often lead to modifications that betray the original purpose.