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Hana Financial Group

Addressing labour relations and board composition

Home / Hermes EOS Case Studies / Hana Financial Group

When Hana Financial Group (Hana) agreed to acquire Korea Exchange Bank (KEB) in 2012, significant tension and conflict arose between Hana and KEB’s labour union, which demanded job security and independent management of the bank. The union filed a lawsuit to block Hana’s acquisition of KEB and sued its president. Hana threatened to sue the union in return. We also noted that its board needed improvement, especially in respect of the independence and skill sets of its non-executive directors. Furthermore, we had concerns about executive remuneration.

What we did
We raised concerns about Hana’s governance structure as many of its directors appear to have close links with the government. We asked the bank to identify candidates who are fully independent from management and the government, as such independence is necessary for the board to be effective. To further enhance governance, we asked the company to consider creating a better link between performance and pay. We challenged Hana's relationships with the union and offered to communicate with union leaders to understand their viewpoints and frustrations regarding the cultural and pay differences between Hana and KEB.

Results
A year after we raised our concern about the board, the company appointed an independent outside director with banking and financial services experience. The number of directors with an apparent link to the government has also been reduced. Hana made significant improvement in linking performance to pay. Its corporate governance report now contains greater detail on the metrics used in the remuneration policy, such as return on equity, risk-adjusted return on capital and total shareholder return. Performance-based promotions are being introduced at KEB Hana Bank, presenting a step change from the traditional seniority-based promotion culture. The company believes this will make it more efficient and attractive to young talented individuals. In relation to employee relations, the company set up integrated departments and held training sessions for Hana and KEB employees. The new CEO of KEB Hana Bank also appointed the former union leader of KEB as chief secretary. The chief secretary is in charge of integrating the two unions associated with the banks. Senior staff from KEB meanwhile were appointed to the leadership team of the merged bank, including the CFO, strengthening its message of treating the employees of both banks fairly in the new entity. The bank also removed the pay gaps of the two sets of employees and made efforts to enhance their work-life balance by limiting the overtime they are permitted to work.

Integration of the information technology systems between the two banks is likely to create further operational efficiency. In 2016, Institutional Shareholder Services, a provider of corporate governance solutions to investors, improved the corporate governance score of the company, confirming the improvements made1 .

  1. 1 ISS' quick score released in March 2016 showed that the company’s score has improved from 2 in 2015 to 1 in 2016. A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk. Scores indicate decile ranks relative to index or region. The score rates a company’s board structure, compensation policies and practices, protection of shareholder rights and robustness of audit arrangements.
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Christine Chow Dr Christine Chow is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has 19 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. She is an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She is a governor of the London School of Economics and a member of the university’s investment committee. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
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Engagement objectives:

Social & ethical:
Employee relations
Governance: Board effectiveness