Transplanting outside Directors to the Korean Financial Market, 1999-2000

Abstract

In an effort to recover quickly from the Asian crisis, the Securities and Exchange Law of Korea was revised in 1998 to require all publicly traded companies to appoint at least one outside director on their boards. Outside directorship had been totally unknown to Korean business before the crisis and thus provides an interesting opportunity to observe how business practices are transplanted to a new environment. Using data compiled from annual reports of Korean financial institutions in 1999-2000, this paper attempts to reveal the logic behind the outside director network that was being formed for the first time in Korea. The analysis finds that, although the legal requirement is being met, the real mechanism at work is cooptation by large financial institutions rather than the originally intended monitoring by outside directors. Unlike the American case where bank centrality has traditionally been predominant, it is not banks but universities with high legitimacy that are at the center of the network. Family ownership is poisonous because it lowers performance and shuts down the window to the outside world. The results seem to imply that transplanting an institutional practice to a new environment with different contexts can often lead to modifications that betray the original purpose.