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Study on the outside director's duty of oversight

  • DONG-A LAW REVIEW
  • 2012, (54), pp.725-752
  • Publisher : The Institute for Legal Studies Dong-A University
  • Research Area : Social Science > Law

고인배 1

1동아대학교

Accredited

ABSTRACT

The significance of the soundness of the fiscal structure of financial institutions was the lesson from the foreign exchange crisis in 1997 and financial crisis in 2008 in Korea. The topic has, consequently, attracted public attention: The way to a better control structure of financial holding banks. The scheme of outside directors was accepted as one of the reliable institutional control devices for this purpose. The Effective operation of outside director scheme requires, as its conditions precedent, that the independence, expertness, and publicness of outside directors are guaranteed and that outside directors are, to an appropriate level, under the duty of oversight. In September 2008, the Supreme Court of Korea decided that directors of a highly specialized large-scale company are bound to establish and maintain reasonable system(s) to be informed of and/or to obtain reports on the present conditions of his/her company and to obtain reports of the same, as well as system(s) of internal controls. Directors are also under the duty to provide assistance with regard to the operation of such systems. Directors who have neglected their duties regarding establishment of the aforesaid system(s) or who have intentionally disregarded their duty of monitoring, with the effect that they were not aware of the illegality in the acts of other director(s) or employees, are liable for the damage(s) to the company. This decision is said to have imposed the obligation to establish and maintain internal control system(s) on directors of large-scale companies, the concrete shape of which obligation is expected to be given by judicature. Financial holding banks are obliged to establish internal control system pursuant to the Capital Market Consolidation Act in Korea. Moreover, such institutions have already prepared well-functioning internal control system(s) and are maintaining them as well. Therefore, application of the legal doctorine which was established in this judical decision in a way which strongly adheres to its literal meaning would only in few cases lead to the liablity of outside directors for damage(s) occurred by the negligence of their monitoring duty. In this article, the author carried out an analysis of the legal doctorine in the aforesaid judical decision and tried to suggest standards of operation of internal control system(s) of financial holding banks and guidelines of monitoring under such system(s). Development of the same legal doctorine by judicature and theory is expected.

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