South Korea’s banking system was hit hard in the 1997 Asian financial crisis, which exposed weak management and poor lending practices. Many of the country’s banks, pushed to the edge of insolvency, have since returned to financial health and international respectability. One of the bankers responsible for the sensational turnaround is Kim Jung Tae.

Kim, a stockbroker and deal maker for most of his career, started in banking, in 1998, as chief executive officer of South Korea’s Housing & Commercial Bank. Until the year before, H&CB had been South Korea’s state-owned provider of residential mortgages, a focus that enabled it to escape the worst effects of the country’s corporate-lending spree. Kim consolidated that strength while adopting Western management practices and leading the bank to profitability. Then, in November 2001, he secured a merger with Kookmin Bank, the market leader and H&CB’s major rival. The smoothly executed merger has created the giant of South Korean banking and accelerated consolidation in the sector. Kookmin Bank, the name assumed by the merged institution, has the largest market capitalization of any Asian bank outside China and Japan and is traded on the New York Stock Exchange.

As Kookmin’s CEO, Kim continues to rock the boat. For one thing, he has taken the distinctly un-Korean step of cutting off debtors—regardless of their prominence in the business community. He has also introduced pay-for-performance systems, stands by the use of stock options as a motivational tool, and believes that the bank can succeed only if it hires the best talent it can find. Maximizing shareholder value ranks among his main goals.

This interview was conducted by Dominic Barton and Jaehong Park, both of McKinsey’s Seoul office.

The Quarterly: How do you see Kookmin evolving in the next five years?

Kim Jung Tae: Even though South Korea’s economy is the world’s 12th largest in terms of GDP, no South Korean bank ranks in the top 50 globally in its market capitalization. Our number-one goal is to increase our market cap—initially, to join the top five banks in Asia—giving us the scale to provide our customers with service at the level of the world’s leading banks, with comparable economic performance.

The Quarterly: How do you intend to reach this goal?

Kim Jung Tae: One of our major tasks is to develop and retain highly qualified people. We’ve found that global-standard systems, processes, and information technology can be set up in a relatively short period, given a strong push from the top. But the more critical issue is the quality of the people who will work with those systems, and that cannot be addressed so quickly.

We have several programs for developing our people and new recruits. I’m expecting to see more outside recruiting and more non-Koreans joining our organization, and we are recruiting MBA graduates directly from the United States. Regardless of nationality, regardless of career experience, we want to get the best talent in the market.

One of our programs supports employees who want to go through an MBA program or receive some other kind of training. For example, after working with the bank for four years, an employee can apply to do an MBA in the United States. More radically, we have introduced a sabbatical system: after ten years’ service, our people can take a year off, during which they will be paid their full annual compensation and bonus. They can take the year to go backpacking, get some experience in the securities market, enjoy some relaxation time, get some investment experience, or go back to school and study something. But they must apply for the sabbatical year with a plan for what they want to do and why, and when they come back they have to report on what they’ve done. It’s a good chance for them to freshen their thinking or to change tracks within the bank.

The Quarterly: What gives you confidence that their year off will benefit the bank?

Kim Jung Tae: When a South Korean bank hires people from a college or university, they are some of the best from that pool. But once they’re hired, regardless of what they want, the bank assigns them to do some particular job, and they have to do it. There has been no system to consider what they are inspired to do. It’s not long before they are not very motivated, they are not focused on their work, and they become a little bit, well, useless. So we want to give them a chance to do what they want for a year, and then we place them in a job they are inspired to do. The bankers of South Korea are high-quality people, but the system has made them lose that high quality. We are paying quite heavily—through this program and in other ways—to get it back.

These programs also have a very positive ripple effect within the bank. When we announced the MBA program, our employees made huge efforts to qualify for positions at universities in the United States.

The Quarterly: Is it unusual in South Korea for a CEO to pay so much attention to the talent issue?

Kim Jung Tae: I don’t think so. But even if many agree that it is important to develop talent, few take tangible actions.

The Quarterly: When you moved from a securities firm to a bank, did you notice differences in management style?

Kim Jung Tae: Banks are more conservative and they have a slower pace. In securities, your decisions are all about timing. When I was working in securities, the South Korean trading hours were 9 to 3, and a very large offer would often appear at around 2:50 or 2:55. You had five or ten minutes to give a "yes" or a "no." I don’t smoke now, but back then I did—quite a lot. Five minutes is time to have one cigarette and then your time is up. The next morning, the decision was either brilliant or a failure. If it was the right decision, I’d give the credit to the employee who brought the offer, and, if not, it was all my responsibility. I think that’s the way you encourage your people to strive for better performance.

I’ve found that urgency for quick decisions is an advantage in banking given the speed at which opportunities come and go in these volatile times. When I first joined a bank and asked a question, the answer came back in a month or two. By then, I didn’t remember why I had asked the question in the first place! I’m not saying that a securities firm’s culture is superior to that of a bank, just that the securities industry emphasizes speedy decisions, for the sake of the customer more than anything. It’s not always a "yes," but there has to be a timely answer.

The Quarterly: Are you proposing any performance-management reforms to complement your talent-development programs?

’But it’s not about work; it’s about results, which are significantly different’ from person to person

Kim Jung Tae: I want to introduce a performance-based compensation system that rewards the contributions of individuals. That’s something the labor unions are quite against. I’ve talked with them for months, and they are willing to accept performance-based compensation at the team or unit level but not at the individual level. They argue that all employees in one branch or unit who do the same work do so with the same effort—their best effort—so they should all be paid the same. But it’s not about work; it’s about results, which are significantly different. Focusing on performance at the unit and team level and cooperation among the members of the group are important. But we shouldn’t overlook the fact that some people contribute to that performance more than others.

I’m expecting quite a clash with the unions on this. Recently, I handed their representatives a front-page article saying that even North Korea is introducing performance-based payment systems. I was trying to say, "See the changes in the world?" I will definitely keep trying to increase the portion of our compensation package that depends on the evaluation of individual performance. And we’ll have a very high ceiling for that compensation, both for current employees and for contract-based new recruits once they prove their competitiveness.

The Quarterly: How do those incentives work for your top team?

Kim Jung Tae: On top of the basic salary, we pay a performance-based bonus, at the end of each year, that provides for a huge range in the total compensation each person can get. The bonus ranges from zero to 120 percent of the annual salary for executive VPs and from zero to 200 percent for the CEO. The compensation committee of the board determines the actual numbers. So if the bank’s performance is excellent, there is a possibility of my getting paid twice my annual salary as a bonus and for executive VPs up to 1.2 times. But it’s not just the bonus. If your bonus is zero or close to it, then you’ll probably lose your job.

The Quarterly: What is your view of stock options?

Kim Jung Tae: Despite the US controversies, I still believe that stock options can be a good system. South Korean businesses introduced them relatively recently, and many of the schemes have been failures. But the scope and amount of stock options given out here are still quite limited compared with the United States, and shareholders don’t find them a problem. At H&CB, I worked for three years for the equivalent of one cent and later received compensation in stock options. I think that’s come to represent an image or a hope for young people: if someone works very hard, there will be due compensation for that hard work.

On top of that, stock options have another major symbolic effect. South Korea’s short history of capitalism has too often seen management serving a handful of large shareholders, at the cost of minority shareholders. Not anymore. Management and employees don’t work for just the major shareholders; they work for the shareholders as a whole, and they are evaluated on their contribution to maximizing shareholder value. Stock options represent that approach, and it’s been quite a positive message.

The Quarterly: The personal-reward system implies a need for transparency and accountability. You have said that we are now all like "carp in a glass fishbowl." What did you mean by that phrase?

Kim Jung Tae: People at the bank get tempted to cross the line for small things. If there is a little bit extra that would help them meet a target, people might want to invent that little bit, even if it is cheating. What I wanted to say by this phrase was that, first of all, our systems at headquarters are accurate enough to detect all those little bits out in the branches. But transparency and honesty are also musts for the survival of the organization, and I want Kookmin Bank to be a synonym for transparent management in South Korea. We will be transparent internally about individual performance and transparent to our employees, customers, and shareholders about the bank’s performance.

The lack of transparency is a serious issue in South Korea. Because of Enron and the other cases, some people strongly criticize US-style management and accounting systems, but I think that’s quite wrong. It’s not right to criticize the whole US system for the wrongs of a few people. Rather, we should work even harder to raise transparency levels in South Korea. As one part of that effort, Kookmin has a scheme to offer lower borrowing rates for South Korean companies whose corporate governance is transparent. In addition, South Korean companies with less than 7 billion won ($5.7 million) in assets are not required by law to be audited, but if they do so voluntarily Kookmin Bank will pay up to 70 percent of the cost for companies to which we lend money.

The Quarterly: What are you actually looking for when you talk about "transparency"?

Kim Jung Tae: Transparency both in accounting and in the decision-making process. The challenge now is to come up with the most effective way of evaluating corporate governance—an evaluation that will in turn drive better governance.

The Quarterly: Did transparency have a role in the merger between Kookmin and H&CB?

Kim Jung Tae: I believe that the most important factor in making a merger successful is gaining the agreement or the support of both organizations—the creation of goodwill and trust. In our case, after being CEO of H&CB, I was especially keen to gain the support of the Kookmin employees. So a week after the announcement of the merger, I started to go around the country to have dinners and meetings with them. I explained the strategy, the vision, what I wanted to do with the two banks. Over five weeks, I personally talked with about 6,000 employees, mostly in groups of 25 to 50, or roughly half of Kookmin’s employees. This personal approach—meeting with them, talking to them, explaining my objectives to them—worked very effectively to eliminate the resistance they had, especially against me, the leader of the other bank.

The Quarterly: Have you continued that personal approach?

Kim Jung Tae: I still try to have such meetings once a week. Last week, in two meetings, I met about 200 bank employees from seven branches of the original Kookmin Bank. Usually I start with a short presentation or talk on our vision, our strategy, and what management will be doing in the future. Then I have dinner with them over glasses of soju.¹

I think this has played a pivotal role in eliminating clashes between the two groups of people and enabled the merger to proceed quietly and to gain momentum. For example, we took the relatively risky approach of choosing one of the two existing IT systems rather than trying to integrate them both. And as expected, there was a lot of resistance, with the labor unions running ads in the daily papers against this course of action. But thanks to the dialogue approach I have taken, we were able to move quickly and with surprisingly few problems.

Many people said that this merger would be the most difficult merger in history, but it’s coming along quite smoothly. Employees from the two banks are now working with each other in the same offices; we’re rotating people around; the headquarters have been merged; the regional headquarters have been merged. There is no sense of people being divided into two groups. You could say that we’ve overcome the cultural differences between two organizations or just that we’ve acknowledged our employees. You have to go out into the field and meet these challenges face-to-face.

The Quarterly: How have you managed the always difficult issue of reducing headcounts?

Kim Jung Tae: We have announced that there will be no forced reduction in the number of employees. Of course, many employees do not believe that. Their doubts are not groundless: while I was CEO of H&CB, I did fire about 3,000 people in one go. However, we will be able to handle any necessary redundancies with voluntary early-retirement packages, and the union has no objection to that.

The Quarterly: What did you do to maintain revenues throughout the merger?

Kim Jung Tae: Before the merger, the H&CB Bank and Kookmin Bank had to be mindful of what the other would do. Neither of us had much pricing power. But after the merger . . . well, let me give you an example.

’When the Bank of Korea was trying to raise the loan interest rate, I said I would not,’ and rates fell

Kookmin has been issuing the Kookmin Bank debenture for quite a long time, but now we are able to offer a yield rate for this bond that is lower than that of the government-owned banks; our bond has higher credibility in the market. We have such market power not only in bonds but also in deposit and loan interest rates. When the Bank of Korea was trying to raise the loan interest rate, I said I would not, and the market interest rate actually went down. That pricing power brings about better net interest margins, lower lending costs, and higher asset-management income, all of which increased revenues after the merger.

The Quarterly: Is there anything in the merger you might have done differently?

Kim Jung Tae: We could have reduced the chaos of the first few months had we clarified the roles of the new chairman and president² when we announced the merger. But for the first megamerger in South Korean banking, we settled things pretty well.

The Quarterly: Your strategy is to provide all retail financial services. How will you do so?

Kim Jung Tae: That depends on the product line. For insurance, I don’t think Kookmin has enough internal capabilities, so we need an alliance with a major global insurance player. The same is true for investment banking. For securities, the alternatives we are studying include teaming up with a South Korean securities company or acquiring a major South Korean player and expanding the business with the same retail focus. Since South Korean securities firms are quite well developed, I don’t see the need for an alliance with a global player. Asset management will involve a more "open-architecture" approach: even though we currently sell ING’s products, we also sell Templeton’s because the key to asset management is the variety of products you can offer, and we will continue to look for the world’s best. UniCredito of Italy offers us a good model for a "multispecialist" bank.

The Quarterly: Do you expect cross-border banking mergers in Asia?

Kim Jung Tae: I believe there will first be a series of mergers within South Korea. Currently, there are 20 or so banks here, but the optimum number of financial groups—covering banking, securities, and insurance—may be three to five. The market is too small to support many niche players. If IT demands and costs continue to increase, then there could be fewer players still. Fortunately, we acted earlier than others and intend to intervene in the market again if that is necessary to secure our share of the pie. We can even drive the market in that direction.

In Southeast Asia and China, we are looking at the options for mergers or strategic alliances with local banks or for entering those markets ourselves. I am not considering a go-it-alone strategy for China, as the risk in that market is so huge. But if we do expand to other countries, retail banking will be the focus. Our competitive edge is in retail, and that will remain the source of our success.

The Quarterly: Do you think that your approach to quick decision making and to spending time with employees will survive at the bank after you leave?

Kim Jung Tae: It will not be easy at all for the bank to go back to the old system. The staff will have become used to working in a self-motivating environment. And anybody doing business in South Korea should remember that it is a society of "affection": you have to be open-minded with your employees and have candid conversations with them.