hankyoreh

While some large conglomerates, such as Samsung and Shinsegae, announced they will establish a more transparent management transfer system, many Korean companies are still not freed from suspicions of illicit wealth transfer. Although it is natural for the company head's shareholdings to be weakened after a series of transactions to pass control to heirs, they are still trying to maintain grip on their sprawling conglomerates through unorthodox measures or by using other family members to hold shares among their affiliates. Currently, the time is approaching for the succession of managerial control among these large firms, or chaebol, as the third generation is set to inherit what the second generation inherited.


Maintaining grip through cross-shareholdings


Doosan Group, which just marked the 110th anniversary of its foundation, employs a so-called ‘dispersed ownership system’ that allows the group’s founding family members to share small portions of stocks in each affiliate. The founding family’ shareholdings were scattered after Doosan Group’s third honorary chairman Park Yong-gon passed the group’s control to heirs. Doosan Industrial Development is 1.14 percent owned by Park’s eldest son, Park Jung-won, 0.75 percent owned by Jung-won’s brother, Park Ji-won, who is a vice president of Doosan Heavy Industries and Construction, and 0.83 percent owned by Park Jin-won, son of former Doosan Group chairman Park Yong-sung and an executive vice president of Doosan Infracore. In this case, shareholdings of chaebol family members were reduced as they divvied up stocks to heirs, sold new shares and paid inheritance taxes. So, to keep control resting in its founding family¡?s hands, chaebol owners thus allow members to own each subsidiary’s largest stake.


Family members holding Doosan Industrial Development control Doosan Corp., which controls Doosan Heavy Industries and Construction. In turn, Doosan Heavy Industries and Construction controls Doosan Industrial Development.


Another stereotype of this kind of practice is the Dongbu Group. Dongbu Hannong Chemicals controls Dongbu Fine Chemical, which controls Dongbu Steel. In turn, Dongbu Steel controls Dongbu Hannong Chemicals. Dongbu Group chairman Kim Joon-ki owns a 14-percent stake in Dongbu Fine Chemical and Kim’s son, Kim Nam-ho, has a 21.1-percent stake in Dongbu Fine Chemical, the result of steady stock transfers. Kim Nam-ho, 31, who is now a student in New York, is a de facto owner of Dongbu Group.


Illicit transfer, inheritance deals


Owners of Samsung and Hyundai Motor have been accused of transferring their wealth and management by selling shares of non-listed affiliates at below-market prices to their children. Chey Tae-won, chairman of SK Group, gained control of SK Corp. and SK Telecom by buying shares of non-listed affiliate SK C&C at below-market prices.


The KCC corporation, which is currently passing control from the second generation to the next, is also being criticized on suspicion that its president, Chung Mong-ik, the second-oldest son of KCC chairman Chung Sang-yung, gained a profit windfall by buying a 20-percent stake in a non-listed unit, Korea Auto Glass, at face value. Shinsegae’s vice president Chung Yong-jin, eldest son of Shinsegae chairwoman Lee Myung-hee, was sued by the People’s Solidarity for Participatory Democracy for suspicions surrounding illicit deals in Gwangju Shinsegae. An owner of Hyosung is accused of illegally transferring wealth to his three children via an unlisted unit, Hyosung Construction.


Transition to holding companies


A holding company system has emerged as an alternative when chaebol owners are banned from passing controls of their conglomerates to heirs by other means. At present, 31 companies, including four financial holding companies, were registered as holding companies under the fair trade laws. The 31 holding companies include LG, GS, STX, Pulmuone and Lotte Corp.


LG chairman Koo Bon-moo holds a 10.33 percent stake in the group¡?s holding company, while Koo Kwang-mo, who was adopted as Bon-moo’s son, owns a 2.8 percent stake in the holding firm. (Although Kwang-mo is not a biological son of Bon-moo, he has a family tie with the LG’s founding family.) As Kwang-mo is steadily buying a stake in the holding company, observers in the business circle expect Bon-moo to pass the group’s control to Kwang-mo by allowing him to gain control of the holding company. GS is 5.41 percent owned by chairman Heo Chang-soo and his eldest son, Yoon-hong, is taking a management lesson as an assistant manager of GS Caltex. In late 2004, Dongwon Group chairman Kim Jae-chul split the group into financial and food holding companies and allowed his two sons to oversee management of the two holding firms. In 2003, Nongshim group chairman Shin Joon-ho set up a holding company named Nongshim Holdings and passed the group’s control to his son.


Still in their initial stages, other chaebols such as Hanwha, Kolon, SK, Doosan, Lotte and others are showing signs of transforming their groups into the holding company system. Hanwha Group is considering reorganizing the group into financial and non-financial holding companies. Doosan Group, which has been plagued by a management feud among members of its founding family, announced it will switch into the holding company system in three years. However, concerns about side-effects of the holding company system are emerging. ¡°Current holding company system can be exploited as a tool for chaebol owners to control more affiliates with less capitals with a risk to expand and last forever the chaebol system,¡± said Choi Jung-pyo, an economics professor of Kunkook University.


Along with a transparency of wealth transfers, experts said it should be needed to check the chaebol heirs’ management capability. For heirs of the chaebol owners, it is common for them to become chief executive officers in about 10 years without objective verification. The Hankyoreh found that third-generation heirs of 14 chaebols became executives of their affiliates at an average age of 31. Kia Motors president Chung Eui-sun became an executive vice president in 2001, a senior vice president in 2002, a vice president in 2003 and promoted to the current post in 2005. CJ is also under spotlight. CJ Entertainment¡?s vice president Lee Mi-kyung, sister of CJ chairman Lee Jae-hyun, started her career as an executive in the company in 1998, and promoted to the current post in five years. Other chaebols are not an exception of such high-speed promotions for family members. Management successions among chaebol owners are now underway throughout illicit stock transfers or high-speed promotions for family members.