Government support is to corporations what milk is to a baby

Posted on : 2016-05-01 17:14 KST Modified on : 2019-10-19 20:29 KST
In South Korea there’s a history of poorly managed corporations treating government assistance like free money

“It’s like taking the milk away from a nursing baby.”

Standing at an Apr. 1997 National Assembly hearing after revelations concerning nonperforming loans, then-Hanbo Group chairman Chung Tae-soo placed the blame for his group’s bankruptcy on a financial community and government that cut off its “milk” - namely financial support.

Having broadened its project scope under preferential government treatment, the group then faced a collapse that threatened the survival of numerous partners businesses and small merchants. Meanwhile, the national credit standing was in free fall. The South Korean government was in the position of having to clean up by providing funds for the group’s dismantling.

Yet Chung - now 93 and living in exile overseas - was ultimately released before serving even half of his 15-year sentence on bribery and embezzlement charges. The suspended sentence was based on his “poor health,” including hypertension. In 2002, he was granted a presidential pardon. Two years later, he was back on the takeover battlefield, intent on “reclaiming” management rights to Hanbo Steel.

Recently, a controversy has erupted after revelations that the family of Eusu Holdings chairperson Choi Eun-young sold off shares in Hanjin Shipping - where she was also previously chairwoman - ahead of a restructuring there that appears likely to result in government-run bank losses. It’s a situation that epitomizes moral hazard: the family minimizing its own losses over a management failure that is certain to do major damage to shareholders and investors, and likely to require the spending of public funds to fix.

The situation also means South Korea has failed in the measures taken since the 1997 foreign exchange crisis to check recklessness and moral hazard by business leaders with different measures to improve corporate governance structures, including the introduction of the outside director system. One of the reasons similar situations have kept happening with major shareholders since the crisis is apparently because the South Korean government has failed to hold owners and managers fully accountable for leading their businesses to failure prior to pursuing restructuring.

Statements by former Daewoo Group chairperson Kim Woo-choong testify to the attitude owners and managers hold toward corporate failures. The Daewoo Group was dismantled in 1997 after revelations of accounting fraud and illegal loans. In the process, the South Korean government spent some 30 trillion won (US$26.2 billion) in public funds alone. Yet as leader, Kim never apologized for the damage the management failure caused to South Korean society.

“I hope that what I have done and said will be judged fairly by history,” he said in 2014.

After his group was taken apart, Kim began making plans to flee South Korea. By 2006, he had been sentenced to prison time on charges of accounting fraud and embezzlement. The following year, he was granted a presidential pardon.

Other examples show moral hazard at work in the restructuring process - an arrangement where companies accept taxpayer bailouts in exchange for a promise to pay it back later. In 2010, the Kumho Group faced crisis and was forced into restructuring procedures after its ruling family started a battle over management rights. Major affiliates Kumho Petrochemical and Asiana Airlines entered voluntary agreements for creditor management, while financial regulators and creditors - chiefly government-run banks - agreed to guarantee the management authority of the majority shareholders, chairman Park Sam-koo and his family, for a minimum of three years. The deal came under heavy criticism from the group Solidarity for Economic Reform, which released a statement saying the creditors had “compromised by promising to maintain the group’s management rights to appease an owning family that refuses to comply with restructuring demands.”

Fixing the situation may require correcting the distorted perception among South Korea’s business community that restructuring is equivalent to free financial assistance from the government. The argument is that responsibility for company failures should be borne by majority shareholders, regular shareholders, and creditors - in that order - and that the government spending should be confined to restructuring in terms of staff reassignments and similar measures. Critics are also calling for an end to the practice of company owners and managers making donations from their fortune and then regarding their responsibility as having been met.

By Kim Sung-hwan, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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