Calls for government-led reform of chaebol gaining steam

Posted on : 2017-09-17 20:05 KST Modified on : 2017-09-17 20:05 KST
South Korean conglomerates seen as reluctant to make internal changes
Samsung Group Vice Chairman Lee Jae-yong is led away to the prison bus after receiving a five year prison sentence on various bribery and corruption charges from the Seoul Central District Court on Aug. 25. (Photo Pool)
Samsung Group Vice Chairman Lee Jae-yong is led away to the prison bus after receiving a five year prison sentence on various bribery and corruption charges from the Seoul Central District Court on Aug. 25. (Photo Pool)

Samsung Electronics vice chairman was sentenced to five years in prison last month in his first trial on bribery charges. It was the first example of actual prison time for a member of the Lee family that controls South Korea’s leading chaebol.

“With their demands to put an end to old vices, the citizens who took to the streets in the candlelight protests realized that government-business collusion was at the root of them,” said Seoul National University Graduate School of Public Administration professor Park Sang-in.

“Lee would most likely not have gotten prison time had it not been for ‘Park Geun-hye/Choi Sun-sil-gate,’” Park added, referring to the government interference scandal that sparked the demonstrations. Lee’s sentence could also be seen as evidence of the social climate facing South Korea’s chaebol, with widespread demands for fundamental governance structure reforms and an end to government-business collusion.

The Moon Jae-in administration has issued powerful calls for chaebol reform as demanded by the candlelight revolution. Blue House Chief of Staff for Policy Chang Ha-sung and Fair Trade Commission head Kim Sang-jo have been noted proponents of chaebol reform since their time as academics. Kim in particular has stated since becoming FTC chief that he plans to take the scalpel to the chaebol himself if they don’t attempt their own reforms by the end of the year.

It’s an inflection point for the chaebol. Their founders, and the second generation of chairmen taking over for them, built immense influence over the rapid growth period from the post-Korean War era to the 1990s. But as the third and fourth generations begin taking over, they are faced with calls for increased social responsibility and transparency in corporate management. The new administration is also planning its own chaebol reforms, including amendment of the Commercial Act to give stronger independence to outside directors and auditors and the Fair Trade Act to step up regulations on funneling practices.

Yet signs of actual change at the chaebol have been hard to spot. Samsung continues to operate under Lee’s management – even from behind bars. An executive at one Samsung affiliate said Lee “apparently meets often with presidents of major affiliates and staff from the former Future Strategy Office.” Other chaebol have continued observing currents, including the FTC’s attempts to conduct a full inspection of internal transactions at large business groups, but show no attempts at change.

“It’s situation where there are no other factors influencing a change in governance structure, so now they’re watching to see how the government goes about things like beefing up requirements for holding company establishment,” said an executive at one of South Korea’s top ten groups.

The chaebol’s desire to continue handing down the management reins within the family also continues unabated. In the US and other advanced economies, professional manager systems became established as the mainstream by the second to third generation – but among the chairmen of South Korea’s chaebol, there is a widespread mentality that the company is “theirs,” and that it is only right to want to “leave it to their children.” Some analysts claim the “owner-management” approach still works as a driving force for South Korea’s economic growth, thanks to fast decision-making and generous investment.

But there is also a price to pay to maintain the system. The current Inheritance Tax and Gift Tax Act makes it all but impossible to hand down ownership of a company legally. Various loopholes are exploited – and laws sometimes broken – to circumvent the terms and keep ownership and management authority within the family. Perhaps the most prominent example is profit funneling, a practice that blocks growth for small and medium businesses and erodes innovation capacities for the economy as a whole.

The companies’ insistence on dynastic succession means a strong likelihood of more leaders finding themselves on trial like Lee Jae-yong, or episode like the “brothers’ feud” at the Lotte Group. Apart from Lotte CEO Shin Dong-bin and Doosan chairman Park Jeong-won, most of the third and fourth generation chaebol family members still have not inherited large shares. Vice chairman Chung Eui-sun performs the role of heir-apparent at Hyundai Motor, but still has not received equity. LG managing director Koo Kwang-mo, Hanwha director Kim Dong-kwan, and Hyundai Heavy Industries senior vice president Chung Ki-sun are in a similar position despite being acknowledged as successors. At SK and CJ, the younger generation is still too young to take over any positions, let alone a stake.

“Hanwha, Hanjin, and Hyundai Heavy Industries are the main places at a risk of overreaching,” said Kang Jeong-min, a researcher with Solidarity for Economic Reform (SER).

In the past, chaebol have tended to accept a bit of stormy weather. Early this year, SER analyzed the governance structure reform plans issues by Hyundai Motor, Doosan, SK, and others after the chaebol stirred up social controversy with illegal actions.

“It was enough to give the sense that they were aimed at getting through their current situation – placating public opinion or getting controlling shareholders pardoned – rather than actually improving the governance structure,” the SER report said. For this reason, calls for greater chaebol reform action from the government are gaining steam.

“The Moon Jae-in administration was able to come to power thanks to the candlelight demonstrations. If it doesn’t take advantage of this opportunity, the only option is to go back to the past,” said Park Sang-in.

“Unless there is chaebol reform, we could see an economic crisis due to accumulating underperformance by chaebol,” Park predicted.

Startup Alliance Center director Lim Jung-wook stressed the need for reforms to improve company competitiveness.

“In overseas markets where there is intense competition, companies that transfer management authority only to their flesh and flood face immediate failures, and the shareholders make their voices heard right away,” he said. “They can’t handle it.”

As an alternative, KAIST Graduate School of Business professor Chang Sea-jin suggested separation of chaebol ownership and management.

“If the family holding the majority of shares changed their mindset, they could do something along the lines of the Wallenbergs in Sweden or the Tatas in India, where they entrust management to professional managers while owning the companies through nonprofit foundations,” he said.

Mars, a maker of chocolate and pet food that is among the world’s biggest food companies, has followed a similar path in a more than century-long history since its 1911 founding.

“The fourth generation of the founding family has set up a board of directors to make decisions on things like mergers and acquisitions, while their role is mainly to travel the world sharing the company’s vision and philosophy with employees,” explained Mars Korea executive director Kim Jong-bok.

“Management duties are handled by a professional manager who emerges from the company’s internal succession program to become CEO,” Kim said  

By Lee Wan, staff reporter

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