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LG Electronics vice president Koo Kwang-mo

The LG Group plans to launch a full-scale transition to a new management system centering on fourth-generation ruling family member and LG Electronics vice president Koo Kwang-mo, 40, following a funeral for late chairman Koo Bon-moo on May 22.

While the reins for the global corporation with over 160 trillion won (US$148 billion) in annual sales are being passed from a 23-year veteran to a comparative newcomer who is just 40 years of age, the shift has not caused any major tumult or backlash within the group to date. Business world observers attributed this to LG’s tradition of “eldest son succession,” along with the equity structure of collective family ownership and early-established holding company system backing it up.

LG’s rule of favoring eldest sons in its management succession has been firmly in place since second-generation ruling family member and honorary chairman Koo Ja-kyung became group chairman in 1970. Koo Bon-moo, who took over as third-generation chairman a quarter-century later in 1995, received his group management authority as the eldest son, as has fourth-generation leader Koo Kwang-mo this year.

When LG founder Koo In-hwoi passed away in 1969, his younger brother and partner, Lucky Chemical president Koo Chul-hwoi, famously stepped down from management, nominating his oldest nephew, then-Goldstar vice president Koo Ja-kyung, to serve as group chairman.

The reason LG adheres to its pre-modern “primogeniture” approach is closely tied to its unique equity structure. As of late 2017, 46.65 percent of LG (the group’s holding company) was owned by Koo Bon-moo and 30 “special relations.” Half of the holding company’s equity – not including the LG Yonam Institute and Yonam Cultural Foundation – sits in the hands of the late chairman (11.28 percent) and 29 members of the owning family, including four first cousins or closer and six second cousins or closer.

In addition to his adopted son Koo Kwang-mo (6.24 percent), they include widow Kim Young-sik (4.2 percent), father and honorary chairman Koo Ja-kyung (0.96 percent), younger sister Koo Hwon-mi (0.79 percent), aunt Koo Ja-young (0.35 percent), nephew Koo Hyung-mo (0.60 percent), and brother-in-law and Klean Nara chairman Choi Byung-min (0.34 percent). Through the LG holding company framework, they effectively co-govern 70 affiliates and subsidiaries, including LG Electronics, LG Chem, and LG Household & Health Care.

It’s a form of collective family ownership and mutual controls that is not found in other groups: by maintaining a line of succession through eldest sons, it heads off the possibility of infighting for management authority, as with the “brother wars” seen at other chaebol groups. In addition to the collective ownership system, another means of defusing potential discontent with the primogeniture system exists in the form of spinoffs for younger siblings, including LS, LIG, and the Heesung Group.

The LG example contrasts with the Samsung Group, where Lee Yu-jeong, eldest daughter of founder Lee Byung-chull’s daughter Lee Deok-hee, is the only “special relation” at de facto holding company Samsung C&T besides family members and corporations directly connected to Samsung Electronics vice chairman Lee Jae-yong.

In the case of the Hyundai Motor Group, chairman Chung Mong-koo (6.96 percent) is the only special relation at Hyundai Motor – the pinnacle of the group’s ruling structure, which otherwise is owned by majority shareholder Kia Motors and other corporations.

“LG has its primogeniture rule in place, but it also has a structure where the entire family owns the group together,” explained CEO Score president Park Ju-gun.

“They view the company as a family thing rather than an individual’s possession. LG doesn’t have a ‘winner takes all’ system, and that seems to be the reason it has less battling for management rights than other corporations,” Park said.

The holding company system, introduced by the LG Group in 2003, has also served to drastically reduce the variables potentially complicating the management succession. Whereas groups with complex ownership structures and circular equity investment like Samsung and Hyundai Motors have experienced intense frictions as power has passed to the third generation, the simpler governance structure at the LG Group has resulted in the fourth-generation management transfer raising no serious issues beyond inheritance tax payment.

“At LG, they don’t overthink things. If you have a lot of holding company shares, you can exercise management authority,” a business world source said.

“Basically, there’s no issue as long as you pay your inheritance taxes,” the source said.

In his book “Manage by Numbers 3,” Seoul National University business professor Choi Jong-hak writes, “After the experience of the 1997 foreign exchange crisis, the LG Group transitioned to a holding company system to improve its soundness as a corporation and boost competitiveness.”

By Choi Hyun-june, staff reporter

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