Korean chaebol face structural overhaul; Large firms urged to decentralize management control

2013-02-26 18:31

Chaebol face structural overhaul

Large firms urged to decentralize management control
By Kim Tae-jong

President Park Geun-hye Monday reaffirmed her will to facilitate “economic democratization” during Monday’s inauguration speech. To some corporate owners, this is obviously a warning sign, as she is expected to take a hardline stance on unfair business practices among the nation’s family-controlled conglomerates or chaebol.

Experts say that the chaebol need to reform their management structure in accordance with the new government in order to survive.

“Things have changed, and conglomerates should also adapt to such changes,” said Hansung University professor Kim Sang-jo. “They can’t go against this new trend.”

He suggested that conglomerates should decentralize their management by reducing their dependency on the owner or his or her family members.

“Since 1997, a number of companies have faced owner risks, as their chairmen were found to be engaged in irregularities. But those that successfully overcame them and reformed their traditional management structure have prospered,” he said.Currently, several dozen conglomerates controlled by a chairman or his or her family members have power over all affiliated operations and have become well-known international brands, enjoying huge profits, thanks to aggressive governmental support.

They are also believed to have contributed to the fast economic growth that saw a war-torn country rise from the ashes to become a global power in just five decades.

Former President Lee Myung-bak also promoted pro-growth policies in favor of big companies and the wealthy, which were later blamed for sacrificing small enterprises and ordinary people, and consequently aggravating social polarization.

But the favoring of big companies has now started to diminish in the name of economic democratization.

The ongoing investigation of Shinsegae Group is one example of a toughening stance among the government and law enforcement authorities on crime and ethical violations committed by chaebol owners and their offspring.

Hanwha Chairman Kim Seung-youn and former SK Chairman Chey Tae-won have received jail terms, although the former is currently on parole for medical reasons.

The sentences handed to the two contrasts with previous lenient rulings.

Seven out of the nation’s 10 largest business group leaders have been put on trial for similar charges over the past 20 years or so. None have been jailed for long because the court either gave suspended sentences or presidents pardoned them in view of their ”economic contribution.”

The recent rulings show chaebol owners can no longer expect such leniency.

With stricter law enforcement, some business heads have given up their seats on the board of their group.

Most recently, Shinsegae Group Vice Chairman Chung Yong-jin gave up his seat on the firm’s board.

Chung’s departure has triggered speculation that he is attempting to evade responsibility for investigations haunting the retail giant, although the group claims his resignation has nothing to do with them.

There is also still strong opposition to strict law enforcement concerning heads of big conglomerates.

“Amid the prolonged economic downturn, it is regrettable that a business leader is imprisoned,” the Federation of Korean Industries said in a statement, after the jail term given to the Hanwha chairman. “The imprisonment of a chaebol chairman could have a great influence on the group and the nation’s economy.”

Another business lobby group, the Korea Chamber of Industry of Commerce, also raised concerns over the imprisonment of business leaders, saying that the ruling may be a letdown for companies that could ultimately disengage from efforts to contribute to society and improve their corporate governance.

But experts say stricter measures can only “tame” chaebol and change their “bad habits.”

“In the past, the government chose to forgive conglomerates for their wrongdoings but now the new government will regulate them properly to prevent them from doing anything wrong,” said Yang Soo-gil, chairman of the Korea Pacific Economic Cooperation Council. “Recent harsh rulings will give the message that there will be no more mercy on them.”

Yang, who also serves as chairman of the Presidential Committee on Green Growth and was a former chairman of the National Strategy Institute, said strict law enforcement will reduce corruption in business and consequently enhance conglomerates’ competitiveness.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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