Chaebol and ‘owner risk’

2014-02-28 17:20

Chaebol and ‘owner risk’

The Supreme Court sent its strongest warning ever to Korea’s family-run conglomerates Thursday, upholding four-year and three-and-a-half year prison terms for two brothers who control the nation’s third-largest chaebol, SK Group.  
For chaebol owners, it must have come as a shocking break from the judiciary branch’s time-honored ”standard sentencing” on law-breaking tycoons ― three years in prison suspended for five years. A top court spokesman said it was different this time because the two embezzled corporate money for ”personal gain.”
That may not be all. The renewed strictness reflects the Korean people’s growing impatience with the wayward behavior of chaebol owners, called the modern noble families, who regard listed firms as their own and often think themselves above the law and institutions.
In the case of SK, an oil refining-mobile telecom giant, Chairman Chey Tae-won ordered his subordinates to send 500 billion won from corporate coffers to his personal ”investment mentor,” Kim Won-hong, whom company officials called the ”don’t-ask chairman,” because of Chey’s absolute confidence in him.
The 140.6 trillion-won conglomerate has of course a board of directors and auditors, both in and outside of the group, but they remained either ignorant or silent even if they knew about it and other aberrations by Chey. The outdated and opaque corporate governance and decision-making system point to increasing ”owner risks,” caused by the inability of or irregularities committed by the second- and third-generation managers of the inherited business empires.
SK has been reportedly missing several opportunities to make massive and critical investments while Chey was in prison for most of the past year, and it will likely remain so for four more years, as ”professional managers” here are by name only.
This also explains why President Park Geun-hye’s chaebol reform policy should not stop at harsh punishment of tycoons committing irregularities.
Of course the legal disciplining of chaebol owners is progress from the past when the executive and judiciary branches dealt with their violations with undue leniency in consideration of their ”contribution to the national economy.”
But Park’s chaebol policy touches only the surface while keeping the substance intact, as the nation’s first female leader has long made it clear that she would not try to reform the basic governance structure, which allows the largest shareholders to control the entire group with just 5 percent or so of equity, by prohibiting cross and circular shareholding.
Unless the government changes the environment that makes such abnormalities and irregularities possible, there will be second or third SK groups in due intervals. And unless President Park reforms not only the surface but the structure, not only chaebol but the national economy will be subject to their ”owner risk.”
SK Group founder, the late Chey Jong-hyun was one of the most globalized and farsighted Korean business leaders, turning his group into a conglomerate of international systems and practices. The deceased tycoon might be turning in his grave for failing to globalize the mentalities of his inheritors.