Benefits of Chaebol-bashing

If there is one thing that Korea’s three presidential candidates can agree on, it’s the need for “economic democratization.” That’s the trendy term for the reform of the country’s family-owned conglomerates, or chaebol.

Chaebol-bashing has been around as a popular political issue since at least the early 1990s, but it has gained more traction among voters and politicians following the 2008 global financial crisis.

The mounting criticism against the chaebol reflects a public backlash over the perceived favoritism of the Lee Myung-bak administration toward big business, which has increased its local economic dominance as a result of the government’s stimulus measures.

Many Koreans believe the recent expansion of the chaebol have come at the expense of small business, while widening the income gap between rich and poor. While ordinary workers struggle to make ends meet, tycoons that have broken the law are given presidential pardons.

Korea’s economic downturn has sharpened the debate. Business associations such as the Federation of Korean Industries argue that it is the wrong time to try to clip the wings of the chaebol when both global and domestic demand is weakening. Eroding the power of such industrial pillars as Samsung Electronics or Hyundai Motor would damage the export-led economy, they claim.

Chaebol critics, such as presidential candidate Ahn Cheol-soo, say that the current economic downturn underscores the need for chaebol reform. The might of the chaebol has stifled the development of innovative small businesses that are needed to reshape the economy for future growth. If they were reined in, it would clear the way for the rise of more next-generation companies like Internet search engine leader NHN Corp. or Ahn’s antivirus software firm.

There are merits in the arguments of both sides. A wholesale restructuring of the chaebol would certainly disrupt the economy, but the chaebol also need to become more efficient and less power-hungry.

One good place to start the transformation of the chaebol is corporate governance. The scale of the problem was highlighted in a recent annual report by the Asian Corporate Governance Association and CLSA, a securities firm.

The report, which received little media attention here, ranked Korea at 8th in terms of corporate governance among the 11 Asian countries surveyed. Only China, the Philippines and Indonesia had more dismal records.

The report was scathing in its criticism of the chaebol leadership on the issue, noting that the conglomerates remain “largely indifferent to pursuing voluntary, bottom-up change. Even as an increasing number of Korean companies grow into world-class enterprises, their governance standards and practices continue to lag considerably behind those of their global peers. To wit, we cannot name a single prominent Korean businessman who champions the (corporate governance) cause in public discourse and aspires to be a leading light for change.”

Despite the criticism that has been heaped on President Lee for his allegedly pro-chaebol policies, the report gave good marks for the government’s push for corporate governance measures that have resulted in Korea gradually climbing up the survey rankings in the last two years ago.

It noted that the government has made proposals that would require that company boards have a majority of outside directors, while it has toughen restrictions on insider trading. Enforcement of current laws has improved such as the conviction and jailing of the head of Hanwha Group in August on embezzlement charges.
The government is being given credit for its suggestion that the National Pension Fund, the massive $300 billion state fund, should use its considerable voting power to demand better corporate governance. The NPS is often the biggest shareholder in large listed Korean companies.

Such pragmatic measures would benefit minority shareholders in chaebol companies by leading to increased dividend payments and a rise in share prices. Poor corporate governance has been blamed for the fabled “Korea discount” on local shares, which means they are undervalued despite strong corporate fundamentals. A resulting boom in the stock market would help revive domestic demand and economic growth.

The key question is whether the momentum for chaebol reform movement will last beyond the current election season. Public pressure for action by the next government will ease since there will be no new national elections until 2016 when parliamentary polls will take place.

There is little doubt that if either of the liberal candidates, Ahn Cheol-soo or Moon Jae-in, is elected president, they are likely to pursue chaebol reform. What is more interesting would be the election of conservative candidate Park Geun-hye, whose father encouraged the development of the chaebol system when he ruled Korea between 1961 and 1979.

Her campaign, like those of her rivals, supports the idea of ending the circular chaebol ownership structure that allows the founding families to control the business groups through indirect voting rights. If the proposals are implemented, it would have a profound effect on the future shape of Samsung and Hyundai. Will Park have the courage to take this significant step or else decide in the end that reform can only go so far and the current chaebol system must be accepted as the traditional Korean way of doing business? <The Korea Times/John Burton>