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Will The Chaebol Let LG Shine?

True, LG Electronics has come far in its quest to break into the top ranks of gizmo makers. It's the world's No. 3 appliance and plasma-TV manufacturer and No. 5 in cell phones. That growing success has translated into record sales and profits. But like so many other members of Korea Inc., LG's ambitions are likely to be hobbled by continuing questions of corporate governance.

To its credit, LG has taken some steps toward reform. In 2003, LG Group set up a holding company -- LG Corp. -- to oversee its investments in LG Electronics and affiliated companies. The move was intended to make it harder for the group's founding family to exert control over member companies through the webs of cross-shareholdings typical of Korean conglomerates, or chaebol. Those webs have long enabled families running the chaebol to quietly transfer funds from healthy companies to weaker ones within the group.

But there's still lots of room for improvement. When LG Card Co., a credit-card issuer that wasn't controlled by LG Corp., ran into trouble last year, the chaebol bailed it out, with LG Electronics kicking in $144 million. All the company's shareholders have to show for that is a fistful of IOUs, and soon some equity in the still-ailing credit-card issuer.

LG isn't the only Korean company with this problem -- and by some measures it's ahead of the game. Founding families of the three other top chaebol -- Samsung Group, Hyundai Motor, and SK -- have 3% or less of total outstanding shares yet exercise over 40% of voting rights. LG Corp. owns at least 30% of each affiliate, so when the family makes a move, at least investors know who's responsible.

More needs to be done. Until LG and the rest of the chaebol clean up their acts and guarantee minority shareholder rights, global investors will continue to apply a "Korea discount" to their stocks. That's when Korean companies get lower valuations than rivals in other nations because investors can't be sure of getting a fair share of the profits. LG Electronics has a bright future. If the folks running the LG chaebol stopped using it to prop up the likes of LG Card, its future would be even brighter.

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