Yale Grad Fights Families Who Rule Samsung to Hyundai
Stock Chart for Samsung Electronics Co Ltd (005930)
South Korean lawmakers are threatening to weaken the control the nation’s wealthiest dynasties wield over business empires ranging from Samsung Group to Hyundai Motor Group.
Led by Nam Kyung Pil, a group of 24 ruling party members submitted a bill on Aug. 6 to deny voting rights on cross shareholdings, used by families for decades to control industrial groups known as chaebol with only minority stakes. Growing public discontent with their power and the lenient treatment of white-collar crimes may help the legislation pass into law as early as this year, he said.
“Enough is enough,” Nam, a 47-year old Yale University- educated lawmaker, said in an interview in Seoul last week. “People’s resentment toward the chaebol has accumulated over the years and now it’s blown up.”
The bill is a challenge to founding families who’ve weathered past campaigns because it’s being spearheaded by members of a party that controls parliament and is traditionally pro-business, corporate governance researchers said. Korea’s tycoons may need to spend $24 billion boosting holdings or risk ceding control, according to Chaebul.com, a Seoul-based organization that collects information about conglomerates.
“If you strip them of their voting rights, that is a big deal,” said Shaun Cochran, head of Korea research at CLSA in Seoul. “It’s highly significant and could act as a catalyst to create some positive change in Korea’s corporate structures.”
Chae Yi Bai, a researcher at the Center for Good Corporate Governance, a Seoul-based private organization that monitors South Korean business groups, said some form of tougher legislation is likely to pass because members of both the opposition and ruling parties are now proposing bills. If Nam’s plan becomes part of his party’s campaign platform for the Presidential election in December, it will definitely be voted into law, Chae said.
Under Nam’s proposal to the National Assembly, existing cross shareholdings in business groups would carry no voting rights and any further purchase of stock between chaebol companies would be banned. The rules are meant to turn the conglomerates into holding companies, Nam said. The opposition Democratic United Party wants cross shareholdings be banned altogether.
“It might be painful for the heads of the corporations, but if these revisions take effect, there won’t be any more foul play,” Nam said. “A holdings company structure is more transparent and strengthens the group as a whole.”
Officials from the offices of the floor leaders and spokespeople of the ruling New Frontier Party in the National Assembly declined to comment on Nam’s proposal. Frank Ahrens, a spokesman at Hyundai Motor (005380) Co., declined to comment. Samsung Group declined to comment on the bill in an e-mailed response to queries.
Such a law would put pointless pressure on corporations, cause investment to shrink and hamper job creation, the Federation of Korean Industries, the nation’s main business lobbying group, said in a Aug. 6 statement. It has argued that dismantling the current ownership structure would cause chaos and roil the economy.
Count Samsung Group Chairman Lee Kun Hee, South Korea’s richest man, among those who may find such rules painful. The patriarch of the biggest chaebol only owns 3.4 percent of Samsung Electronics Co. (005930)’s common stock and 0.1 percent of its preferred shares, 21 percent of Samsung Life Insurance Co. (032830) and 1.4 percent of Samsung C&T Corp. (000830), according to the Bloomberg Billionaires Index. Yet he controls a collection of 84 companies connected by a maze of shareholdings.
For example, the 70-year-old billionaire is the biggest shareholder of Samsung Life, which owns 7.5 percent of Samsung Electronics, which holds 35 percent of Samsung Card (029780), which has 5 percent of unlisted theme-park operator Samsung Everland, which in turn owns 19 percent of Samsung Life. His son Jae Yong owns 25 percent of unlisted Everland and 0.6 percent of Samsung Electronics.
At Hyundai Motor, Chairman Chung Mong Koo controls the nation’s top carmaker and 54 other companies that make up the nation’s second-largest chaebol through another web of shareholdings. Chung, 74, controls Hyundai Motor through holdings involving Kia Motors Corp. (000270) and Hyundai Mobis. (012330) Those companies also own stakes in group units including Hyundai Engineering & Construction Co. (000720)
Lee Sang Hun, who specializes in chaebol research at Seoul- based HI Investment & Securities Co., said the bill may hamper succession plans for the next generation of South Korean business tycoons.
“The groups will have to take action and shuffle their ownership structures in order to ensure that the owners retain their power,” Lee said.
Scions at Samsung, Hyundai Motor and Hyundai Heavy Industries Co. (009540) would face the biggest challenges to inherit control of their families’ business empires should the legislation pass, said Kim Sang Jo, a professor at Seoul’s Hansung University who also leads Solidarity for Economic Reform, a shareholder activist group. The combined market values of Samsung Electronics and Hyundai Motor alone is 235 trillion won.
“Korea has passed the point of no return, crossed that river, and the debates we have today won’t go away,” Kim said. “But we can’t be certain of an outcome until after the presidential election.”
Chaebul.com estimates it would cost as much as 27.6 trillion won ($24 billion) for the nation’s six-largest conglomerates to reorganize into holding companies, and 10.8 trillion won at Hyundai Motor Group. The Center for Good Corporate Governance estimates the total cost to be about 9.7 trillion won.
While cross shareholdings exist in overseas markets such as Japan, France and Germany, the practice has been perfected by Korean families for retaining control of businesses at a minimum cost, said Chae, the corporate governance researcher.
The chaebol have been under mounting scrutiny in Korea with opinion polls conducted this year by the nation’s two main political parties showing deteriorating sentiment toward them. A Feb. 6 survey showed 62 percent of respondents believed the business groups contributed to the nation’s economic development, down from 70 percent in August 2011.
Nam is also seeking to increase sentences and limit the scope for judges to suspend jail terms for leaders of the chaebol. The heads of Samsung, Hyundai Motor and SK Group have all been convicted of white-collar crimes and all of them received prison terms that were ultimately suspended.
Hanwha Group Chairman Kim Seung Youn, who in 2007 was convicted, then pardoned for striking a man with a steel pipe and threatening others with an electric shock device, was jailed this month for embezzlement. Kim said he plans to appeal the Aug. 16 conviction.
The chaebol weren’t always demonized. Originally modeled after Japan’s zaibatsu conglomerate system, they took a leading role in South Korea after Park Chung Hee seized the country’s presidency through a military coup in 1961 and promoted industrialization through multiyear economic plans.
Though the chaebol helped push through Korea’s industrialization during the following decades, the International Monetary Fund cited their debt-driven practices as part of the reason the economy landed in a financial crisis at the end of 1997.
Tom Coyner, who helps advise foreign investors in Korea as president of Soft Landing Consulting Ltd. in Seoul, said Nam’s anti-chaebol push may be short lived.
“Over the years politicians of various political parties have tried to reduce the near monopoly of the chaebol in the Korean economy but as we’ve seen they’ve always failed,” he said. “It could simply be window dressing for the upcoming presidential election.”
Nam said he’s confident a bill restricting cross shareholding will pass, regardless of which party.
“I predict there will at least be a tight restriction on voting rights over affiliates under the cross shareholding structure,” Nam said.
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