Management

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

South Korea has a love-hate relationship with its chaebol.

With their opacity, corruption and dominance of national life, the sprawling family business groups that account for as much as 80 percent of gross domestic product look like they've stepped out of a Dallas-style soap opera.

Indeed, the word "chaebol" serves as a nickname for the charming, caddish Christian Grey characters who set local pulses racing on Korea's home-grown K-dramas. They're often as much admired as hated: About 54 percent of the population thinks the government shouldn't pardon senior business figures who get in trouble with the law, according to a Gallup Korea survey last July -- but 35 percent thinks it should.

That makes the arrest of a sister of Lotte Group's chairman on bribery and embezzlement charges Thursday as much a story for the gossip columns as the business press.

More than that: The business community needs to stop worrying about Korea's chaebol. For all their sleaze, there's precious little evidence they're holding the country back.

Boom
South Korea has gone in a generation from an emerging market to the brink of overtaking older rich countries
Source: World Bank
Note: Shows GDP per capita at purchasing-power parity.

South Korea, after all, vies with China for the status of greatest economic success story in living memory. In 1970 it was poorer than Swaziland; in 2015, it was richer than Spain . While it's hard to demonstrate that this growth occurred as a result of the chaebol , it's equally hard, in the face of such an achievement, to argue that they represent a unique handicap.

Certainly the chaebol are embarrassing, and it would be nice if they were less flamboyantly corrupt. Chey Tae-Won, chairman of SK Group, spent two years in prison for embezzlement before being pardoned last year. Samsung Electronics Chairman Lee Kun-Hee, Hyundai Motor Chairman Chung Mong-Koo and former Hanwha Group Chairman Kim Seung-Youn have also received presidential pardons. The feuding within Lotte's Shin family is worthy of a Jeffrey Archer novel. But the focus on chaebol families vastly overstates the importance of corporate leaders in the performance of economies, and even their own businesses. 

Western CEOs like to believe that their decisions are crucial to the success or failure of their organizations -- how else to justify those C-suite compensation packages? But there's a dearth of evidence to prove that's the case. Indeed, a 2014 analysis by Bloomberg Businessweek showed almost zero correlation between CEO pay and shareholder returns.

While the chaebol's shenanigans are a bad look, the families are ultimately little more than a tarnish on a fundamentally strong economy. Korea's strengths are its education system, appetite for hard work, and industrial creativity. Measured by patent filings per head of population, it's comfortably the most innovative country in the world.

Innovation Engine
South Korea leads the world in terms of patent filings per million population
Source: World Intellectual Property Organization

The chaebol are more of a problem for investors. The lack of say in corporate decision-making helps explain the "Korea discount" -- the tendency of local companies to trade at lower valuations than peers elsewhere. Still, those discounts may mean bargains. Korean companies are profitable, with returns on equity in the Kospi index ahead of the FTSE-100 and Euro Stoxx 50 and only narrowly behind the Nikkei 225, despite its lower price-earnings ratio. 

Cheap at the Price
South Korean companies aren't highly valued by investors, but they're pretty good at turning a profit
Source: Bloomberg
Note: P/E ratio is for blended forward 12-month earnings.

That sounds like an opportunity for activist investors ready to sweat for their profits, as Daniel Loeb's Third Point is showing in Japan or Indus Capital and iMeigu Capital in China. The discount reflects pessimism that outside investors will get their fair share of returns, but cracks in the chaebol model aren't unheard of. Samsung announced a $10 billion share buyback and sharply raised its dividend payout last year in the face of a campaign by Elliott Associates.

Be My Baby
South Korea's fertility is just a fifth of what it was in the early 1960s
Source: World Bank
Note: Shows total births per woman.

The real worry for investors shouldn't be the warring families of the chaebol, but the ever-shrinking families of everyday Koreans. The country's fertility rate is barely a fifth of what it was when family minister Kang Eun-Hee was born in 1964. The government has taken a leaf from Singapore's book and offered matchmaking services.

Long working hours and an assumption that household tasks should all be done by women are holding the country back, President Park Geun-Hye, the country's first female elected head of state, said in a speech in December. That should be a much bigger worry than the People magazine-style scandals at the chaebol: At the current birth rate there'll be no Koreans left by 2750.

--With assistance from Nisha Gopalan

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The 1970 data is measured in nominal GDP, the 2015 data in purchasing-power parity GDP per capita.

  2. Although that was the more-or-less explicit purpose of Korea's dictator Park Chung-Hee, the father of current President Park Geun-Hye, in encouraging their growth.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net