Industrials

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

How does a government investigate family empires that it partly owns?

The answer probably is: not very well.

The heads of South Korea's nine top chaebol conglomerates, including the Samsung Group, are being hauled in for questioning by parliament Tuesday to address the millions of dollars of donations they gave foundations controlled by President Park Geun-hye's long-time friend, Choi Soon-sil.

This will be the first time all the executives, usually a publicity-shy bunch, have been brought before the National Assembly as a group.

It might be a mistake, however, to assume that this roundup -- or recent raids on chaebol companies -- signal significant change for the dynastic structures. South Korea's conglomerates are no strangers to anti-corruption probes, so it's a safe bet the firms and their founding families will outlast this political scandal.

Indeed the government, a major indirect shareholder in the chaebol, may lie at the heart of the problem.

South Korea's $465 billion National Pension Service made headlines worldwide last year when it supported a merger within the Samsung group over the objections of an activist holder, Elliott Associates LP. The combination tightened heir apparent Jay Y. Lee's grip on the country's biggest conglomerate.

Offices of both Samsung and the pension fund were raided last month. The fund's tentacles are everywhere -- it owns 9.3 percent of Samsung Electronics Co., the crown jewel of the empire, and 8.4 percent of Lotte Chemical Corp., part of the Lotte Group, for example.

Family Ties
South Korea's National Pension Service owns stakes in many publicly traded chaebol units
Source: Bloomberg

It's because of the government's relationship with some of the country's top companies that investors in South Korean stocks are unlikely to see a way out of the so-called Korea discount. That exists because of years of poor corporate governance at the chaebol, which dominate the economy.

The companies and their complicated cross-shareholdings have been dogged by allegations of corruption since the 1970s, when Park Chung-hee, father of the current president, helped set up the chaebol and led South Korea to a so-called economic miracle built on manufacturing and exports.

The Korea Discount
South Korea's benchmark index trades at a lower price-earnings multiple than many of its peers
Source: Bloomberg

As South Korea's economic growth slows, the pressure on the chaebol to change and innovate should be immense. Already, Hanjin Shipping Co.'s fleet has shrunk to one-tenth its former size as the company struggles in receivership; Lotte Group is under investigation for corruption; and Samsung Electronics needs to find avenues for growth amid global recalls of phones and washing machines.

With the government so tied to these corporate empires, investors should worry that the latest scandal will shake the system up too little, rather than too much. The Korea discount may live on.

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

  1. The nine are Samsung Group, Hyundai Group, Lotte Group, LG Corp., SK Group, Hanhwa Group, Hanjin, CJ Corp. and GS Group.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net