Commentary: The Next Frontier In Remaking The Chaebol

Chaebol reform? What chaebol reform? Good question, given the family feud that went public in late March at Hyundai Group. As two sons of founder Chung Ju Yung vied to install their personal favorites as CEO at Hyundai Securities Co., it was no surprise that Koreans erupted in a very public protest. Neither son sought approval from shareholders or the board of the brokerage. Instead, both sides asserted they had the backing of the elder Chung--who's neither a board member nor a shareholder of Hyundai Securities. Finance & Economy Minister Lee Hun Jai put it best: "It's an old-era evil."

It's a new-era problem, too. President Kim Dae Jung's government has tried to force units of the nation's giant conglomerates to stand as accountable independent corporations. Kim's technocrats can point to some successes, but not much has changed as far as corporate governance goes. The founding families still operate like dynastic powers, though none owns more than 10% of the stock in their empires; the Chungs' share is about 7%. It's not exactly conducive to maximizing shareholder value.

Seoul must now correct a critical error of emphasis. It has focused almost exclusively on reducing corporate debt and cutting capacity. After the Asian crisis hit, Seoul encouraged chaebol chiefs to decide how to swap redundant businesses ranging from auto companies to chip and petrochemical plants. The government also lifted limits on chaebol shareholdings in affiliates.

DYNASTIC INFLUENCE. But not enough attention was paid to outdated management practices. Yes, chaebol units have cut their debt-to-equity ratios to less than 200%, from an average 352% at the end of 1998. But most did so by increasing equity bases, not slashing debt. And the founding families boosted their influence by increasing the cross-shareholding among affiliates. Cross-holdings within the 30 largest conglomerates were worth $32 billion at the end of last June--double the 1997 figure.

So what happened at Hyundai Securities comes as no surprise. Although nobody in the Chung family owns much stock in the brokerage, they have an indirect interest of about 6% via shares in other affiliates. That should not give the Chungs the right to choose the next CEO--though they did. On Mar. 27, the elder Chung tipped his hand in favor of Chung Mong Hun, the younger of the embattled sons. With Chung Mong Koo eclipsed, Mong Hun's man is now established as CEO. "The issue here is the power wielded by founding families," says Hansung University economist Kim Sang Jo, a shareholder-rights activist. "Without tackling governance, you can't expect significant reforms at the chaebol."

The Fair Trade Commission is now moving aggressively against Samsung, Daewoo, LG, and SK for allegedly shifting wealth from healthy companies to weaker ones in need of cash. Hyundai Securities and other financial units were found to have transferred $414 million to affiliates last year via stock manipulation and other illegal means. There were modest fines and suspensions, but the FTC pledges to toughen penalties. It should. "Mild punishments will not discourage violators," says Lim Won Hyuk, a senior economist at the Korea Development Institute, a state-supported think tank.

The larger problem is entrenched management culture. While the chaebol have appointed outside directors to improve transparency, families named most of them. Seoul passed a bill to protect board members representing minority shareholders, but the National Assembly, succumbing to chaebol lobbies, more or less gutted it.

Korea has been too generous with those who bend or break the rules. It needs a clear set of do's and don'ts--and the authority to enforce them.