Putting Investors First -- Sometimes

LG Electronics is on its way to becoming a world-class electronics and appliance company. But a world-class investment? That depends on how much progress it makes on the vital issue of governance.

The company belongs to the LG chaebol, or conglomerate. Like most other chaebol, LG is dominated by its founding family -- the Koos and their patriarch, Koo Bon Moo. To its credit, LG -- the country's second-biggest chaebol -- wants to improve corporate governance to attract more international investors to group companies. So in March, 2003, LG set up LG Corp., a holding company headed by Koo Bon Moo that oversees LG Electronics and 16 other affiliated companies.

That move, LG contends, boosts transparency by clarifying the chaebol's ownership structure. Top advisers to South Korean President Roh Moo Hyun even lauded LG's reforms as an example of good corporate behavior. Both the government and LG said the new structure would prevent the chaebol's companies from helping out distressed members of the group -- a common practice before the 1997 Asian crisis, when families running the chaebol would routinely transfer funds from healthy companies to weak sisters.

Then came last year's meltdown at LG Card Co. The company had expanded fast by offering credit cards to millions of households -- and ended up with billions in defaulted debt piled up by overeager consumers. LG Card teetered on the edge of bankruptcy, and a takeover by creditors seemed likely. Even though LG Card wasn't controlled by LG Corp., other chaebol members a year ago coughed up $870 million to bail out the card issuer, including $144 million from LG Electronics. And on Dec. 31, various LG companies agreed to a debt-equity swap to give the still-ailing LG Card even more relief. Such deals "demonstrate the vestiges of old Korea Inc., where collusive government-business ties ignore market principles," laments Jun Sung In, a professor of economics at Hongik University in Seoul. LG Corp. officials say the family lacked the cash creditors wanted as a condition for a rescue and that keeping LG Card afloat would do less damage to the chaebol than letting it fail. LG Electronics declined to comment.

The bailout clearly undermines LG's campaign for more transparency. Yet, hard as it is to believe, LG still scores well on some tests of governance. LG is the only one of the four biggest chaebol that doesn't control dozens of companies through complicated webs of cross-shareholdings, according to a Korea Fair Trade Commission study. At the other three top chaebol -- Samsung, Hyundai Motor, and SK -- the founding families have 3% or less of total outstanding shares but exercise 41% to 52% of voting rights. At LG, by contrast, the holding company owns at least 30% of each subsidiary. That means the influence of the Koos -- who own 51.5% of LG Corp. -- is more transparent. The result, obviously, is mixed. "The holding company structure closed some loopholes, but it by no means ended governance problems," says Phillip Lim, an economist at Korea Development Institute, a state-financed think tank in Seoul.

Such concerns are the bane of Korea Inc. Korean companies are subject to a "Korea discount," which values them less richly than rivals in countries with laws that better protect small shareholders. These concerns carry over to LG Electronics. The company's p-e is 7.6, vs. 11 for Samsung Electronics (which is more profitable and hasn't made any suspicious looking deals recently) and 21.7 for Motorola (MOT ).

Brand image, it seems, is just as important for investors as it is for cell-phone buyers.

By Moon Ihlwan in Seoul

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