A Scratch On Hyundai's Paint Job

As a scandal widens, questions about the chairman's sweet deal with an affiliate

On the surface, the arrest of the chief executive of a key affiliate of Hyundai Motor Co. seems to be a classic case of Korean corporate shenanigans. State prosecutors on Mar. 26 raided Hyundai's offices, and have accused Korea's biggest auto maker of using companies controlled by Chairman Chung Mong Koo's family to raise money for illegal political lobbying. Police detained Lee Ju Eun -- the CEO of Glovis Co., Hyundai's auto-shipping arm -- and grabbed computer hard drives and paper documents. Lee has been charged with creating a $7.2 million slush fund, while Hyundai group executives, including Chung's son, Eui Sun, have been barred from leaving the country.

The raid comes as Hyundai has surged to the front of South Korea's corporate pack. The company, like much of Korea Inc., has buffed up its image in recent years. Its well-designed cars today score near the top of customer satisfaction surveys, and have made a big splash in the U.S. Hyundai's shares, which have nearly quadrupled in the past three years, are a must-have emerging-market play for institutional investors.

The Glovis case, though, highlights something investors might be even more concerned about than the allegations of political corruption: the company's ownership structure. In 2001 the Chungs put up just over $5 million to become the sole shareholders of Glovis. Last December the company was listed on Korea's bourse, and today it is worth $1.6 billion, although its stock price has dropped 11.5% since Lee's arrest. The Chungs now own 60% of the company, a stake valued at nearly $1 billion. They have already received some $180 million in profits, thanks to dividends and the 2004 sale of a 20% stake to Norwegian shipping company Wilh. Wilhelmsen.

The reason for Glovis' meteoric rise? Hyundai and its affiliate Kia Motors Corp. gave Glovis exclusive rights to deliver vehicles to customers at home and abroad. In its first year of operation, Glovis posted a net profit of $6.7 million on sales of $203.4 million. By last year its earnings had climbed to $81.9 million on sales of $1.58 billion.


Although this setup is perfectly legal in Korea, it has shareholder rights groups hopping mad. "If a Glovis-type arrangement were made in the U.S., Hyundai board members would have been sued, and the profits made by Chairman Chung and his son would have been returned to the company," says Kim Sang Jo, of People's Solidarity for Participatory Democracy, the pioneer of shareholder activism in Korea. Kim says that until Glovis was set up, profits from shipping belonged to the auto makers, thereby benefiting all their shareholders.

Hyundai defends the arrangement. Company officials say that by having an arm specializing in logistics, deliveries are more efficient and flexible. Hyundai spokesman Jake Jang emphasized that the company broke no laws in setting up Glovis. Hyundai declined to comment on the raids, citing the ongoing investigation, or to pass a request for comment on to the Chung family. A Glovis spokesman declined to comment or to provide a contact for Lee's attorney.

Such deals were supposed to be a thing of the past. In recent years, Korean businesses and the government have been pitching global investors on the idea that the country takes corporate governance seriously. And there has been progress. Hyundai, for example, has filled four of its seven board seats with outside directors, while its audit committee now consists solely of independent directors.

But if Chung is to realize his dream of turning Hyundai into one of the world's top five auto makers within five years, he will have to improve Hyundai's corporate governance as much as he has its cars.

By Moon Ihlwan

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