Hyundai: A Smoother Ride Minus The Big Wheel?

The arrest of the company's chairman is a blow, but it could help improve operations

With its charismatic chairman, Chung Mong Koo, now prisoner No. 4011 at the Seoul Detention Center, Hyundai Motor Co. seems to be adrift. On Apr. 27, Hyundai postponed announcement of its quarterly results, and has put on hold construction of new factories in the U.S. and the Czech Republic. "The chairman's sudden removal has serious implications for the future of the company," says Hyundai spokesman Oles Gadacz.

But there may be promise in the pall hanging over Hyundai. Some say that Chung's arrest will give Hyundai a chance to tap younger managers and grow in ways it might not have under the chairman's tight control. And while Chung has been the driving force behind virtually every key initiative in recent years -- from improving quality to building plants in the U.S. and Europe -- Hyundai's stock could get a boost if the affair leads to greater transparency and accountability. "With the main road map and basic systems in place, professional managers will likely do a better job going forward than one man running a fiefdom," says Park Kyung Min, head of fund manager Hangaram Investment Management Co. "What happened at Hyundai is a blessing disguised as a misfortune."

On Apr. 28, investigators arrested Chung on charges of embezzlement and breach of trust. Prosecutors say Chung played an important role in raising some $140 million in illegal funds that were used to bribe government officials. And they say he inflicted damage of more than $400 million on the group through irregular deals aimed at enriching his family. Neither Chung nor his lawyer was available for comment, though when he was brought in for questioning in April, he apologized for "causing a furor."


Chung has earned well-deserved praise for building Hyundai Motor Group from an also-ran into the world's No. 7 auto maker. The 68-year-old chairman owns only 5.2% of Hyundai Motor, but he enjoys near absolute control through a web of cross-shareholdings in affiliated companies. And he is known as a micromanager who obsesses over details as small as the color of parts under the hood.

Although Chung will likely be released on bail in a couple of months, for now CEO Kim Dong Jin will steer the company. Hyundai also has a strong bench of managers, including research chief Lee Hyun Soon, who developed engines for the Santa Fe SUV and Sonata sedan, and Suh Byung Kee, who has overseen the rise in quality rankings. "Hyundai's going to grow from this," says Chuck Baccarella, sales manager at Maita Hyundai in Sacramento. "If you have one person making all the decisions, there are no checks and balances."

Hyundai's board, which Chung kept on a short leash, might also benefit. Although the company has filled four of seven board seats with outside directors, and its audit committee now consists solely of outsiders, many say the panel must be far more independent to ensure that dissenting opinions get heard. "It simply wouldn't make any sense for important investment decisions [such as the new factories] to be affected by the probe if the company had a credible board," says Nam Dae Woo, an independent director at Korean oil refiner SK Corp. The company acknowledges that Chung wields considerable power but says the board is independent.

Chung's absence could usher in more harmonious labor relations. The chairman has long battled Hyundai's unions, and workers dislike his "emperor-like" rule, says Song Hi Sok, a labor leader. "We hope this incident will serve as a turning point," Song says, "for Hyundai to make another leap forward."

By Moon Ihlwan, with Elizabeth Woyke in New York

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