Cleaning Up in South Korea

A local B-school dean hopes that a Lazard-managed fund can reform the chaebol systemwhile making money for U.S. investors

For about a decade now, Jang Ha Sung has been on a crusade. The business professor has devoted a big chunk of his adult life to drawing attention to the gold-plated corporate corruption and insider dealing that have been defining features of South Korea's mighty corporate conglomerates, or chaebol. Jang's weapon of choice has been a very blunt instrument: shareholder lawsuits.

Now Jang, the dean of Korea University's business school, is taking another approach in his quest to prevent the corporate family-run dynasties from enriching themselves at the expense of shareholders.

He is advising a fund that will take stakes in midsized companies and work for reform from the inside, playing the role of influential stakeholder rather than litigious gadfly. "It's a pity our nation lacks institutions actively pressuring board members and executives to end bad practices and improve corporate value," laments Jang.


  And Jang has attracted a serious ally to his cause. New York-based Lazard Asset Management recently launched the Korea Corporate Governance Fund, currently capitalized at about $120 million. Jang will serve as an adviser to the fund to identify targeted companies and work out strategies to implement changes.

Lazard officials, who weren't available for comment, didn't buy into this idea out of a sense of pure altruism. Jang made a compelling argument that there is serious money to be made in investing in Korean companies whose share price is depressed due to poor financial disclosure, accounting gimmickry, and other common corporate- governance problems. "There are many, in fact too many, companies being traded at fractions of their net asset values," says the 52-year-old Jang.

To really have any influence on management, the Lazard fund plans to take stakes of at least 5%. Lazard also signed a consulting contract in February with the Center for Good Corporate Governance (CGCG), an independent watchdog group that will monitor and carry out research on targeted companies.


  A team of managers headed by John Lee—a longtime Korea hand who managed the Korea Fund, set up by Scudder Kemper Investments, for some 10 years—will exert every effort to ensure that the companies in which they have part ownership are operated in a way that benefits all their shareholders, not just those with bigger stakes.

Kim Sun Woong, executive director at CGCG, says his group has begun studying more than a dozen potential targets. "There's no shortage of companies whose values are undervalued because of governance problems," he says. The open-end fund, which is expected to be increased to at least $200 million by the end of this year, will begin releasing the names of targets soon, according to Jang.

Investors may want to give the fund a serious look. After all, Dubai-based Sovereign Asset Management walked away last year with $800 million in capital gains from its investment in SK, Korea's top oil refiner. Sovereign made a serious run to oust SK Chairman Chey Tae Won, who had served several months in jail for his conviction for accounting fraud (see, 3/14/05, "Staging A Revolt At The SK Chaebol").


  Although Chey is still the CEO of SK, the outside pressure has resulted in some serious change for the good at the oil refiner. The company's share price jumped five-fold in the two years following his prosecution thanks to reforms that were initiated. Outside directors, who now occupy 7 of 10 board seats in the company, have direct oversight of the audit committee and must approve all transactions totaling $10 million or more.

"SK Corp. is a typical case where a company was revalued following the improvement of corporate governance," says Chang In Hwan, CEO of Seoul-based fund manager KTB Asset Management.

Another recent and closely watched case is the recent investment by U.S. corporate raider Carl Icahn and his ally Warren Lichtenstein in KT&G, Korea's biggest tobacco company (see, 3/17/06, "Icahn: A Korean Welcome Is Unlikely").


  The former tobacco monopoly, where Lichtenstein won a board seat in March following the Icahn group's 7.68% equity investment, announced on Aug. 9 that it will return up to $2.9 billion to shareholders over the next three years either through dividends or share buyback as demanded by the U.S. investors. KT&G's shares have gained almost 30% this year, compared with a 4% slide by the benchmark Kospi index on the Seoul bourse.

Despite such wins, many fund managers in Korea believe they are the exception to the rule. Korea Inc. often rallies behind takeover targets to fend off intruders. The chaebol and the Korean business establishment often successfully portray foreign funds as opportunistic predators more interested in making a fast buck than corporate reform.

Korean public money also often sides with the home team. Jang argues that such a tactic won't work with the Lazard fund, because it will be a long-term player in Korea.


  Meanwhile, fund managers widely blame poor corporate governance for the so-called Korea discount and believe the stock market would be valued far higher if corporate reform were truly to take root in the country.

The average share price on the Korean bourse is 10.2 times estimated 2006 earnings, against 15.1 times for Singapore, 13.6 times for Malaysia, 13.4 times for the Philippines, and 11.5 times for Indonesia, according to statistics compiled by USB early this year.

Jang's hope is that the Lazard-managed fund will both do some good and make a pile of money for its investors. If so, other local fund managers would likely follow suit instead of caving into pressure from Korean management out of misguided deference or fear that their business connections to the chaebol will suddenly vanish if they speak their minds.

If Jang succeeds, the impact could be a lasting one for Korea.

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