South Korea's Chaebol
Time for Change?
The story of South Korea’s transformation from economic minnow to the world’s fifth-largest exporter owes much to its sprawling family-run conglomerates. Known as chaebol, these long-time pillars of the nation’s “miracle economy” include the likes of LG, Hyundai, SK, Lotte and — largest of them all — Samsung. Yet the chaebol’s oversized influence and cozy relationship with government, highlighted by a scandal that's cost the country’s president her job, have put the conglomerates under an intense spotlight at the same time as many are navigating generational transitions. Is it time for change at the chaebol?
South Korea’s influence-peddling scandal has claimed the nation's top politician and put the highest executive of its biggest chaebol on trial. Jay Y. Lee, the de facto head of Samsung Group, must answer charges including bribery and embezzlement. Lee, also the vice chairman of Samsung Electronics, is accused of playing a role in payments of tens of millions of dollars that Samsung made to benefit a close friend of the deposed South Korean President Park Geun-hye. Investigators have focused on whether those payments were made in order to gain the backing of Korea’s national pension fund for a controversial merger between Samsung affiliates in 2015 that helped smooth Lee’s transition to power. Park was impeached by parliament in December and a constitutional court upheld the decision in March, stripping her of the presidency in part for leaking documents to her friend. At a hearing in December, nine chaebol leaders seated together faced a barrage of questions from lawmakers, as hundreds of thousands of protesters calling for the president’s ouster turned their anger to the country’s conglomerates. Samsung denies providing financial aid in return for favors but has apologized to investors for the scandal. In 2016, the collapse of Hanjin Shipping and investigations into the conduct of the head of the Lotte retail group also served to erode confidence in the nation’s industrial system. Lotte's founder and his three oldest children are on trial for criminal charges including embezzlement.
The chaebol, which means “wealth clique” in Korean, is widely believed to have been influenced by Japan’s zaibatsus — both share the same Chinese characters and meaning. Like the chaebol, zaibatsus were family-controlled conglomerates that dominated Japan’s economy until they were disbanded by the U.S. government shortly after World War II. In Korea, establishing a chaebol was viewed as a key way to fast-track the country’s economic development. Shortly after taking over the government in a military coup in 1963, Park Chung-hee, the father of the deposed president, launched a modernization effort driven by “guided capitalism” in which government-selected companies undertook major projects often financed with government-backed loans. There are now 45 conglomerates that fit the traditional definition of a chaebol, according to Korea’s Fair Trade Commission. The top 10 chaebol own more than 27 percent of all business assets in South Korea.
While the chaebol helped make South Korea an economic success story, many politicians and investors argue that the system is a cultural relic poorly suited to the 21st-century economy. The shares of chaebol-linked companies trade at lower multiples of earnings than their peers in the U.S., Europe or Japan (a phenomenon called the Korea discount) because of concern over cronyism and cross-ownership. Ordinary South Koreans are also increasingly questioning the consolidation of wealth among a handful of families and the stifling effect they’ve had on small businesses and startups. People are no longer prepared to turn a blind eye to illegal and improper relationships between government and business as they were in the past when the chaebol were seen driving growth and creating jobs, according to Professor Kim Sang-jo of Hansung University. Amid the public criticism, regulators and investors have been pushing to unravel cross-shareholdings and revamp governance structure of the chaebol. The merger of the two Samsung affiliates in 2015 — the subject of the current investigation — was opposed by activist investor Paul Elliott Singer and only succeeded by a narrow margin, thanks to the support of the state pension fund.
The Reference Shelf
- Bloomberg Businessweek reports how South Korea is trying to rein in the chaebol.
- Bloomberg News shows how events in South Korea drove support for change.
- A Quicktake Q&A explainer on South Korea’s largest conglomerates and another on the bribery allegations Samsung faces.
- Harvard Business Review looked at how conglomerates differ in developed and emerging markets.
First published May 29, 2014
To contact the writer of this QuickTake:
Peter Pae in Seoul at email@example.com
To contact the editor responsible for this QuickTake:
Grant Clark at firstname.lastname@example.org