A cornerstone of President Park Geun Hye's drive to make South Korea more innovative is reining in the family-owned conglomerates, or chaebol, that have towered over the national economy. Unfortunately, the biggest one seems not to have gotten the memo.
Samsung heir apparent Lee Jae Yong is tightening his family's control over an empire that generates the equivalent of 25 percent of Korean gross domestic product. With family patriarch Lee Kun Hee still recuperating from the heart attack he suffered a year ago, the younger Lee has been making acquisitions, meeting with leaders from China’s Xi Jinping to Apple’s Tim Cook, and replacing his dad as "chairman" of two charitable foundations (the first time he's taken the title within the Samsung universe). The latest turn of the vise was a $9.4 billion purchase of the construction subsidiary Samsung C&T by Cheil Industries, the family's de facto holding company, which counts Lee as the largest shareholder.
Samsung will claim that the Cheil-Samsung C&T maneuver was designed to simplify the company's organizational chart, and thus make its dealings more transparent. But the company's restructuring has been designed mostly to enrich the Lee family, not advance Park's economic agenda. Lee has shown that the families who dominate Korea's largest companies, and view them as their birthright, can't be trusted to reform themselves.
There's little doubt that chaebol need to play a smaller role in Asia's fourth-biggest economy. From the outside, Korea might seem to be on a roll, with 2.4 percent growth, a 3.7 percent jobless rate and a healthy export sector (Samsung's Galaxy phone is now outselling Apple's iPhone). But the chaebols' success isn't trickling down to Korean households. Salaries have been stagnant and economic confidence is low.
The chaebol are also increasingly managed in a way that puts them at odds with shareholders. What traders want from Samsung is a steadily rising stock price. But Lee Kun Hee's kids have shown they mostly have their own interests in mind: They have been maneuvering for a bigger take of profits to help them pay the tax bill when they inherit their father's assets, which is expected to amount to roughly $6 billion. If shareholders were wise, they would explicitly demand that the next leader of Samsung not be a Lee family scion.
But in the absence of shareholder pressure, Park needs to make good on her pledges to take Korea's corporate behemoths down a peg. The economic system her father, former South Korean dictator Park Chung-hee, created is now at the same watershed Japan reached in the 1990s and China is approaching -- the moment a nation that rode an investment-and-exports model out of poverty must plot a new course.
Park won the 2012 election promising "economic democratization" as a replacement for her father's empowerment of a handful of national champions. Those companies' scale and political connections, she argued, were hobbling the small-to-midsize sector that had the potential to produce a domestic Google or Alibaba. The outsized importance of the chaebol also distorts the countries' labor markets, because the widespread desire among Koreans to work for a safe household name has starved startups of talent.
Hence Park's desire to build a "creative economy." In October 2012, during her campaign, Park said "small and medium-sized enterprises, independent shop owners, the self-employed must all support the ecosystem and nurture it to growth. Nobody should fall behind because of an unfair structure." Unfortunately, since winning the presidency, Park has mostly stayed silent as the chaebol deepened that unfair structure.
It's not too late for Park to live up to her earlier rhetoric. She can start by taxing the roughly $2 trillion of cash sitting on company balance sheets if the families running them refuse to share it with workers or invest in new businesses. Next, she should significantly increase fines for conglomerates that violate fair-trade laws and untangle the corporate cross-shareholding plans that reduce competition in the economy. Also, she should devise new anti-trust measures to disrupt the country's vast web of corporate affiliates, which families have used to cement their control over companies.
Park obviously knows what needs to be done, but it's not clear what she's waiting for. As the ongoing intrigue at Samsung demonstrates, there's not a moment to waste.
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