Many of the changes have gone deep. After the crisis, foreign investors were welcomed, and now around half of the shares of Samsung Electronics and LGE are foreign-owned. South Korea made a vigorous attempt to improve corporate governance, increasing the rights of minority shareholders, boosting the role of outside directors, punishing improper disclosure and requiring the chaebol to publish consolidated financial statements. Shareholders may now, at least in theory, pursue class-action suits against the country’s biggest companies.
The previous two progressive administrations, less enamoured of big business than the current one, also took aim at the dominance of the biggest chaebol and their controlling families. By putting a ceiling on shareholdings in other companies held by chaebol-related firms, the Korea Fair Trade Commission (KFTC) hoped to cut through the rat’s nest of cross-shareholdings through which the founding families typically exercise control. The KFTC argued that the complex structures discouraged transparency, disadvantaged minority shareholders and raised the risk that bankruptcy in an affiliate might bring down the whole group.
In practice the new rules were hardly draconian. Exemptions were made for chaebol that had good internal monitoring systems or that formed a holding-company structure. Moreover, no South Korean government appears able to resist the temptation to use the chaebol for policy ends. Some of the biggest ones were exempted from the ceilings on outside shareholdings because they were giving support to Roh Moo-hyun’s favourite initiatives, such as investing in sectors designated as “growth engines”, promising to help build the “enterprise cities” that Mr Roh hoped would spread growth to the regions, or even attempting to do business with North Korea. As a result, the founding families of large business groups, using circular chains of shareholdings, continue to exercise control even though, says the OECD, they hold an average of only 6% of their group’s shares.
In almost any other OECD country this would be a scandal. In South Korea such foibles are too easily tolerated. Moreover, the chaebol’s ruling class displays an extraordinary degree of delinquent behaviour, and only rarely does it suffer the consequences, as it did in the case of Kim Woo-choong and Daewoo’s collapse.
A roster of recent misdemeanours illustrates the point. Last year Kim Seung-youn, the chairman of Hanwha, an explosives, construction and insurance group, confessed to going to a bar and, helped by his goons, beating up the staff. He said it was in retaliation for his own son having been hurt in a scuffle. Last year, too, the chairman of Hyundai Motor (and son of Hyundai’s founder), the world’s fifth-biggest carmaker, was convicted of embezzling $90m from his company. In 2003 the head of SK Group, a telecoms, oil-refining and construction conglomerate, was convicted of illegal share swaps designed to keep the group in family control. All three men were pardoned by President Lee Myung-bak on South Korea’s national day in August. Only Mr Kim served any time in jail.
The biggest case concerns the Samsung Group, South Korea’s largest, and its recent chairman, 66-year-old Lee Gun-hee. Samsung has long been accused of corrupt practices: Mr Lee was convicted of political bribery in the 1990s, though escaped without penalties. In April he was charged with tax evasion and breach of trust. But more serious allegations of bribery were dropped—even though he had been fingered by Samsung’s former chief lawyer, who spoke of a huge slush fund.
Mr Lee has also been charged with transferring control to his 40-year-old son and heir, Jay Y. Lee, by arranging for Samsung affiliates to sell shares to the younger Mr Lee at artificially low prices. After the charges he resigned, on live television, “to take legal and moral responsibility”. Yet though Mr Lee technically faces a life sentence, few believe he will spend much, if any, time in jail. Nine other Samsung officials have been charged, but none has been detained—partly, the government says, out of concern that the economy might be harmed. Although Mr Lee is no longer chairman, Samsung executives in private talk as though he were still running the group.
How do the chaebol families get away with it? Many of them grew from black markets, smuggling and other rackets that thrived after the Korean war in the early 1950s, thanks to vast amounts of American aid and military spending, and to the policies of import substitution favoured by South Korea’s strongman, Syngman Rhee. When Park Chung-hee seized power in 1961, the junta marched many of the racketeers through Seoul wearing dunce caps and placards with slogans such as “I am a corrupt swine”. As Mr Cumings recounts, it was Lee Gun-hee’s father, Lee Byung-chol, who proposed to Park that the swine seek foreign capital and equipment to launch the South Korean economy. Park called in ten of the leading businessmen and agreed not to jail them if they invested their “fines” in new industries that would sell to foreign markets.
The rest is history. To this day chaebol families are more admired for their economic contribution than reviled for their criminal propensities, which are often viewed as the foibles of a ruling aristocracy. The chaebol families are the closest thing South Koreans have to royalty. The clans intermarry and their shenanigans fill the gossip pages, as well as providing much of the inspiration for the television soap operas of the “Korean wave”—yet another South Korean export hit.
http://www.economist.com/surveys/displaystory.cfm?story_id=12237177
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