Who Really Runs Korea?

A presidential campaign provokes a debate about the power of South Korea’s conglomerates | “There is a clear push to reduce the ability of families to exploit their control of companies”

Sangwon Yoon


Lee Bok Sun is planning to close her 28-year-old fruit store in Seoul for good. Many of her customers have switched to a new hypermarket owned by one of South Korea’s chaebol, the family-controlled business groups that dominate the economy. “My baby brother gave me the money to start this shop to thank me for the years I worked as a seamstress to pay for his college fees,” says Lee, 63, as she counts the day’s earnings from a battered Nike shoebox. “He wouldn’t have gotten his job at a chaebol without that degree, and now I’m being put out of business by the same system I worked so hard to get him into.”

Since Lee moved to Seoul to sew clothes at 15, the business empires that include Samsung Electronics and Hyundai Motor have lifted the economy 22 places, to 15th in the World Bank’s ranking. As Koreans prepare to vote for a new president on Dec. 19, the public’s attention is focused on the cost of Korea’s chaebol-led success: a widening income gap, struggling small businesses, and the highest suicide rate in the developed world. “To outsiders, it may seem like the economy is doing relatively well, but here are people stuck in the cracks of society where chaebol wealth was supposed to trickle down to,” says Kim Woo Chan, a professor at Korea University Business School in Seoul.

The presidential hopefuls — software mogul Ahn Cheol Soo, opposition party nominee Moon Jae In, and ruling party candidate Park Geun Hye — all pledge to rein in the chaebol. Park’s late father, Park Chung Hee, built up the chaebol during his 1961-1979 dictatorship.

Popular support for change has been fueled by the perceived failure of outgoing President Lee Myung Bak, whose single term ends in February. Lee, a chaebol ally, vowed to put Korea on a path that would yield annual growth of 7 percent and per-capita income of $40,000 by 2017. Instead, the U.S. recession and debt woes in Europe have hurt exports, which are mostly manufactured by the chaebol. Conglomerates account for nearly half of gross domestic product as well; GDP may grow only 2.14 percent this year.

The chaebol touch almost every aspect of South Korean life. In the morning, Samsung Electronics salesperson Ellen Jeon leaves her home in Tower Palace, a complex in Seoul’s Gangnam district built by Samsung C&T Corp. She crosses the lobby to Starbucks, a franchise owned by a unit of retailer Shinsegae Group that’s run by Samsung Chairman Lee Kun Hee’s nephew. Wearing Tory Burch flats, bought at a Shinsegae department store, she carries her caramel macchiato to her Renault Samsung Motors SM5 sedan to drive to work.

Near her home is the Samsung Medical Center, where she bore her first son, a year after her wedding at the five-star Shilla Hotel, run by Chairman Lee’s eldest daughter. On her way to Samsung Digital City in the suburb of Suwon, she passes Shinsegae’s Jookjeon outlet, where her husband bought his first suit — a pinstripe from the Galaxy label of Cheil Industries: Lee’s second daughter is vice president. Naturally, Jeon and her husband both carry Samsung phones.

Any diminution of the chaebol’s power is likely to be slow, according to a September report from CLSA Asia-Pacific Markets, a brokerage and investment group, and the Hong Kong-based Asian Corporate Governance Association. “The most aggressive policies will be toned down due to practical constraints and the importance of the chaebol to the economy,” wrote Shaun Cochran, head of Korea research for CLSA, in the report. “However, investors should make no mistake; there is a clear push to reduce the ability of families to exploit control of companies.” The 10 top chaebol make up more than half the value of the 1,779 companies on the Korea Stock Exchange.

As the chaebol moved into more businesses, complex, circular shareholding structures developed, with relatives of the chairmen installed in affiliates, ensuring family control. Chung Mong Koo is chairman of Hyundai Motor. The carmaker is 20.8 percent owned by its parts supplier Hyundai Mobis, which in turn is 16.9 percent owned by Kia Motors, which is 33.9 percent owned by Hyundai Motor, according to data compiled by Bloomberg from the latest figures published by Korea’s Fair Trade Commission. With the help of other family-held stakes and cross-shareholdings with affiliates, Chung retains control of the auto group with a 5.2 percent stake in Hyundai Motor and 7 percent in Mobis.

In 2008, Chung was convicted of embezzlement and breach of duty, including charges related to selling stock in a Hyundai unit to his son at a discount. His jail term was suspended after he promised nearly 1 trillion won ($924 million) to charity, and he was later pardoned. This year, Hanwha Group Chairman Kim Seung Youn was sentenced to four years in jail and fined 5.1 billion won after a court found he used funds from the group to pay debts of private firms owned under false names. Kim, who received a pardon in 2008 after striking a man with a steel pipe, has appealed.

The economic slowdown, as well as the scandals, have turned the chaebol and their ruling families into political piñatas. Front-runner Park says she will increase fines for conglomerates that violate fair-trade laws to as much as 10 times the incurred damage. She also wants to ban new cross-shareholdings. Moon would give the chaebol three years to unwind existing cross-shareholdings and stop the channeling of investment funds between affiliates, which makes it easy for the groups to finance their activities without revealing their source of funds. He says that if the chaebol don’t resolve these issues in time, they will be penalized. Ahn would incrementally break up the web of affiliates altogether and sever the family ties that dominate the securities markets and banks. Ending that dominance would make more capital available for small business.

The chaebol aren’t backing down. These corporations are “the backbone of the South Korean economy,” and limiting or banning cross-shareholdings would make them vulnerable to foreign takeovers, the Federation of Korean Industries, which represents the chaebol, said in an Aug. 6 statement to the press.

Many Koreans are simultaneously hostile to the chaebol and proud of their success. Even Lee Bok Sun, the fruit seller, says she’s glad she managed to get her brother into a chaebol. That love-hate relationship may complicate any restructuring, says Charles Lee, North Asia research director for the Asian Corporate Governance Association. Kim Kyung Won demonstrates this ambivalence. “I don’t think anyone can deny that South Korea’s economy wouldn’t be where it is today without the chaebol,” says Kim, who works in marketing in Seoul and owns an LG phone, Samsung TV, and Kia sedan. “But I’m not so sure how positive the current structure will be for the economy in the future. I mean, it can’t be healthy to have just a few companies own almost everything, right?”

The bottom line With the top 10 chaebol making up half the value of the stock exchange, Koreans say the conglomerates have a corner on capital.


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