Chaebol chairmen's absolute power still unchallenged despite reform drive
Korea Herald
by Kim Hyun-chul
Jan. 22, 2000The government's efforts to reform the corporate governance structures of chaebol groups have apparently brought about little, if any, change in the way chaebol chairmen exercise clout.
As is well known, chaebol chairmen's personal stake ownership in group firms is around five percent on average. But with this minority stake, they have been wielding a disproportionately large power. The mechanism that allows them to exercise undue power is the web of mutual equity investments intertwining the group firms.
Chaebol chairmen are often likened to emperors in the sense that they exercise power without taking responsibility for the outcome of their decisions. They claim credit for success while conveniently passing the responsibility for failures to managers.
The government's reform campaign aimed to correct these two abnormal aspects of chaebol's present corporate governance practices - the chairmen's exercise of undue power beyond their stake ownership and their lack of any accountability.
But the campaign has not produced any tangible progress. Chaebol groups are still following the same old practices and seem to have no intention of changing them. Some critics say the government has not pursued the reform drive with the same vigor and coherence as what it has shown in reducing corporate leverage ratios.
Analysts say the most visible evidence of the chaebol's indifference, if not outright revolt, to the government's reform campaign can be found in the recent reshuffling of executives. All major business groups have announced a new lineup of executives for group firms without shareholder approval.
According to analysts, the election of a new CEO is a matter to be decided by the board of directors, with the directors supposed to be elected at a general shareholders' meeting.
But these groups named new CEOs and directors without following the procedure prescribed in the relevant law. "They carried out the reshuffles as business as usual. But the chaebol alone are not to blame. Few, if any, including government officials, seriously challenged the practice," an analyst said.
Officials of business groups say that their new appointments are subject to approval at the annual general shareholders' meetings scheduled for next month, asserting that they will follow due procedures.
But they ruled out the possibility of any change in the announced lineups at the shareholders' meetings.
It is widely suspected that key appointments were personally made by chaebol chairmen, with the group restructuring office simply announcing the new lineups. "Judging from the way the reshuffles were carried out, chaebol groups appear determined to maintain the present control structure," said an official of the Ministry of Finance and Economy.
It was in this context that Finance and Economy Minister Lee Hun-jai expressed concern about forming the executive lineup with the chairmen's coterie during a speech at the Federation of Korean Industries yesterday.
Lee compared General Electric to Walt Disney. "GE executives are well known for their independence and accountability to shareholders. This helped the company increase sales and profits. But Disney filled the executive posts with officials close to the chairman, which was one of the causes of the company's decline."
Lee said the government will strive to reform existing law and regulations to help a new corporate governance system take root. He added that in the future, the competition among corporations will be partly determined by what form of corporate governance they have adopted.
It remains to be seen, however, how chaebol groups will react to the warnings of the new minister who faced down recalcitrant chaebol groups and forced them to attain the 200 percent debt-to-equity ratio.
"In light of the slow pace and half-heartedness the government has shown in approaching the corporate governance issue since early last year, it is questionable whether the government will be able to force the chaebol to reform their management practices," said an analyst. "For a year, the government did nothing but talking about the need to reform."
"If the government cannot change the ownership structure of chaebol groups, it should devise ways to ban chaebol chairmen from exercising voting rights for the shares that key group flagship companies own in other minor subsidiaries," he said.
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