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Traditional Business Practices Changing in South Korea
USA Today
July 25, 2000Two Ssangyong Investment & Securities employees were carrying $50,000 in company cash from one branch to another when thieves grabbed the money and ran.
Under the brokerage's policies at the time, the money was deducted from the employees' paychecks. The women had 10 years to cover the loss.
Luckily for them, the failing brokerage was acquired in 1998 by foreign investors led by the U.S. investment firm H&Q Asia Pacific. The new owners recruited a CEO from Citibank, who said punishing employees for being robbed defied common sense. He gave the women their money back.
The new management at Ssangyong--now Good Morning Securities--has been demolishing the brokerage's hidebound policies ever since.
Similar makeovers are occurring across corporate Korea. Foreign investors and the Western-trained executives they're installing are bringing change to South Korean firms that once valued seniority over performance, wishful thinking over honest accounting and edicts from a meddlesome government over the demands of the marketplace.
The corporate overhaul would have been unthinkable four years ago. South Korea--known as the Hermit Kingdom for its xenophobic resistance to foreign influences--used legal, regulatory and cultural barriers to limit acquisitions by foreign firms. The Asian financial crisis of 1997-98 changed everything. South Korea's tottering firms were desperate for money, so they sold subsidiaries to foreigners or took on stronger partners from overseas. The government rewrote laws and regulations to make it all possible.
''The crisis made people really think,'' says Finance Ministry spokeswoman Kang Yeoun Sun. ''We realized we cannot survive alone in the global economy.''
The results have been dramatic:
* Foreign companies announced 162 acquisitions in South Korea last year and 111 in 1998, up from 24 in 1997 and 27 in 1996, according to the research firm Thomson Financial Securities Data.
South Korea was No. 1 in Asia for overall mergers and acquisitions in 1998 and 1999: More than $25 billion worth of deals were announced in '99, $12 billion in '98, Thomson Financial says.
* Foreign direct investment (including acquisitions, investments in plants and joint ventures with South Korean firms) shot up 76% in '99 to $15.5 billion from the year before and was up an additional 31% the first five months of this year from the same period of 1999, the Finance Ministry reports.
The foreign invasion continues. Ford Motor is poised to take over South Korea's deeply troubled Daewoo Motor. Daewoo is being auctioned by its creditors, who gave Ford's bid the nod in June.
Plenty of lures
Foreign companies are attracted to South Korea by its prosperous middle class, its proximity to Japan and China, and the opportunity to buy factories and businesses at cut-rate prices. Bargains abound because struggling conglomerates--known as chaebols--need cash and because the dollar is strong, 25% higher vs. the won than it was before the financial crisis.
''You had attractive assets to begin with,'' says Eric Yoon, head of the Korean practice for the law firm White & Case. ''They're up for sale now, and they're cheaper if you've got U.S. dollars.''
In 1998, Bowater, a Greenville, S.C., paper company, spent $201 million to buy a state-of-the-art paper mill from the ailing Halla chaebol, which had built it two years earlier for $336 million. ''We happened to be in the right place at the right time,'' says Jerry Gilmore, the Bowater vice president who negotiated the deal. The mill started producing profits for Bowater immediately.
The foreign buyers are bringing big changes to South Korean business. South Korea, for instance, wasn't used to fat, U.S.-style CEO paychecks. The press was shocked by the $3 million-a-year compensation given Korean-born investment banker Tom Kang, 38, when he became CEO of Seoul Securities, acquired in 1999 by financier George Soros. Reporters turned Kang briefly and somewhat reluctantly into a local celebrity.
Forcing change
Foreign buyers also are shaking up the Hermit Kingdom by:
* Demanding realistic accounting. South Korean firms -- banks in particular -- got away for years with concealing losses. But foreign buyers demand better bookkeeping. Bowater, for instance, had to haggle individually with 22 banks, some of which were initially unwilling to admit that the Halla mill was worth considerably less than the loans they'd made to finance it. ''The banks never had to take a write-off before,'' Gilmore says. ''They had always been able to extend the loans. They were kind of in shock.'' Eventually, they absorbed losses and OK'd the sale.
* Entering new markets. The government closely managed the country's post-World War II economic rise, telling the chaebols how to run their businesses and ordering banks to feed them with loans. Decades of government coddling eventually left the chaebols uncompetitive and in debt and stuck banks with bad loans.
Korea First Bank emerged over the years as the primary lender to the Daewoo conglomerate, which has staggered into insolvency. ''A lot of people thought Korea First Bank was Daewoo Bank,'' says Wilfred Horie, a veteran U.S. finance executive brought in as CEO after the ailing Seoul bank was taken over last year by U.S. investment firm Newbridge Capital.
Now, Horie is pushing Korea First into consumer banking and small-business lending, markets ignored as South Korean banks serviced the chaebols. But conquering new markets means retraining workers and changing the culture of the bank, works in progress.
* Bringing in new blood. Foreign buyers usually make sweeping changes in senior management. At Korea First, 231 veterans left this spring on an early retirement program that wasn't always voluntary. The cuts weren't designed to reduce the payroll but to rid the bank of longtimers who couldn't change. Most of the positions were filled with younger people.
* Taking a hands-on approach to management. Top executives traditionally were distant figures who rarely met the rank-and-file. The new breed of managers likes to take an active role in day-to-day management. Ha Sang Yul, vice president of the labor union that represents most Korea First Bank workers, isn't happy with all the changes that Horie has brought to the bank, especially the early retirement purge. But he is impressed that the new CEO meets regularly with union leaders to solve problems and explain his strategy, something the old boss never did.
* Paying for performance. In the old days, seniority was all that mattered in South Korean companies. Foreign owners increasingly try to peg pay to performance. Before foreign investors took over, for instance, back-office workers at Good Morning Securities received no incentive pay at all. Lately, bonuses based on individual and corporate performance have comprised half their pay. But CEO Doh Ki Kown, brought in from Citibank last year, admits the change went smoothly, largely because a surging South Korean stock market last year swelled profits and bonuses and made everyone happy. He wonders how workers will react when a lean year means meager bonuses.
Doh says the brokerage's old ways were sometimes irrational and unfair. It used to dock the pay of workers who lost money -- clerks who came up a little short of cash at the end of the workday or the two women who were robbed. But it was no harsher to employees guilty of fraud. When a branch manager was caught slipping a few thousand dollars in brokerage money to a friend, he was forced to repay the money -- but got to keep his job. When Doh took over, he changed things. Honest mistakes were forgiven, the robbery victims pardoned, the dishonest manager fired.
Will it endure?
Some experts wonder whether the foreign takeovers and their reforming influence will continue in South Korea. As the economy bounds back from the financial crisis, companies here will be under less pressure to sell to foreigners or change their ways. This year, the number of foreign takeovers is down and South Korea lags Hong Kong and Taiwan in the value of deals announced.
But most experts think foreigners and changes are here to stay.
''You can't open the door a little bit to tide you over in times of emergency,'' lawyer Eric Yoon says. ''I don't think there is any going back.''
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