south korea cracking down on big business

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washingtonpost.com



Spotlight Directed at S. Korea Tycoons

By KELLY OLSEN
The Associated Press
Tuesday, May 2, 2006; 1:15 PM

SEOUL, South Korea -- The arrest of Hyundai Motor Co.'s chairman in a bribery scandal has refocused attention in South Korea on the role of tycoons and the conglomerates they run as family empires.

Prosecutors on Friday arrested and jailed 68-year-old Chung Mong-koo on suspicions that he had embezzled about 100 billion won ($107 million) to create a slush fund used to influence government officials and allegedly incurring about 300 billion won ($321 million) in damages to South Korea's largest automaker.

The arrest, coming after weeks of investigations, has highlighted concerns, never far from the surface, about openness at the country's ubiquitous family run industrial conglomerates, or chaebol.

"Now, all companies in the nation will be forced to establish a more transparent corporate governance system," the mass-circulation JoongAng newspaper said in an editorial after Chung's arrest.

For decades, chaebol have been accused of lax practices and controls, including dubious dealings between member companies to help controlling families evade taxes and transfer wealth to heirs. Subsidiaries are often share major shareholders, which helps enable one family to retain control.

In a recent case of corporate malfeasance, prosecutors in 2003 uncovered 1.55 trillion won in accounting irregularities at an affiliate of SK Corp., South Korea's largest oil refiner and a mainstay of conglomerate SK Group.

SK Corp. Chairman and CEO Chey Tae-won was convicted in the scandal. He later withstood a revolt by foreign investors who sought his ouster in a bid to improve corporate governance at the company.

Prominent conglomerates include the Samsung Group, which includes Samsung Electronics Co., South Korea's largest and perhaps best known corporation both at home and abroad.

Not far behind is the Hyundai Automotive Group, which also includes Kia Motors Corp., led by Chung Mong-koo's only son, 35-year-old Chung Eui-sun.

Hyundai and Kia together aim to become the world's sixth-largest carmaker by 2010 and are aggressively expanding overseas production to meet the goal.

Family run conglomerates like Samsung and Hyundai have been the driving force in South Korea's rise from one of the world's poorest countries in the early 1960s up to the world's 10th-largest economy today by some measures.

Their topdown, authoritarian management style was well-suited to a post-Korean War political culture of military-backed governments that curbed civil liberties, quashed dissent, kept labor protests in check and channeled government resources such as loans to the chaebol, sometimes in return for bribes.

South Koreans, however, increasingly demanded democratization, a movement which came to a head in the late 1980s when a rising middle class took to the streets in frustration at rule by military strongmen like President Chun Doo-hwan.

The 1997-98 Asian economic crisis forced the chaebol, which had become bloated and highly leveraged, to streamline operations and reduce costs and debt by cutting waste, shedding workers and improving efficiency.

The Fair Trade Commission, South Korea's main antitrust watchdog, and other regulatory authorities have from time to time taken a hard line on the conglomerates. President Roh Moo-hyun, who took office in 2003, has called for stricter controls.

But the huge and entrenched role of executives like Chung in the success of their business has some wondering how much fundamental change is really possible.

"I think everyone really recognizes that the big central figures run the show," said Michael Breen, the South Korean-based author of the book, "The Koreans," who has been observing the country for over 20 years.

A recent trend among chaebol chiefs has been to try and deflect the public anger over scandals by making huge "donations" to society _ a practice that has met with some suspicion.

Samsung Group announced in February that it would donate more than 800 billion won ($856 million) in corporate and private assets to charity as part of an apology for several scandals, including a presidential campaign finance scandal dating back to the late 1990s that rocked the country last year.

Hyundai announced last month that the Chungs planned to donate 1 trillion won ($1.1 billion) worth of personal assets to the public, and that the company "apologizes" for causing worries to the public over the scandal.

"Corporate donations to society can be respected only when they are made in the context of a company carrying out its social responsibility," People's Solidarity for Participatory Democracy, a civic watchdog, said after the announcement.

Some see the potential for the wrenching nature of the current scandal to lead to change _ at least at Hyundai.

"It's going to be hard for the Hyundai group to continue to do business as they did," said Yun Tae-sik, an auto analyst at NH Investment & Securities in Seoul.
© 2006 The Associated Press