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Winning hearts and minds

The chaebol cannot last long if they are despised by society. Earning respect is the way.
Jan 21,2017
Passing control of a Korean conglomerate to the next generation is a painstaking process for our chaebol’s owner families. It requires shrewd maneuvering between legalities and illegalities. It can be costly as purchases of treasury shares may be necessary to defend management rights from overseas corporate hunters. Korean chaebol owners fought hard battles to defend their family businesses into a third or fourth generation. As a result, today’s big Korean groups are run by grandsons of the founders.

Their ordeal, however, has not ended. Predators loom everywhere. They also have to fight anti-chaebol sentiment and widespread prejudices against the heirs and heiresses born with silver spoons in their mouths. Presidential wannabes all cry out for chaebol reform.

Whoever wins the next presidential election, chaebol reform will likely be at the top of the agenda of the incoming administration.

Yet Korea cannot do without chaebol. Whether we like them or not, chaebol are crucial to the economy. Young people all want to get jobs at well-known chaebol. Still the public calls for changes in the ownership structures so that the family members do not control the business empires while owning a tiny stake. They demand cash-rich companies invest, create new jobs, and seek balanced growth with their suppliers and subcontractors, smaller companies.

We advise the third-generation corporate leaders to take the initiative to change if they cannot reverse the trend. They could invite bigger troubles if they keep resisting. Multinational companies have promised multi-million-dollar investments and thousands of jobs upon bullying by the U.S. president-elect Donald J. Trump.

One reasonable solution would be joining forces with the National Pension Service (NPS). Chaebol could set aside one outside board seat to a member recommended by the NPS. The state fund commands the largest outside shareholder’s stake in most large companies affiliated with chaebol. It owns near 10 percent, a limit for shareholdings in a listed company, and often that’s more than the owning family members. The NPS’s capital comes out of the pockets of taxpayers. All companies must treat their large shareholder well.

By giving one board seat to an NPS-nominated person, little would change for the company. One board member cannot overturn a management decision. Still, a company with an outside director named by the NPS on board would better respect minority shareholders and ensure management with a greater degree of transparency.

There, however, must be a condition. The NPS’s fund management capacity requires sovereignty. We may be able to expect some kind of action to ensure the sovereignty of the NPS fund management especially after the fund’s implication in the power abuse scandal of the president and her inner circle.

The NPS also should ready itself to send forces to companies where it commands sizable stakes. It must establish a pool of experts mostly with experience in running businesses after thorough screening and make the list public. If it appoints members from the pool, the controversy about parachute appointments could ease. It could make multiple recommendations to allow a company to choose one.

Inviting other institutional players to recruit the members for the pool and make recommendations would be an even better idea.

After ensuring more transparency in decision making at the management level, chaebol should try to win public support. The best way is to provide decent jobs. The time has come for large companies to open up their rich cash hoards. Companies cannot survive in the fourth industrial revolution age without investing in the future technologies of artificial intelligence and robotics. But their investment does not translate into the immediate creation of new jobs. Companies must specify their investment and hiring plans. That is what American and other large companies are doing to please Trump.
Lastly, large companies must seek ways to help their smaller suppliers. It would not be the chairmen who order their companies to cut contract prices and invade smaller industries. The predatory and unfair practices would be mostly committed by managers eager to polish up their performance records and stay competitive.

Nevertheless, the onus falls on top owners. Their pressure for fast achievements could have brought about such irregularities. But demand for price cuts could impair the productivity of the suppliers and undermine the quality of finished goods bearing the chaebol names. The management must revise their performance review system so that business division managers are not under pressure to turn out fast results.

Enterprises are social entities just as human beings are. They cannot last long if they are despised by the society. Earning respect from shareholders, employees and suppliers is the way the third and fourth generation owners can sustain their businesses for many generations.

JoongAng Ilbo, Jan. 20, Page 28


*The author is the manager of newspaper production and head of the Economic Research Institute of the JoongAng Ilbo.

Kim Kwang-ki