Lotte stumbling on secrecy

Shin Sun-ho, the younger brother of Lotte Group founder Shin Kyuk-ho, who runs the noodle maker Sansas in Japan answers questions from reporters when he emerges from the house of Shin Dong-joo, former vice chairman of Lotte Holdings in Japan after attending memorial services for the late father of Kyuk-ho on Friday evening. / Yonhap

Group expected to suffer major damage to image

By Park Si-soo

The escalating feud between the two sons of the Lotte Group founder has laid bare the outdated, opaque management system underlying the nation's fifth-largest family-controlled chaebol.

Officials and analysts say the secretive way the conglomerate is run has been a key element behind the group's growth in the past, both in Japan and Korea.

However, they believe it no longer works and instead poses a threat to managerial stability and sustainable growth.

Unlike other major companies in Korea, Lotte's holding company and major affiliates remain unlisted, meaning key corporate information is veiled in secrecy.

What's known to the public, in terms of governing structure is that Lotte Holdings in Japan governs the entire group through a web of cross-shareholdings.

Lotte Holdings is also under the control of a paper company called Kwang Yoon Sa, which holds the biggest stake of 27.65 percent in Lotte Holdings.

The Lotte Group founder Shin Kyuk-ho is known to have a major stake in Kwang Yoon Sa, but rumors have circulated that he handed some of his shares over to his two sons, though it's uncertain how much.

It is said that his eldest son Shin Dong-ju holds a 30 percent stake in the paper company, and second son Dong-bin has 25 percent.

Analysts and industry officials say such secretive management and ownership structure would leave top managers unchecked in the decision-making process, allowing the group to be vulnerable to higher risks of misjudgment.

Lee Sang-hun, an analyst at Hi Investment and Securities, raised concerns that the secretive management could dent Lotte's growth potential.

"The secretive and closed management style is a double-edged sword," Lee said. "On the one hand, the chief executive can make a decision quickly because he or she will be unchecked in the decision-making process. On the other, unchallenged leadership will leave the company exposed to managerial risks."

Another analyst said the secretive management might have contributed to Lotte's rise to the nation's fifth-largest conglomerate.

At the same time, it has prevented the group from drawing greater investment, he said.

"Several years ago, Lotte attempted to raise funds by issuing corporate bonds," said the analyst asking not to be named. "Back then, the financial regulator said it would approve the issuance on the condition that Lotte discloses detailed information about its governing structure. Lotte refused to do so and accordingly the regulator didn't approve the bond issuance."

The analyst said there were many other cases that Lotte had to abandon due to its opaque management that fails to meet regulatory standards.

Kim Sang-jo, an economics professor at Hansung University, said the limited information will end up hurting Lotte's competitiveness and growth.

"Let's imagine that you are a company's owner and you share only a limited amount of information about your company," he said. "In this situation, who do you think will willingly invest in your company? And who do you think will work for your company with high commitment?"

Meanwhile, Dong-joo and his supporters disclosed a recording of his father Kyuk-ho saying Dong-bin should be foreced to step down. The Lotte founder expressed his anger when he heard that Dong-bin didn't resign despite his "order" to leave.

He urged Dong-joo to take action againt Dong-bin who intended to keep the founder from having a say in management decisions.

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