Is transparency possible in chaebol?
By Kim Da-ye
If it had happened, it would have been the biggest delisting in the Seoul bourse’s history caused by lack of transparency.
Hanwha, one of Korea’s major conglomerates whose market cap until recently exceeded 2.9 trillion won, was considered on Feb. 5 for delisting after it was forced to disclose that Chairman Kim Seung-youn and four other executives had been prosecuted for embezzlement.
The disclosure came nearly a year after they were prosecuted on Jan. 29, 2011. Hanwha had been delaying the announcement until on Feb. 2 when the prosecutors demand for the chairmen nine years in prison and a 150 billion won fine.
The Korea Exchange (KRX) requires a firm to immediately make a disclosure when 2.5 percent or more of a large firm’s equity is embezzled. Kim allegedly embezzled nearly 90 billion won — 3.88 percent of the firm’s equity as of late 2009.
If the firm had made the disclosure to the prosecution last January, that would have been it. But in April 2011, the law changed — now the stocks of a firm suspected of fraud are immediately suspended from trading and the firm goes under review for delisting.
After a day of intense review, the KRX decided not to kick Hanwha off the bourse, instead suspending it for a day for breaching the disclosure rule, not for embezzlement.
Amid criticism that this was only a slap on the wrist favorable toward the chaebol, the bourse operator said Hanwha’s proposal to boost management transparency was valid.
Corporate transparency has no single definition. It means more than a timely disclosure of financial information but encompasses the decision making processes and operations of a business.
For instance, Standard & Poor’s (S&P) which has produced transparency and disclosure rankings examines three categories: ownership structure and information disclosure; financial transparency and information disclosure; and board and management structure and process.
“Good corporate governance includes a vigilant board of directors, the timely and adequate disclosure of financial information, meaningful disclosure about the board and management process, and a transparent ownership structure identifying any conflicts of interest between managers, directors, shareholders, and other related parties,” according to S&P’s 2002 report.
While Korean firms’ disclosure practices have significantly improved — important reports and announcements are made in real-time online — large conglomerates still suffer risks stemming from their “owners.”
Is transparency impossible in chaebol?
Many of Korea’s large conglomerates are controlled by family members of the founders who have learned to wield much power with a relatively small stake although the firms are listed on stock exchanges.
Traditionally, the heirs of the founders are called the owners and many behave as though they own the firms. Transparency in such an environment has tended to be pushed aside especially in decision making processes.
“In a conglomerate with an owner, the owners’ thoughts and voices hugely matter. Strong leadership means fast decision making while the firm may have to follow the owner even if he or she makes an abnormal choice. It may not be communicated to the markets well,” an electronics analyst said on condition of anonymity.
The analyst said that foreign investors are aware of corporate governance in chaebol and some do think that diversification of business and the resulted creation of synergy among them is the strength of chaebol. They are, however, more harsh than domestic investors toward dogmatism and corruption committed by owners.
Kang Jeong-min, a research associate of the Economic Reform Research Institute, said that it isn’t just owners but also members of companies that prioritize owners’ benefits, not those of shareholders.
In Hanwha’s case, it was the company that decided not to let its investors know about the charges brought against the chairman.
Furthermore, SK Holdings Chairman Chey Tae-won is standing trial for charges that he embezzled from the firm’s affiliates to cover losses from investment into derivatives by him and his brother Chey Jae-won.
When the KRX asked the affiliates of SK Holdings to verify the suspicions that they were involved in Chey’s embezzlement, SK Telecom, SK Gas and SK C&C replied, “Not true at all.” Businesses in such the situation are supposed to say that they would verify it and make a disclosure later since it is an ongoing case. The KRX designated all three affiliates as “unfaithful disclosure corporations.”
Jeffrey Jones, the former chairman of U.S. business lobby American Chamber of Commerce in Korea, said that corporate governance is more of an issue than transparency, which he said has improved by far.
“In today’s Korea, almost all big companies are transparent because they are under a lot of scrutiny by the government and by the shareholders. Most of the large companies have operations outside Korea. They have to be very, very concerned about their reputation in Korea and out of Korea,” Jones said.
Is transparency always good?
Greater transparency that keeps the employees, shareholders and other types of stakeholders well informed is believed to lead to better management. But some argue that in the case of chaebol, their owners’ instant yet arbitrary decision making has helped them, especially those in the manufacturing sector, to grow so fast.
“Manufacturing sectors require quick decisions on investments in technology, especially in difficult times,” the analyst said.
He said that growth at Samsung Electronics was exponential because it made huge investments in difficult times.
“Korea’s IT industry is at this stage because the owners’ decisions were made swiftly,” he said.
As the conglomerates expand in size and to various sectors, the analyst said that the power of the owners will likely shrink and professional managers will replace them.
Kang of Economic Reform Research Institute said on the contrary, the owners’ control over companies won’t fade easily as their close allies or family members together still hold large stakes.
“What makes me more pessimistic about an improvement to the status quo is that the judiciary seems very generous toward heads of chaebol. They are hardly ever imprisoned, and even if they are, they are released early under special pardons by the president,” Kang said.
He said that harsher punishments as well as stronger scrutiny by authorities are necessary to boost the transparency of chaebol management. Large institutional investors, especially pension funds, should also be more active in exercising their rights.
“There are many affiliates of chaebol in which the National Pension Service (NPS) holds more than a 5 percent stake. The NPS has so far been reluctant in exercising stockholders’ rights, but if it becomes more active in doing so, that can make changes,” Kang said.
Jones said that good corporate governance eventually matters more than owners’ abilities to take risks and make relatively swift decisions.
“In a proper course of decision making, the owners that are able to make decisions quicker than those without owners, still should convince and persuade board members who can exercise their rights independently,” he said.