Lotte's leadership vacuum looming large

Chairman’s absence would derail Lotte Hotel IPO, suspend new biz projects

By Lee Hyo-sik

A leadership vacuum is looming large at Lotte Group as its Chairman Shin Dong-bin faces arrest over the alleged creation of a slush fund, breach of trust, embezzlement and other illegal activities.

If a court decides to issue an arrest warrant for Shin, this will paralyze Korea’s fifth-largest family-controlled conglomerate, halting its plans to venture into new businesses and overhaul its corporate governance structure. Lotte has been seeking to list the shares of Lotte Hotel, the de-facto holding firm of Lotte Group in Korea, on the local bourse to weaken the control of Lotte Holdings in Japan over the Korean units.

A bigger problem is that it appears there is no one who can replace the chairman among the Shin family members or Lotte’s top executives.

Shin’s father Kyuk-ho and older brother Dong-joo will soon be summoned for questioning about a range of allegations. His older sister Young-ja is behind bars for accepting bribes from her business partner in exchange for offering undue favors.

In August, Lotte Group’s No. 2 man Lee In-Won committed suicide before he was questioned by the prosecution, while most of the other top executives are grappling with legal troubles.

Under these circumstances, Shin’s absence will likely give rise to Japanese executives at Lotte Holdings in Japan, which holds controlling stakes in Lotte Hotel and other key group units here, according to industry analysts Tuesday.

On Monday, the Seoul Central District Prosecutors’ Office requested an arrest warrant for the Lotte Group chairman, a move sending shockwaves across the Lotte empire.

The Seoul Central District Court will decide whether to issue the warrant after holding a hearing today.

Among others, the prosecution suspects that Shin pocketed about 10 billion won ($9.1 million) every year from group affiliates in Japan without playing any role. Investigators also said he caused financial damage to group units through “questionable” merger and acquisition deals, which they say constituted breach of trust.

But Shin has been denying these allegations.

“It is very regrettable that prosecutors decided to seek an arrest warrant for Shin, “a Lotte Group official said. “ We will wait and see what the court does. The chairman’s absence will certainly deal a blow to the group’s businesses. Our operations in both Korea and Japan will inevitably face difficulties.”

Shin’s arrest will turn things from bad to worse for Lotte Group, according to an executive at one of the country’s major business associations, who declined to be named.

“I would say that Lotte is facing its worst crisis since its foundation,” the executive said. “There is no one who can effectively replace Shin at the moment. The Shin family members are in serious legal trouble, while the chairman’s confidants struggle with their own legal problems. Shin’s presence is a must for Lotte to function properly.”

He expressed concerns that if the chairman is put behind bars, this would derail the group’s ventures into new businesses, and suspend its campaign to revamp its corporate governance structure.

“Shin has been aggressively acquiring other companies and moving into unexplored areas to find new growth engines,” the executive said. “He has also tried to list shares of Lotte Hotel and took other steps to reduce the control of Lotte Holdings in Japan over Korean units. But if Shin is gone, all these efforts will be in vain. Executives at Lotte Japan will likely step in to fill Shin’s void, a scenario that no one in Korea wants to see.”

Lotte Holdings in Japan and affiliated L investment funds hold a combined 91.7 percent stake in Lotte Hotel, which has considerable stakes in Lotte Shopping and other key group units.