Korea's gilded age

By John Burton

The last couple of years has seen a series of chains that have weakened the status quo by making the nation’s leaders more accountable for their actions and which has now cumulated in the imprisonment of former President Park Geun-hye and Lee Jae-yong, the de facto head of Samsung.

The result could be significant improvements in Korean corporate governance that will benefit the country in the long-term. The recent scandals may be seen by future historians as transforming the business sector in the same way that the democracy movement in the late 1980s brought change to politics.

While democratic traditions have established deep roots in politics in the last 30 years, the corporate sector until now has been left largely untouched. But Korea’s business royalty could be facing a day of reckoning in confronting a revolution that could radically alter the management of the family-owned conglomerates.

When Roosevelt went after the business “trusts” and “combines” in the early 20th century, the goal was not to destroy the engines of economic success but rather to create a new corporate environment that would allow smaller businesses to grow. That should be the aim of coming reforms in Korea.

Although the chaebol have delivered great wealth to Korea that would have been unimaginable even 40 years ago, their backward corporate governance and addiction to debt has resulted in boom-bust cycles, such as the 1997 financial crisis, as well as shortchanging minority investors. In addition, their economic dominance has distorted the financial system and deprived emerging businesses of needed capital.

The chaebol have argued in the past that sudden and serious reforms carry the risk of damaging the economy. This argument has often taken on a circular logic: when times are good, the response is “Why should we fix something that is working well?,” and when times are bad, “It is not the moment to do something that could make the situation worse.”

These arguments may be offered again, particularly when political tensions are rising on the Korean peninsula with Pyongyang’s accelerated nuclear and missile program and Beijing’s stage-managed boycott of Korean products because of the THAAD deployment.

The challenge for Moon Jae-in, if he is elected president, will be if he can actually follow through on promises to dilute the power of the chaebol. Previous presidents have made similar promises, but their actions have often been ineffective because they have failed to hold owners fully to account.

Will this time be different? The public mood has grown increasingly hostile to the chaebol amid the disclosures of crony capitalism. This improves the prospects for meaningful corporate governance reforms.

But the desire for reform could weaken if global demand continues to remain sluggish and the Trump administration pushes ahead with protectionist measures that would dampen Korea’s export performance.

Indeed, there is little doubt that corporate reforms could disrupt economic growth in the short-term. But Korea is a better position than many other countries to withstand a slowdown because of its strong current account and fiscal positions.

The supporters of reform should be arguing that the recent corporate and political scandals provide an opportunity to reinvigorate the economy in the long-term.

That has been the view adopted by foreign investors in the Korean stock market in recent months. They have recognized that reforms would improve the country’s strong economic fundamentals, while investors would benefit from increased shareholder returns resulting from better corporate governance.That is one reason why shares in Samsung Electronics have continued to perform well despite the scandal affecting the group’s top leadership.

A President Moon, backed by majority support in the National Assembly, should take the plunge and carry out fundamental corporate reforms. These would include giving minority shareholders a greater voice in selecting a company’s board of directors and forcing the chaebol to adopt a holding company structure that would provide more transparency.

John Burton, a former Korea correspondent for the Financial Times, is now a Washington,. D.C.-based journalist and consultant. He can be reached at johnburtonft@yahoo.com.