By Dr. Jeffrey I. Kim
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Chaebol have made a great contribution to Korea's rapid industrialization but they have also produced adverse effects socially and economically.
Despite holding a small stake, chaebol families control the entire business conglomerate by adopting the ingenious circular shareholding investment strategy. Also, chaebol have allegedly contributed to serious income inequality in Korea.
Many Korean people began to turn their backs on chaebol when the economy was devastated by the 1997-98 Asian financial crisis. They believe that reckless investments by chaebol caused the Korean economy to crash, resulting in massive unemployment.
They were critical of the corporate governance practiced by chaebol. They disliked the chaebol chairman's "emperor-style management."
Insiders of chaebol would easily say, "The words of the chairman are like the words of the emperor, the words of God, and they cannot be refuted in any way."
People do not think it fair for chaebol to exercise voting rights beyond their investments. They have been very critical of the chaebol's circular shareholding.
One example of circular shareholding investment is the following. Within Samsung Group, Samsung Everland holds a stake in Samsung Life Insurance, which owns a stake in Samsung Electronics, which has a stake in Samsung Card, which in turn holds a stake in Samsung Everland.
This circular shareholding scheme allows Lee Jae-young, the largest shareholder of Samsung Everland, to wield control over the other companies.
Chaebol's circular investment practice has come under fire as debates on "economic democracy" intensified among politicians in mid-2012 during the presidential election campaign.
Both ruling and opposition politicians competitively criticized the practice of chaebol's circular equity investment. They condemned chaebol for exercising voting rights way beyond their actual investments. They demanded that chaebol should sever the chain of circular equity investments.
In her inauguration address in February 2013, former President Park Geun-hye clearly emphasized chaebol reform. President Moon Jae-in also promised to conduct chaebol reform in his presidential inauguration in May 2017.
Fortunately there has been some progress in chaebol reform in terms of reducing circular equity investment, improving the business relationship between chaebol and small and medium enterprises (SMEs) and promoting the spirit of shared growth. Still, however, there are miles and miles to go overcoming the various hurdles lying ahead.
To carry out chaebol reform more effectively and expeditiously, the government should know the following. First, the public should appreciate the positive role of chaebol because they believe chaebol can retain competitiveness in the global product markets.
But Koreans are very critical of the ill-behavior of chaebol CEOs and chairmen. Their ill-behavior includes bullying their subcontractors and exercising emperor-like management.
There are some problems and issues that have been inadvertently hidden under the carpet. Most family-run conglomerates have monopsony power in the factor markets.
For instance, chaebol with monopsony power can be the only purchaser in the labor market so that they tend to undercut wages below the competitive market level. Thus, chaebol with monopsony power discourage workers as it reduces employment. But this is only a partial equilibrium solution.
If a minimum wage law is imposed, it can raise employment even above the competitive market level. This is a surprise! The government may explore this possibility.
Among chaebol CEOs, some are loyal to the owner-chairman but some are wicked and treacherous due to an insufficient monitoring system. This is called "the principal-agent problem." The number of bad CEOs can increase unless the owner-chairman takes proper preventive measures.
The chairman's emperor-syle management is not easy to change but must be corrected. The public's wrath on emperor-like management is well justified.
Chaebol business is so big that if the owner-chairman makes the wrong investment decision and fails, then taxpayers' money will have to be used to bail them out of bankruptcy. For this very reason, the owner-chairman should reach out to the public as much as possible and show them that he is a healthy and rational decision-maker.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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