(Bloomberg Businessweek) -- “No chaebol chiefs want to lose control over their empires,” says one analyst. “Their tendency is to lie flat on the ground, tough it out, and then resume business as usual.”
While this could be a commentary on Seoul today, the reporting comes from a Businessweek article in the late 1990s, when South Korea was ensnared in the Asian financial crisis. Then South Korea’s corporate empires were under attack. The Korean economy was struggling, and politicians were responding by pledging to reform the chaebol, the family-controlled conglomerates that dominate businesses ranging from shipbuilding to chipmaking. The conglomerates waited for the storm to pass.
For the chaebol, reformers come and reformers go. In the decades since the Asian crisis, politicians have made repeated calls for reform of the conglomerates, and prosecutors have won criminal convictions of top executives. But the chaebol showed enough flexibility in their business, so that the market value of the top nine still accounts for roughly 60 percent of the Kospi 200 stock index. Their combined revenue is about 75 percent of gross domestic product.
With the arrest of Jay Y. Lee, the 48-year-old vice chairman of Samsung Electronics Co. and dauphin of the dynasty controlling the Samsung Group, the chaebol are again under pressure from the state. Since the crippling heart attack of his father, Samsung Electronics Chairman Lee Kun-hee, in 2014, Jay Y., his only son, has been de facto head of Korea’s most powerful chaebol. On Feb. 28, South Korea’s special prosecutor indicted the younger Lee on bribery and related charges. It’s the latest move in connection with a political and corporate scandal that’s led to the impeachment of President Park Geun-hye. Both Samsung Electronics and Lee deny he did anything wrong. The special prosecutor on Feb. 28 indicted four other Samsung executives alongside Lee.
Many chaebol bosses have been accused of wrongdoing. Lee’s father was convicted of bribery in 1996 and tax evasion in 2008; he received suspended prison sentences and presidential pardons for both convictions. In 2007 the chairman of Hyundai Motor Group, Chung Mong-koo, was convicted of embezzlement and breach of duty; he received a suspended three-year prison sentence and a pardon. Chey Tae-won, chairman of SK Group, was convicted twice and pardoned twice. Kim Seung-youn, chairman of Hanwha Group, was pardoned in 2008 for assault.
With a presidential election later this year, the scandals are strengthening the opposition Democratic Party of Korea, which has called for stronger measures against the chaebol including reforms to unravel cross-shareholdings and improve corporate governance. The government has failed to crack down in the past, but “this time might be different,” says Jong-sung You, a senior lecturer at Australian National University’s College of Asia and the Pacific. “People think the old practices of corruption and collusion will jeopardize Korea’s economy in the long run.”
The arrest of the younger Lee comes at a time of economic weakness and political upheaval. Household income last year grew just 0.6 percent from 2015, the slowest pace since the statistics office started compiling data in 2003; household spending also set a record low. Economic uncertainty is contributing to a weak investment climate, the government said on Feb. 27.
Korea also needs to address longer-term problems such as an aging population and an underdeveloped small- and midsize business sector, says Oliver Salmon, an economist with advisory firm Oxford Economics in Singapore. The conglomerates have absorbed much of the available capital in Korea. “The chaebol have really strangled investment” in smaller businesses, he says. “The growth model of the past 40 years is not so good now.”
Lee’s legal woes haven’t slowed Samsung Electronics. Shares in the chaebol’s flagship company have held steady since Feb. 17—the day a Seoul court issued an arrest warrant for Lee. Samsung Electronics showed off two new tablets and a virtual-reality viewer on Feb. 26 and will unveil its latest smartphone on March 29.
Even with the de facto head of Samsung Group in custody, there won’t be a power vacuum, says Park Ju-gun, president of Seoul-based corporate watchdog CEOScore: “Lee will be able to make orders on new businesses from behind bars.”
And Lee doesn’t need to worry about a sibling stepping into his role at Samsung, says Kim Sang-jo, a professor at Hansung University. “It’s just literally unthinkable in chaebol society” to depose the designated heir, even if he’s imprisoned, Kim says. “No matter how long he will be away, all people at the group will just wait for Lee to return to his job.” As history shows, the tough-it-out strategy has proved remarkably effective.
The bottom line: The chaebol system, which has survived many crises, may be harming South Korea by suffocating small and medium-size businesses.
To contact the authors of this story: Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net, Sohee Kim in Seoul at skim847@bloomberg.net, Jungah Lee in Seoul at jlee1361@bloomberg.net.
To contact the editor responsible for this story: Christopher Power at cpower3@bloomberg.net.
©2017 Bloomberg L.P.
