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[VIEWPOINT] Lessons to Be Learned from Daewoo

Feb 10,2001
If We Do Not Learn From It, the Daewoo Failure Will Be Repeated At Hyundai and Elsewhere

The Hyundai and Daewoo groups, which once competed to be the leaders of Korean business, are both in tatters. Daewoo finally collapsed and prosecutors arrested presidents of its affiliates one after another on charges of falsifying accounts to the tune of 41 trillion won ($32 billion) and of assisting former group Chairman Kim Woo-choong to embezzle money.

Hyundai Group can no longer operate without government support due to its debts. Hyundai Engineering & Construction, the leading affiliate of the group, was rescued by the government and creditor banks last year, but needed more help again this year with foreign debt guarantees and the purchase by a government bank of rolled-over bonds. Without government aid, it will not survive.

The issues in the Daewoo crisis will be settled by the courts, but the financial burden on the people will never be reduced by the court ruling. We need to learn a lesson from the Daewoo crisis so that Hyundai and other conglomerates will not follow in its footsteps.

First, it is urgent to spin off affiliates of large business groups. The group management system of leading conglomerates was one of the major causes of making false financial statements and embezzling corporate fund as was the case with Daewoo. Because management priorities were focused on profit in terms of the group rather than each individual affiliate, mutual interaction of investments and aid within the group led the group to failure. There was no organization monitoring and checking group management. Although the government and finance circles were responsible for monitoring such practices, they not only failed to check, but rather aided and abetted those ill practices because of the collusion between politicians and businessmen. Shareholders' meetings and bank inspections are devices to check individual companies, but such a monitoring function cannot perform efficiently for large-scale business group under the management of one owner. As long as Hyundai maintains such a structure, it can never be free from risk, hinting to us that the problem is that the current government support to Hyundai neglects restructuring of the management.

Second, the structure of management led by the owner is a problem. Former Daewoo Chairman Kim probably had no intention to ruin the group from the beginning. He carried out heavily leveraged management, abused his management powers and failed to pay interest during the foreign exchange crisis in 1997. It is our understanding that he falsified the financial statements of Daewoo Corporation, Daewoo Motor Company and Daewoo Heavy Industries, illegally borrowed money based on the falsified records of assets and transferred part of the loans to secret accounts overseas. Such ill practices, dogmatically led by group owners, were supported by management executives, and those managers ended up serving to profit only the owner to the detriment of shareholders. Other conglomerates, including the Hyundai Group, are all managed the same way. As long as dogmatic management by group owners and lackey managers exists, problems like Daewoo's will recur. A management system led by professionals, in which managers are responsible for their decisions, has to be introduced as soon as possible.

Finally, it is urgent to reform politics to prevent collusion between political and economic circles. Behind management irregularities of all companies, corrupt relationships between politicians and businessmen are hidden, because such practice will satisfy the demands of the companies hoping to raise their gains and politicians needing funds. The recent Daewoo crisis shows what conglomerates in our country should do and should not do.

Learning from the failure of Daewoo Group, they should promptly reform the group management system and turn to independent management of affiliates. They should remember that establishing ownership structures based on practical checks and balances in each individual company is the shortcut to sound business.

The writer is a professor of economics at Seoul City University.

by Kang Chul-kyu




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