&#91OUTLOOK&#93Reform zeal smacks of arrogance

After a pause with the launch of the new government, jaebeol reform is in the news again. The Fair Trade Commission, in its April 7 report to the president, said it would press the big business groups until “transparent and independent management, and a fair competition system” were established. The framework of proposed reform is to strengthen restrictions on total investments, stiffen the regulation of jaebeol financial affiliates and improve corporate governance structures by enforcing a holding company system. In a nutshell, the government intends to put pressure on the jaebeol from every side. Behind this drive for reform are the perceptions that the conglomerates still are owner-centered, are managed murkily, compete unfairly and keep ownership in families.
We have seen jaebeol reform efforts in every administration. Reforms have not been successful despite good intentions, mainly because they were driven by ideology and idealism degenerating into self-righteousness. Self-righteous reform is prone to be trapped in anti-market ideas and arogance. This is well demonstrated by the jaebeol reforms of the Kim Dae-jung administration, which were only half-successful because the conglomerates did not cooperate. It takes two to tango, and the government cannot just think, “If the conglomerates change, everything will turn out all right.” Reform means creating an atmosphere conducive to change. The Roh government’s reform drive is based on what it calls jaebeol “anomalies and irregularities.” The logic is that once such anomalies and irregularities are corrected, a fair market economy will be in place. In fact, the correct order should be the opposite. When constitutionalism is established through reforms and the market is regulated through normal relations between the government and the market, businesses resorting to anomalies and irregularities will be weeded out in the process of competition. Just correcting irregularities and calling it reform is a mistaken notion of a government that wants to be omnipotent.
Jaebeol reform should be carried out after acknowledging the process under which they evolved in the Korean economy. All existing social phenomena have causes. Jaebeol are business organizations born and bred when the market did not work properly and the government led the charge for industrialization.
Although it would not be the best form of business organization even if it developed naturally, jaebeol could survive competition by operating efficiently. The first step for reform is to let the jaebeol transform themselves and leaving the system alone. The negative perception of jaebeol only restricts their ability to change themselves.
Companies are organizations that profit by seizing market opportunities. Because they cannot survive without growing, “defense of management rights” is natural for their management. Stock swaps between the Walkerhill Hotel and the SK Group led to the imprisonment of the SK Group chairman because SK tried to evade investment restrictions. After the SK incident, we may begin to see hostile takeover attempts; a foreign investment fund has become the largest SK stockholder through the purchase of depressed shares. The company says it bought the shares for investment, but given the possibility that the SK chairman may have to turn over his holdings to the group’s creditors, a takeover is not out of the question.
While I have no intention to defend the chairman, I would like to ask what benefit comes from regulating jaebeol investments by denying voting rights to shareholdings that exceeds 25 percent of net assets. SK’s attempt to defend its management rights will only benefit foreign investment funds. And the holding company system is a device to encourage jaebeol to manage themselves transparently. But the current requirements to set up a holding company are too rigorous ― it is just a policy game being played by the administration. The government worries that the holding companies will just be jaebeol shelters.
Companies are living things that respond rationally to changes in conditions. It is important to understand the nature of business entities and make use of market regulation. It is here that I am concerned about jaebeol reform policies that are laced with the “participatory government’s” idealism.

* The writer is a professor of economics at Myongji University.

by Cho Dong-keun