Posco’s big challenges

President and chief technology officer of Posco, Kwon Oh-joon, has been nominated as chairman of the board of the global steelmaker headquartered in Pohang. After former Chairman Chung Joon-yang resigned without serving out his second term, there were rumors that he had to step down because of his connection with former President Lee Myung-bak. Regardless, we welcome the board of directors’ decision to recommend an insider - well versed in the operations of the multinational steelmaking giant - for the top post. With the move, Posco has kept its appointments principle based on internal promotion and professionalism, which it has been known for since the company was privatized in 2000.

Kwon is known for his expertise in technology. After graduating from the University of Pittsburgh with a Ph.D. in metal engineering, he served as the head of the Technology Research Center and the Research Institute of Industrial Science and Technology at Posco. The board of directors assessed him as a “man fit to lead Posco’s management innovation, including fostering a long-term growth engine.”

However, the company’s business environment is less than friendly. Its operating profit of more than 7 trillion won ($6.58 billion) five years ago dropped below 3 trillion won last year due to a decline in demand because of the global economic slowdown and China’s oversupply of steel. Industry analysts say the former chairman’s attempts to diversify Posco’s businesses put the profitable company on piles of debt. Along with a sharp increase in the number of Posco affiliates from 36 to more than 70, Posco’s debt-to-equity ratio soared to 87 percent from 60 percent and its credit rating fell. Company insiders say that Posco faces the biggest crisis since its foundation in 1968.

The next chairman must confront tough challenges, including figuring out effective ways to restore the company’s revenues and secure a new growth engine for the future. To achieve that goal, the company must end the vicious cycle of replacing its CEO whenever the administration changes. If Posco maintains a shaky corporate governance structure that cannot withstand outside pressure, it can’t survive in the jungle that is the steelmaking business. Internal reform is also urgent. Industry insiders say that an old boys’ club that relentlessly pursues its own interests is one of the biggest reasons for the company’s financial deterioration. The new chairman must establish a fresh and transparent management environment.

The government must break away from the temptation to meddle in the management of Posco. It must ensure that a CEO can serve his or her term to the finish. The government must not repeat the practice of forcing Posco to put someone loyal to the president at the helm.