[VIEWPOINT]Posco and the 'Korea discount'

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[VIEWPOINT]Posco and the 'Korea discount'

Posco, one of the most sound companies in Korea, is now in turmoil after reports that Yoo Sang-boo, the chief executive of the firm, allegedly bought shares of Tiger Pools International, a lottery management company, at above the market price after meeting with Kim Hong-gul, the third son of President Kim Dae-jung.

There is no reason for the chief of Posco not to meet the president's son. Whether the purchase price was excessive depends on how we gauge the future value of the stock. Still, the scandal is a symbol of how our large corporations operate. Let's think about a few questions.

First, what if there were true private owners of Posco, the largest steelmaker in the world? For example, would the president's son have possibly thought of asking the same favor from Samsung Electronics? Posco is privatized, but still is under the influence of the government. Maybe this is why political circles, be it the Blue House or elsewhere, continues to assume that Posco would surrender to political pressure.

The governance of Posco, including the introduction of outside directors is evaluated as a model management structure. But the recent turmoil revealed that no matter how transparent corporate governance might be, there always is room for political pressure.

Second, what are the proper relations between large corporations and the government? In the early days of the Kim Young-sam administration, Kim Woo-choong, then chairman of the now-defunct Daewoo Group, paid dearly for having criticized senior government officials for incompetence. Seoul immediately lowered the ceiling on bank loans to Daewoo and the amount of promissory notes that it could issue.

What should be the relationship between the government and Posco, which is not a business conglomerate? It cannot turn to the government or politicians to help it grow because it has been privatized. But Posco does not really have a rival in the domestic market, and it has to compete in the global market.

On the other hand, the government and politicians still have the power to harm Posco. When the steel company was still owned by the government, the government could mobilize the Board of Audit and Inspection to conduct special audits of the company. After privatization, the government can still investigate the firm through the National Tax Service.

If this is the reality, I doubt whether the company was in a position to reject the alleged request from the first lady to meet her son. And would rejecting it have been a wise choice? It's hard to say.

As the Blue House contends, the first lady may not have been involved in the meeting. According to media reports, Choi Gyu-seon, the central figure in the political scandal, was powerful enough to invite George Soros and Michael Jackson to meet Kim Dae-jung. Mr. Yoo probably felt no need to avoid meeting that kind of a big shot. But the above makes sense only in theory, and this is Korea. If something goes wrong, involved parties, voluntarily or involuntarily, are held accountable for the trouble.

Bill Gates, the founder of Microsoft, has reportedly said he has had no need to visit government officials so far in connection with his business. But Korean companies have to study the intentions of the government and be careful not to offend it. About 60 percent of Posco is owned by foreign investors; I wonder what they think about this mess. I am also curious about what effect the scandal might have on the company's ownership structure. Perhaps privatization with a strong owner could be discussed. Korean companies are undervalued compared to their performance because of corporate governance issues and political risk ?that is the so-called "Korea discount."

Judging by the Posco case, politicians are responsible for that Korea discount. No matter how advanced corporate governance is, if the government can still wield its influence on the market, corporations are exposed to risk all the time.

So corporations get burned if they get too close to politics, but on the other hand, they can get frostbitten if they stay too far away. Korean corporate leaders have to navigate carefully to keep the right distance.


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The writer is a co-president of Vision@Korea.

by Yu Han-soo

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