[OUTLOOK]A defense of corporate practicesThe government recently announced a plan for business reform called the “Three-year Road Map for Market Reform.” The plan would continue restrictions on capital outlays within conglomerates to tackle problems in the market that are caused by cross-investment by affiliates. The plan is an ambitious one that makes use of unprecedented measures such as measuring the degree of separation of management and ownership and the ratio of actual voting rights interest as a multiple of share interest.
But the market is not something that can be molded in a laboratory, because that would compromise the diversity and spontaneity of the market. A look at the international business environment will show that corporate governance takes as many different forms as there are different markets. The majority owner of Ford Motor Co. of the United States can exercise up to 40 percent voting rights with the ownership of just 7 percent of the shares. The same happens in Europe also. Unlike Korea, where there can be no exception to the rule of one vote for every share, the corporate decision-making is left up to the market and the company instead of rigid laws and regulations.
Allianz of Germany has a 15-percent stake in Munich Reinsurance through cross-ownership. Mitsubishi and Mitsui are just two Japanese conglomerates where inter-affiliate cross-ownership is the norm. These are just some of the companies with large potential problems by Korean standards, but Japanese manufacturing continues to be strong.
The government’s road map puts great emphasis on cross-share ownership and the segregation of ownership and management, but what should be more important is the market’s assessment and the performance of the company. We should think about whether there is a mismatch in how the market and the government see the situation. The government’s road map would see the best conglomerate in the country, ranked 42nd in the world by the Financial Times, as a problem just because it is affiliated with a jaebeol. The same standard would put a Kosdaq-market registered start-up company as a model company with a chief executive with a history of wrongdoings just because it does not have cross share ownership. We see the jaebeol as a problematic form of business corporation, but the international business community has more interest in the fundamentals of a company, such as its cash flow and whether there are abuses of management rights.
The ills of cross share ownership get highlighted, but there are also benefits to this form of share distribution. It was the basis of innovative moves into automotive industries and semiconductors when the capital market failed to support such changes. It was also a defense against hostile takeovers that allowed companies to concentrate on technological innovations in relative safety. The management of the SK Group has recently come under attack by a global investment fund. There is growing management instability at such strong corporations as Samsung Electronics and Hyundai Motor with foreign investors now owning larger interests than the Korean majority owners.
The government’s plan to reduce cross share ownership by affiliates will result in the loss of decades of accomplishments. And this is why businesses cannot stand by as the government pushes ahead with its plan. If the government’s plan is to criticize the corporations and maintain restrictions on inter-affiliate investment, then the government blueprint is the appropriate tool. But if what is intended is to improve corporate governance, then it will certainly fail to accomplish what it set out to do.
Problems in corporate governance should be addressed through the power of the market and the decisions of management. With the introduction of business restrictions and supervisory measures following the financial crisis of 1997 and 1998, the watchful eyes of financial institutions, foreign investors and civic groups have become sharper in their supervision of businesses. Business corporations now understand the importance of the market’s trust in their survival and have reoriented management more in the interests of shareholders and increasingly adopted ethical standards.
And the market has changed significantly in those years. It is the government’s turn to change. Has it failed to hear the decades-old criticism that it is the government that is hindering the development of the market? Businesses will have no choice but to leave this market for less controlled ones if the government keeps restrictions in the guise of market reform.
The most urgent task for our business community is the revitalization of investments by corporations. And business investment cannot afford any more damage from some vague measure that purports to judge corporate governance. The government ought to loosen the restrictions on inter-affiliate cross investment. And business corporations ought to draw up their own blueprints that will meet the expectations of the market and the public.
* The writer is president of the Korea Chamber of Commerce and Industry. Translation by the JoongAng Daily staff.
by Kim Hyo-sung