[OUTLOOK]Conglomerates aren’t all bad

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[OUTLOOK]Conglomerates aren’t all bad

Korean conglomerates have two contrasting reputations: one at home and one abroad. Outside the country, their leading role in Korea’s miraculous economic growth is positively recognized. However, a rather negative reputation prevails at home, as they are considered ideal targets for reform.
Personally, I find the grounds for the economic rhetoric of those taking a negative perspective to be very weak. They are often based on what can be considered prejudice.
Let’s look at the controversial “fleet-style” management or “insider trading” issues. At present, the government has taken the side of those who advocate a reform of the conglomerates. Any transaction between subsidiaries made at a price different from the current market price is defined as “unlawful insider trading,” and the government imposes a penalty. Korea is the only country in the world that regulates internal trading under the fair trade act.
However, from the conglomerates’ standpoint, internal trading is the reason for their existence. As subsidiaries share management resources through internal transactions, the groups can expand easily in many ways. In fact, the internal transactions played a crucial role in the rise of Samsung Electronics and Hyundai Heavy Industry to the ranks of globally competitive companies. In Japan, China, India, Italy and many other nations, most prosperous businesses work in the form of large business groups.
Of course, there is a financial risk in having subsidiaries intertwined with one another, in terms of circular cross-unit equity investment and loan guarantees. If some subsidiaries are in jeopardy, they can take down other healthy subsidiaries with them. However, conglomerates can be understood as a network of businesses willing to take such risks as they focus on expansion.
Family-oriented management is often seen as another evil of conglomerates. Reformists tend to think a system headed by a professional CEO is the best form of management.
However, if you look at businesses around the world, you will soon realize that family businesses are the most common form. In the United States, where the professional management system is most developed, 20 percent of the top 20 listed companies are family-managed, and 60 percent of the all 54,000 publicly-traded companies are managed by members of the owning family. Over 60 percent of some 5,000 listed companies in Germany, Italy, and France are family businesses. In China, India and other Asian nations, family-oriented management is dominant in private companies.
Family-oriented companies perform better on average. In the 1990s, among the top 800 American companies, family-oriented companies had 33 percent higher profitability and grew 15 percent faster than the industrial average. A survey of the top 325 British companies in the 1980s also showed that family businesses performed better in terms of rates of return, sales growth and asset growth.
The cozy relationship between businesses and politicians, which is often mentioned as an anti-social aspect of conglomerates, is not something that is only happening in Korea. Political economics is important in any country. Government policies exert a big influence on the operation of businesses, so it is only natural that businessmen try to exercise influence on the formation and implementation of policies. The fact that Wall Street and the three major carmakers are the biggest lobbying entities in the United States tells us that economics and politics cannot operate separately, even in the most developed nation in the world.
Of course, internal trading, family-oriented management and collusion between politicians and businessmen are not necessarily advisable. You can always find flaws in anything, so it is important to make up for the faults and accentuate the merits. For example, instead of making internal trading illegal, we can take the alternative of publicly announcing the permitted range of internal transactions so that minor shareholders can take it into consideration when making investment decisions in the first place. As for family-oriented management, who is going to hold control over the management is up to the shareholders to decide, so it can’t be an issue as long as the process of deciding the executives is transparent. The problem of collusion be-tween politicians and businessmen should also be resolved by a systematic framework, through which a reasonable level of communication be-tween the government and businesses is made, is maintained.
The recent domestic discussion and policies on the conglomerates have been pursued based on the idealistic and absolute premises that the problems of conglomerates are uni-que, chronic ailments of Korea and that they must be eliminated for the development of Korean society. How-ever, businesses compete relative to one another in a given environment. There is no such thing as an absolute good for business organizations.
In the process of applying an absolute standard for business organizations, the discussion often becomes political. The reason the negative perception of conglomerates has become prevalent in Korea, despite the lack of reason and evidence, is because it has become political. That may be the reason why Koreans are buying into reformist rhetoric so easily.

* The writer is an economics professor at the National University of Singapore. Translation by the JoongAng Daily staff.


by Shin Jang-sup
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