[VIEWPOINT]Faulty circular investment logicRegulating cigarette smoking in public places or drunken driving are functions the government should implement for the public interest, because such acts hurt other people.
But what should we think of a regulation that requires drivers to fasten their seatbelts? The one who will get hurt by the violation of that regulation is the person who violates it. Others will not get hurt by it. Nevertheless, the government imposes such regulations and even levies fines when the rule is violated. The same applies to the regulation that makes it mandatory to wear helmets when riding a motor bike.
We can say that such regulations are examples of authoritarian intervention, and that the government is providing guidelines and protection to people because they don’t know what is in their interest.
Nevertheless, people accept them as proper because the benefits from the regulations are big, although the effort and expenses required to observe them are very small.
The Fair Trade Commission now plans to impose a regulation to ban big businesses from making circular cross-unit investments as an alternative to abolishing the investment ceiling on cross-affiliate shareholdings.
Exercising the ownership of a large number of companies through circular cross-unit investment with only a small amount of money is not a desirable form of business governance.
Business owners invest a small amount of capital and the financial structure of such businesses is weak, although they can defend their management rights well. Therefore, the benefits and burdens of circular cross-unit investments go to the business owner who makes a small amount of the fund look big by investing it in other business units in circulation.
As long as the details of the investments are made public, there can be no bona fide victims of circular investment. There is no reason for the government to protect small shareholders who invest in the businesses, because they know about the weak financial structure and abnormal business governance when they invest.
In that sense, regulating circular cross-unit investment is an authoritarian intervention against an activity in which the victim commits the violation, as in the case of requiring all drivers to wear seatbelts because the government knows what is good for them.
Unlike seatbelts, however, the regulations on circular cross-unit investments cannot be justified, because their expected effect is questionable, although it requires an enormous amount of expense to observe the rule. Banning circular cross-unit investment may have postive indirect and ethical effects, such as restraining the possibility of the owner’s abuse of management rights and the stashing of slush funds. But the side effects are direct and practical things, such as the loss of opportunities to create jobs and income. The decision on whether to make a circular investment or not should be decided by the businesses, with the consent of shareholders, at the management level.
It is not a matter the government should enforce and punish by law.
In case a business owner exercises the management rights of a large-scale business group with small shareholdings, there is the possibility that the interests of small share-holders and businesses will be sacrificed for the sake of the owner’s private interest. But similar things can also happen in small and medium businesses and independent companies. They do not occur because of circular investment, nor will they disappear if circular investment is banned. Embezzlement, breach of trust and unfair insider trading are illegal activities already banned by existing laws. So, such activities will be regulated if the law in force is implemented properly.
There may be people who believe it is necessary to regulate circular investment in advance because it could bring confusion and hardship to our national economy if a business group established by circular investment gets insolvent.
But this should be approached by monitoring the financial market and the system of driving out insolvent businesses from the market. It cannot be resolved by limiting the investment activities of businesses.
Like the imposition of an investment ceiling on cross-affiliate shareholdings, the ban on circular cross-unit investment is an unfair pre-regulation that is molded under the premise that all business investments are potentially illegal activities that aim to expand management control over businesses while stashing slush funds.
If the imposition of an investment ceiling is an unnecessary regulation, the ban on circular cross-unit investment should be withdrawn on the same logic.
Advising businesses not to make circular cross-unit investments is a job for management consulting companies, not for the government.
by Kim Jong-seok