A new era for chaebol

A Seoul district court delivered a four-year jail term for Hanwha Group Chairman Kim Seung-youn for embezzlement and abuse of power and sent him straight to prison. It is an unprecedentedly heavy court ruling for a conglomerate owner as in the past most were slapped with fines and pardoned from prison. The court’s strong stance against corruption in family-run conglomerates coupled with a political call for economic justice may bring changes to corporate governance.

The court determined that Kim and other senior executives of Hanwha Group used company money to finance the enterprises Kim personally ran under borrowed names and sold stakes in group affiliates at cheaper prices to Kim’s sister, costing the group 283.3 billion won ($249 million) and 14.1 billion won. It punished Kim for abusing his power as the largest stakeholder. In the strongly worded verdict, the court said it ruled according to strict standards on economic crimes demanded by the public. Founding owners and their succeeding generation have been pardoned from prison sentences even after being found guilty for bribery, tax dodging, embezzlement, illegal funding, stock manipulation and other malpractices in fear of damaging the too-big-to-fail companies. Court rulings against conglomerate chairmen were mocked as having a fixed template of a “three-year sentence with a five-year stay of execution.” Kim’s ruling suggests that the days of slap-on-the-wrist sentences may have ended. Regardless of their status and influence, economic crimes are expected to come under strict court scrutiny and punishment. The next time corporate owners think about using company money as their personal piggy bank, they should ask themselves if the action is worth prison time.

The court ruling also should send reverberations to the political sector scrambling to come up with various campaign ideas to contain chaebol as a demonstration for economic justice. In the ruling, the court criticized Kim’s abuse of authority and strict corporate hierarchy. “Documents showed that Kim was addressed as ‘CM,’ short for chairman and treated almost like a deity.” The latest ruling suggested that such abuse of power by corporate owners and largest shareholders can be contained through strict rules and punishment on misappropriations, unfair trade practices and tax evasion. Such ill practices were rampant because these legal mechanisms so far hadn’t worked. The work on reforming chaebol governance does not need to be entirely creative.