Chaebol dynasties must get real

Chey Tae-won, chairman of SK Group, became the most prominent Korean business tycoon to be handcuffed in a courtroom and led straight to prison after being found guilty of a crime. Chey, who is serving his second prison term, is not merely unlucky. He wouldn’t be where he is now if prosecutors hadn’t found 17.5 billion won ($16.04 million) worth of checks signed by him in a safe of Benex Investment. It’s hardly coincidence that the country’s third-largest business group, which runs the country’s biggest mobile carrier and oil refiner, repeatedly gets caught in corruption scandals. At the root of this phenomenon is the insecure futures of the second-generation owners of Korea’s chaebol or business conglomerates.

The SK tragedy goes back to the sudden death of patriarch Chey Jong-hyun, who passed away in 1998 from lung cancer. Following time-honored custom among the family-owned chaebol, the eldest son took the helm. But he was unprepared. His stake in the group was small while the group’s assets were divided in a highly complicated way among his cousins. Worst of all, he had few liquid assets. He inherited a mega-scale conglomerate with various affiliates to run, but without a solid foundation of actual wealth.

Chey was slapped with inheritance taxes of 72.9 billion won, the value of half the stocks he owned. He offered to pay in installment over five years because he didn’t have cash. He cashed in dividends and sold non-core affiliate shares. When that was not enough, he had to borrow from banks. Then in 2005, his mainstay company SK Corporation faced a hostile takeover attempt by the Dubai-based Sovereign Asset Management he had to raise whatever cash he could to guard his control of the group. He ended up resorting to fraud and embezzlement.

Chey’s fall could happen to any of the princelings or princesses of family-owned business groups. Their every move is closely watched and regulated through inheritance taxes as high as 65 percent and antitrust rules. Authorities also are ready to slap a ban on cross-affiliate investments that help keep second- or third-generation owners in charge of their groups.

The ballooning market capitalization of large companies is also a problem to the dynasties. To inherit the equities and secure enough shares to protect their management control, they must own a corresponding amount of traceable clean cash. They can no longer rely on booty from politicians. The tide has turned against them and legislators have become their biggest enemy as they use chaebol-bashing to make them more popular with the hoi polloi during elections. Life is no longer a breeze for Korea’s tycoons.

The first generation who rose under the industrialization drive of the military regimes from the 1960s to 1980s were hardly media-shy. Lee Byung-chull, founder of Samsung Group, frequently did press interviews and contributed opinion pieces to newspapers. He was a popular guest on New Year TV talk shows and wrote regularly to newspapers. Before he died, he publicly posed 24 questions about religion to a Catholic priest. Hyundai Group founder Chung Ju-yung was also a public figure. He played volleyball and wrestled with workers on the sand and bargained with the union during strikes. That generation mingled and kept in tune with the contemporary times.

Their sons, daughters and grandchildren, however, are a different breed. They lead veiled, secluded lives. The legal department of their headquarters - which serve as control towers of today’s chaebol - have swollen out of all proportion. Lawyers are the real princes these days and business owners rely on them to protect them from lawsuits. But the law has increasingly turned against the chaebol. The headquarters need to restore their original policy-making function.

Korea’s large companies are credited with the rapid growth of the Korean economy. Quick decision-making, acumen, and the enterprising drive of family control helped build Korea’s corporate success. But corporate performance is but one of many qualities demanded of a business owner these days. The amount of shares he or she controls is no longer sufficient protection. Entrepreneurs must win respect and admiration from the people.

Henry Ford, founder of the Ford Motor Company, was one of the richest American tycoons, but he was admired for his commitment to his workers and contribution to society. He kept his company under family ownership, albeit with a stake of only 3.2 percent. When the automaker faced bankruptcy during wartime, Henry Ford II, who was serving in the navy, was brought in to save the company. He led the automaker for 35 years and rebuilt the Ford legacy. The Toyota family has been running Japan’s largest automotive empire into its fourth generation with a stake-holding of less than 2 percent.

The United Kingdom acquired the control of Hong Kong’s New Territories on a 99-year lease. At the time, the British Empire was at the peak of its power and China at its nadir. The British could have demanded control over the territories forever if they wanted, but they drew the line. They believed sovereignty beyond a century was the will of God.

Korean chaebol have celebrated their 60th year and are heading toward the century mark. They will have to prove themselves worthy if they want to push their heavenly blessings.

The times demand creativity in corporate governance and entrepreneurship. Chaebol owners can sustain their corporate dynasties only with unquestionable reputations. The second- and third-generation owners should come out of their palaces and enter the real world.

*The author is an editorial writer of the JoongAng Ilbo.

by Lee Chul-ho