Chaebol family members are keeping a low profile

With the Park administration’s vows to push economic democratization to curb chaebol’s economic power, market observers are paying special attention to whether the conglomerates will appoint family members to boards of directors at shareholders’ meetings March 15 and March 22.

They say some chaebol family members are likely to shy away from such positions to try to avoid responsibility for any potential wrongdoing as directors have the responsibility and accountability for decisions at board meetings and could be subject to legal punishments if the companies are embroiled in scandals.

President Park Geun-hye has said she will get tough on chaebol members by zeroing in on the longtime court practice of giving suspended sentences to chairmen who have committed crimes and limit the presidential practice of giving pardons by Liberation Day on Aug. 15.

Economic democratization

In her inauguration speech, Park said economic revitalization will be propelled by a creativity and economic democratization, dispelling public concern that the new government may scale back its position. Economic democratization wasn’t mentioned in the road map announced by Park’s presidential transition team on Feb. 21.

“One of my critical economic goals is to ensure that everyone who works hard can stand on their own two feet and where, through the support of policies designed to strengthen small- and medium-sized enterprises, such businesses can prosper alongside large companies,” Park said at the National Assembly on Monday. “By rooting out various unfair practices and rectifying the misguided habits of the past that have frustrated small business owners and small- and medium-sized enterprises, we will provide active support to ensure that everyone can live up to their fullest potential, regardless of where they work or what they do for a living.”

In addition to toughening punishment on chaebol members, the Park government aims to ban chaebol affiliates from giving lucrative deals to companies run by chaebol families. It also want to prohibit any additional equity investment meant to expand circular shareholding structures, while at the same time allowing them to retain current shareholding structures despite criticism that such practices allow chaebol families to control entire groups with small ownership stakes.

The Park government also plans to more strictly regulate conglomerates’ control of nonbanking financial companies by restricting voting rights for stock in non-financial affiliates held by financial and insurance companies to 5 percent for the next five years compared to the current 15 percent limit.

Chaebol step back

Chaebol members keeping distance from taking board positions was seen in a Feb. 15 announcement by Samsung Electronics in advance of a general meeting of shareholders scheduled for Mar. 15.

It didn’t appoint Jay Y. Lee, the only son of Samsung Electronics Chairman Lee Kun-hee and vice chairman of Samsung Electronics, as a board director, while it did select JK Shin, president of Samsung Electronics’ IT and mobile communications division, Yoon Boo-keun, head of Samsung Electronics’ consumer electronics and Lee Sang-hoon, chief financial officer of Samsung Electronics.

While some market observers suggest Samsung Electronics’ board nominations may have been influenced by public criticism after company’s failure to promptly report the January leak of danger hydrofluoric acid at its memory chip plant in Hwaseong, Gyeonggi, others suggested Samsung’s appointments was a response to the specter of economic democratization.

“Being a board member means taking greater responsibility, as he will take part in important decision-making processes, such as administering business plans, selling off or transferring important assets and borrowing a large sum of money,” said an industry source who spoke on condition of anonymity citing the sensitivity of the issue. “Chaebol families shy away from becoming board directors these days more than ever to avoid accountability in case things go wrong. This is related to President Park’s pledges to tighten legal punishment against chaebol families’ illegal activities.”

Some insiders have suggested that Chung Eui-seon, vice chairman of Hyundai Motor and the only son of Hyundai Motor Group Chairman Chung Mong-koo, is likely to get a board director post for Hyundai Glovis this year, but Hyundai Glovis did not include Chung’s nomination on an agenda for the March 15 general shareholders’ meeting.

Chung, who has been on the board of Hyundai Steel since last year, already has a strong presence on Hyundai Motor Group’s affiliates given that he also serves on the boards of Hyundai Motor, Kia Motors, Hyundai Mobis and Hyundai AutoEver.

LS Group is the only conglomerate that has included an agenda for appointing chaebol family members at its general shareholders’ meetings as LS Group

LS Industrial Systems will appoint LG Future Center Chairman John Koo (also known as Koo Cha-hong) as a new board director on March 15, and Koo Cha-yub, chairman of LS Industrial Systems, as a board director March 22.

Minority interests

As a part of overhauling the corporate governance structure, Park has vowed to help minority shareholders raise their voices and exert their rights by encouraging companies to introduce electronic voting at general meetings, but none of Korea’s listed companies has applied for electronic voting this year, according to the Korea Securities Depository and the Korea Listed Companies Association.

Park has encouraged companies to adopt electronic voting to allow shareholders unable to attend meetings to their vote via the Internet.

According to the Korea Securities Depository, of the 87 listed companies that have released shareholders’ meeting schedules, 77 percent, or 67 companies, will hold them on Friday.

Shareholders’ meetings of Korea’s 24 major companies, including Samsung Electronics and KT, are concentrated on March 15 and March 22.

Although companies say shareholders’ meetings often tend to happen on the same day as other companies’ shareholders’ meetings due to business schedules, critics have suggested companies are deliberately trying to discourage minority shareholder participation.

On March 15, aside from Samsung Electronics and KT, Cheil Industries, Hyundai Glovis, LG International and LG Life and Science are scheduled to have shareholders’ meetings. On March 22, LS Group, NC Soft, Posco, Korea Aerospace Industries and Nongshim will have their shareholders’ meetings.

Market watchers said local listed firms are not willing to introduce electronic voting systems as many of them prefer shadow voting as a way to solidify the interests of major shareholders.

Shadow voting refers to an indirect method for minority shareholders’ to cast votes on business decisions by transferring their rights to the Korea Securities Depository in order to prevent meetings from being canceled due to lack of a quorum.

If a shareholder does not declare the intention to exercise voting rights, in accordance with the Financial Investment Services and Capital Market Act, companies will ask the Korea Securities Depository to exercise the voting right instead.

In this case, the depository will cast those votes in accordance with the ratio of consent and dissent of voting at the shareholders’ meeting.

The revised Financial Investment Services and Capital Market Consolidation Act pending in the National Assembly stipulates that local companies must abolish the shadow voting system by 2015.

Last year, only four of the country’s top 100 manufacturers adopted a cumulative voting system that allows minority shareholders to transfer their rights to a candidate of the board of directors. Many of the manufacturers fear that minority shareholders will use the system to check on chaebol family members and existing management.

Market observers said minority shareholders eventually will have their rights protected and be able to exert greater power as Park has vowed to allow them to establish a system where they can independently appoint outside directors.

Kwon Seong-man, chairman of the Korea Minority Shareholders’ Association, said the Park government needs to toughen punishment of major shareholders to curb their power and enhance the rights of minority shareholders.

“There are many executives who commit breach of trust or embezzlement while rejecting minor shareholders’ requests to examine company account books, but the current legal system is not enough to keep tabs on them,” Kwon said. “We need a law to punish executives who ignore minor shareholders’ requests and establish an independent screening committee that will review account books.”

Meanwhile, some market observers have raised concerns that Park’s economic democratization policies will have a negative effect on Asia’s fourth largest economy.

Song won-geun, a senior research fellow at the Korea Economic Research Institute, said Park’s drive for economic democratization will weaken vitality and decrease quality of life.

“The government will use economic democratization as a pretext to intervene in private companies,” Park said in a report released Feb. 21. “The more the government moves on economic democratization, the more it will generate rampant bureaucracy.”

By Kim Mi-ju [mijukim@joongang.co.kr]