Fix corporate governance structure

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Fix corporate governance structure

One thing Korean society desperately needs is the improvement of its governing structure. A multitude of problems and negative phenomena stem from dysfunctional governing and hereditary procedures. They are prevalent and embedded from the national level to the corporate, financial and religious sectors.

The system and governance structure the Western society has adopted and applied in the modern age underwent progressive evolution on the stratum of tradition, culture and customs and thus was refurbished and reshaped with practicality and empathy. In contrast, we applied an imported government system and structure without relevance and reference to our tradition and culture.

Our national governance structure has been imported from the Western Hemisphere - primarily from the United States - since liberation from Japanese colonial rule, and it later blended with our particular political circumstances in 1987, when nationwide demonstrations led to the amending of the constitution and the beginning of direct presidential elections.

Because the political import did not sit well with those in power, it sometimes was beaten down by force and illegality.

But such strong-arm tactics no longer can work or be tolerated in today’s democratized society, generating various fissures and complaints about our system across the board. If we do not come up with a more practical and effective governing structure that better accommodates our present environment, we may not be able to overcome a multitude of challenges our society struggles with and faces today.

Under the current governing structure - where ruling power as well as major government offices, heads of state-invested companies, financial institutions and public-sector agencies change faces every five years - our country and public sector cannot be run with a long-term perspective and effectively respond to fast-changing world and regional environments.

State and public goals change constantly and policies are short-lived, often generating contradiction between state policies and management direction. Long-term vision is mostly rhetorical and quickly wasted as state, public companies and institutions concentrate on short-term goals that can be completed within the tenure of their leaders. Because governments run on a five-year term, senior government officials’ time in office is short-lived, as is that of public companies, public-related organizations and private institutions that do not have large shareholders. Because of the desire to achieve something during their short-terms in office, senior officials and executives in the public sector often are dismissed or forced out of office for reckless governance and obsessive pursuit of self-interest.

Even the heads of state-run think tanks - who must spearhead research and studies to produce farsighted and lasting state agendas and policies - last three years at most and even shorter if the ruling powers change. Chairmen of financial holding companies are in the same position. Chief executives of foreign financial institutions can run business with responsibility for short and long terms because they can keep their jobs for at least 10 years or longer through an established hereditary process. Which business can be run better and more competitively?

The corporate sector, mainly large family-owned chaebol groups, in contrast has outlived its original strength from owner-run governance. The third generation is now mostly in charge of major chaebol-run groups. Entrepreneurship and management capacity does not, however, always succeed. In foreign cases, too, companies flourish until the second generation who learned and worked with their fathers to establish and build their businesses. But they often go downhill at the helm with third-generation executives. Having succeeded in established businesses and grown up in wealth, grandchildren of corporate empires lack the entrepreneurship and boldness to take on challenges and risks. Instead, they concentrate on easy profits through their funding capacity.

In a capitalist society, individual properties and inheritance are strictly guaranteed. But Korean capitalism bestows upon chaebol families a far greater stake in corporate management than their wealth allows as they can wield control over all group subsidiaries through cross-affiliated investment. They also use various irregular and illegal means to share and build family wealth, and maintain hereditary control at the expense of the interests of minority shareholders. Large conglomerates on which the future of the country hinges should gradually pave the way for tested and professional corporate executives to run their businesses.

The Korean economy is quickly losing vitality. Economic vitality and mobility has diminished, widening the conflicts among different classes. The state is not functioning well in the area of resolving social and economic problems and setting direction. The country is stuck in the middle-income rank of per capita income of $20,000, chained by multiple layers of regulations and systematic constraints. We cannot move up without a broad system overhaul.

Revamping the governing system across our society is our imperative task. The starting point should be reinvention of state governance. The political sector is mired in a stalemate. The ruling and opposition parties both promised constitutional amendment. The government should take the initiative to revise the state governance system through public debate and study.

Translation by the Korea JoongAng Daily staff.

*The author is an economics professor at Sogang University.

By Cho Yoon-je

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