Upgrading family-run businesses

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Upgrading family-run businesses

The “nut rage” incident that brought about international ridicule and disgrace for Korean Air Lines (KAL) and the Cho family who owns the airliner may have actually been a good thing for the Korean economy. It laid bare the ills of hereditary rule in the corporate empire, or chaebol. It could be a rude awakening for Korea’s corporate families, now into their third or fourth generations running their businesses.

Chaebol, or family business, is a unique corporate system that helped to turn the war-devastated, resource-poor Korean economy into an industrial and technological powerhouse at an unprecedentedly rapid pace. Our industrial forefathers built the foundation for manufacturing and trade from the ashes of war, with an extraordinary foresight and venturous drive. Their sons kept to their fathers’ sides and stretched entrepreneurship overseas, turning Korean companies into global names.

Over the decades, the companies went public and founding families’ combined stake ratio was reduced to about 5 percent on average. Shareholders had no complaints about the family-run businesses. They were happy with the fat returns and stable operations under fast decision-making and aggressive investment from owner-management. The household corporate names were handed down in the family as a kind of legacy with which society came to terms.

But the mood began to change under the younger generation. They were born with silver spoons in their mouths, educated overseas and enjoyed unlimited protection and benefits in their exclusive moneyed club. They lag behind their fathers and grandfathers in capacity, business insight and character. Many began to question if the Korean Inc. was safe in their hands. Some even blamed the poor performance of Korean shares - with the lowest growth among global stock markets - to their incapacity. Then there was this “nut” episode with former KAL executive Cho Hyun-ah at New York’s John F. Kennedy International Airport.

There are many foreign cases where family businesses have successfully been handed down over five and six generations. There are many well-known family corporate dynasties in Europe. Family business and society worked together to establish a reasonable arrangement on succession and management share. The Wallenberg family of Sweden - publicly envied by Samsung Group Chairman Lee Kun-hee - has been around for 158 years. By 1990, the family was said to have controlled nearly a third of Sweden’s gross domestic product. Now in the fifth generation, the family still enjoys an invincible rank in the economy with principles and business practices that cannot be emulated by Korean companies. Their hereditary system is strict. The candidates go through rigorous training under stern family ethics and business value guidelines. They must earn their university education and must complete military service as naval officer. They are numerously tested once they enter the group before they can be promoted to an executive post. The family runs business only through the board. They approve the big decisions and leave general management to chief executives.

The Quandt family that owns BMW has a similar reputation. They possess 47 percent in the German automaker, but only interfere as board members. None from the family took up the role of chairman. The children joined BMW and worked their way up, and their colleagues were unaware of their family name. Despite their large-stake ownership, the family keeps a low-profile and leaves business up to the professionals.

The corporate family empires are different in Korea. They have a say in big and small business affairs and appointments. Chief executives, senior executives and outside board members all have to prove their loyalty and kowtow to the owning family. This roughshod management has become more blatant under the third and fourth generations. Of course, we may be too harsh and impatient. There may be many among contemporary corporate owners who could do big things for their businesses later. But they are always rotten eggs. Wrong business decisions among big companies can not only jeopardize the family empire, but also the economy, which is still heavily reliant on chaebol industry. The damage could be dumped on the taxpayers if bailouts are necessary. If the national pension is at stake, the country’s future could be at risk.

Ordinary shareholders can prevent such catastrophe. They are entitled to exercise their rights through the vote vested by their shares. They must participate in shareholders’ meetings and vote against any questionable business moves. They must join up with institutional investors to dispatch watchful outside board members. The family business could shape up under such scrutiny.

Cho Yang-ho, the chairman of Hanjin Group and KAL, who had to bow deeply to apologize for the misbehavior of his daughter, declared that he would promote a corporate culture that openly encourages opposition to injustices and unfairness. To determine whether that is possible, we may have to wait and see.

JoongAng Ilbo, Dec. 25, Page 24

*The author is the head of the Economist, a weekly business news magazine published by the JoongAng Ilbo, and the Korean edition of Forbes.

by Kim Kwang-ki

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