Strange management succession

“The Happy Youth of a Desperate Country” is a book about young people in Japan. The author is a Japanese sociologist, and he calls Japan “a desperate country” with extremely few employment opportunities and in a prolonged economic slump. In fact, nearly 40 percent of Japan’s work force work in non-salaried jobs, How can young people living in such a country be happy?

His conclusion is terrifying.

They have given up on the future. No matter how much they try, there is no escaping reality. So they have no hope for the future and are content with the present.

How about the young people in Korea? As I read the book, I realized that Korean youngsters are increasingly becoming similar to those in Japan.

“While the older generation is right to say that they had been much poorer in the past, the young people back then had much more opportunities,” it reads. “We have all dashed for growth, and when economic growth stopped suddenly, everyone became stunned.”

These statements make sense if you substitute Japan with Korea. Are Koreans as happy as their peers in Japan?

Park Je-ha, the deputy dean of the Asia Development Bank Institute in Tokyo, asserted that it is not the case. Is it because Korea’s economic slump and aging society are not as serious as in Japan? Do we have bigger windows of opportunity? Haven’t young Koreans given up on regular employment yet?

Park thinks the management succession makes young Koreans unhappy. The practice of promoting young heirs and heiresses to executive positions in their 20s discourages young Koreans.

He has a point. There are similar family-owned conglomerates in Japan. These companies make up about 10 percent of listed companies. Toyota Motors is a notable example. But the management succession is quite different.

While the management of Toyota has come down to the third generation of the founding family, professional CEOs run the business alternating with heirs.

Since its establishment, there have been 11 CEOs - six family members and five professionals. And they went through similar career paths. It took an average of 31 years for a family member to become a CEO, about the same time as management professionals with an average of 35.8 years in the business. When members of the founding family became CEOs, they were 57 years old on average, not much younger than hired CEOs, at 62.

Moreover, when members of the owning family became CEOs, the labor union supported the decision, even saying that a competent founding family was the symbol of the group’s centripetal force.

So how about Korean companies? According to research on the country’s top 20 companies three years ago, members of the owning family rose to executive positions in 6.6 years, and became president in 14.8 years. They join the company at age 27.9, on average, are promoted to an executive at age 34 and become president at age 42. It’s not an exceptional case that the youngest daughter of Hanjin Group became an executive at 27 and the son became president of a subsidiary at 31. Their promotion is clearly distinguished from the general career path, on which it takes about 21 years to be promoted as an executive.

In Japan, professional corporate executives are tremendously powerful. Sony and Matsushita’s attempt to transfer management to the second generation failed because professional managers considered the heirs to be incompetent. The process of a management transfer is also different.

Kikkoman, a food producer known for soy sauce, does not always prioritize its direct family members. The second generation willing to participate in the business’s management join the company and receive hands-on experience. After being tested for decades, those who prove their competency rise to management positions. In Japan, it is relatively rare for businesses to get involved in controversy over corporate succession.

There was a long debate over whether management by the owning family or professional managers is better, but the global financial crisis ended that. The answer to the crisis was management by the owners, who can make swift, bold decisions and long-term investments. The system helped Korean companies to become global corporations in a short period. But there are flaws, too. The case involving Cho Hyun-ah is a good example of existing corporate family succession being met with resentment.

Society has become more transparent, and the economy is growing slowly. Additionally, anti-conglomerate sentiment prevails. So now, the tycoons need to change. They need to revamp their practices for succession before it’s too late.

It will only become harder to hand over their businesses now: They can only maintain management by changing the process. They may want to refer to the examples of Japanese companies that don’t give special treatment to the owning family. The Cho Hyun-ah case may just illustrate this lesson for Korea.

JoongAng Ilbo, Jan. 8, Page 32

*The author, a former editorial writer for the JoongAng Ilbo, is an adviser at the Korea Institute of Finance.

by Kim Yeong-ook