Lotte shoots itself in both feet

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Lotte shoots itself in both feet

There are a couple of clear-cut rules in the succession strategy for family-run corporate empire Samsung. One, an heir is named and bestowed with a controlling stake. The combined stake-holdings of other siblings cannot exceed that of the heir. This is to preempt any sibling rivalry. Another rule is that the chairman never gets on the same plane with the heir-apparent, apparently to preempt any danger of both perishing together and a subsequent void in leadership. The is the legacy of Samsung Group founder Lee Byung-chul. His son Lee Kun-hee has never been on the same plane as his only son and heir Lee Jae-yong - known professionally as Jay Y. Lee - over the last 15 years. The current chairman and his father were close to their daughters in old age, but there was no misunderstanding about who was the successor to the Samsung empire.

The house of Lotte has been different. Shin Kyuk-ho, the founder of the country’s fifth largest conglomerate, apportioned out almost equal stakes to his two sons Shin Dong-joo and Dong-bin, who is but one year younger than his brother. The elder Shin and his older son travelled on the same plane just last month, a thing their Samsung counterparts would never do. Shin, who is now 92, was advised by the group’s strategy division to divide Lotte’s operations, which are spread between Korea and Japan, since 1996 when he was in his mid-70s. Shin reportedly cut the conversation short and ordered the officials to leave his office every time they raised the issue. Nobody dared to confront the mighty patriarch about heir-grooming and management.

Shin never wanted to divide his corporate empire. He often said he dreamed of making “One Global Lotte” and would leave the group in the hands of one son. He nevertheless gave out a 13 percent stake in the Korean businesses of Lotte to his younger son, Dong-bin, and 12 percent to the elder. He distributed a 13 percent stake in the Japanese businesses to the elder Dong-joo and 12 percent to the younger. He fanned sibling rivalry to keep control over them. With a marginal 0.05 percent stake, the aged despotic Shin effectively controlled all of Lotte Group through shareholding in a packaging company in Japan called Koiyunsya (known as Gwangyusa in Korean) that is the biggest shareholder of Lotte Holdings, which oversees the entire Lotte Group and its combined revenue of over 80 trillion won ($68.5 billion) with 200,000 employees in Korea. Shin has been saying the next heir will be chosen by the employees of Lotte.

As in the Shakespearean play “King Lear,” the overbearing dad’s plot to divvy up his kingdom and test his offspring backfired. The two brothers have been waging a public war, with the elder claiming he has the backing of his senile father although he was dismissed from all management positions earlier this year for unknown reasons. Relatives ran to the side of the eldest after the young son stripped the senior Shin of any rights over management by moving him into an honorary position. Relatives are pressuring executives to line up with the older son, who is more fluent in Japanese than Korean and has more interest in businesses in Japan. Shin Dong-bin, current chairman of Lotte, is also confident that he can accumulate enough votes from board members from both Korea and Japan, saying any verbal order from his father would have no legal binding force.

Regardless of who ends up on top, a tragic ending of some sort is inevitable in such a dysfunctional family and corporate empire. The business structure with headquarters spread over two countries will have to be reorganized. Lotte has already lost much of its reputation as a retail giant. A poor image can be fatal for a brand that directly sells products and services to consumers.

It is a pity that the livelihoods of over 200,000 employees hinge on such a dysfunctional family. The Korean public has been appalled by the fact that a Japanese company that accounts for just 5 percent of total revenue controls 95 percent of the business in Korea. They were irritated by the way the elder Shin and his older son held conversations and wrote documents in Japanese rather than Korean.

A U.S. Air Force plane on an economic development mission crashed in Croatia in 1996 killing Commerce Secretary Ron Brown and 34 others, including 11 CEOs. Companies with heirs apparent soon recovered from the sudden loss of their CEOs. But companies like Bechtel and ABB were shaken for a long time.

Peter Drucker, a management guru and expert on the study of entrepreneurship and innovation has said great entrepreneurs plan successions well. From his standard, the elder Shin has failed. The Shin family must be aware of the cold vibe from Korean consumers. The Korean public is hardly amused and is losing patience with the family feud.

JoongAng Ilbo, Aug. 4, Page 30

*The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho

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