Five enemies to restructuring

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Five enemies to restructuring

The owners of conglomerates, the management, bureaucrats, creditors and lawmakers all contributed to bringing about the disastrous state of Korea’s shipping and shipbuilding industries. Who’s most to blame depends on the perspective. The owners and management are accountable for failing to prevent losses and for mismanagement, and the government and creditors are responsible for poor oversight. Legislators must answer for poor damage control by delaying restructuring actions.

Korea’s form of ownership of its chaebol allows for fast and bold decision-making and secures long-term investment in a company. Korean companies have ascended to global ranks thanks to the merits of the country’s chaebol. Korean products from the chipmaking industry, smartphones and automobiles sustained the country’s economy based on the family-run chaebol system. This is because the country and people chose to see more advantages than disadvantages in the chaebol system and an economy revolving around large companies.

But there is a downside to family-run businesses. Executives choose to report to the chairman what they know will please his ears, often leading to wrong management decisions. The owners of two global shipping companies and three shipbuilding giants were content with rosy business reports delivered by executives. They did not bother to check on the figures that were reported to them. The executives, who are paid to run the business, preferred to hide the dark side and the business complexities that could cost them their job.

Management should be blamed most for ruining businesses. Executive groups were assigned and paid handsomely to run businesses on behalf of shareholders, both big and small. They are at the helm of the ship. They are responsible for reading changes in the business climate well ahead to navigate the ship through all possible conditions. Management at the shipping and shipbuilding companies should be found accountable for negligence in their duty. The first restructuring move is to replace the crew at the helm. A company cannot be rebuilt with the same management that ran it into the rocks in the first place.

Government officials and creditor groups have contributed to the mess through structural abnormalities. First of all, bureaucrats do not know how businesses work, or what the conditions are in any given industry. What matters to them is a promotion opportunity. A government official stays in a director-level or working-level supervisory position for two years at most. He or she cannot fully understand the industry in just a year or two.

And since working government officials lack expertise, they cannot draw up pre-emptive measures. Cozy relationships are inevitably established between supervisory bureaucrats and businesses dominating a sector. Nobel Prize-winning economist George Stigler called this “regulatory capture,” where a regulatory agency created to act in the public interest instead acts to advance the concerns of an interest group, the industry itself.

Government officials cannot easily sway the private sector if they perceive dangers. They must consider the interests of bondholders, market upsets and massive job losses should they allow large companies to become insolvent. Their jobs or promotions would be at stake if such disasters occur during their terms. Creditors are also pulled into the whirlpool. They may grumble but cannot be pardoned. They should have kept close watch on the credit portfolios of their corporate clients. They could complain of the tradition of revolving-door practices in state-run enterprises. Chief executive officer positions at bailed-out private companies are reserved for retirees from state-run banks like the Korea Development Bank and Export-Import Bank of Korea. Parachute appointments must be prohibited to prevent further corporate catastrophes like that befalling the shippers and shipbuilders.

The legislature should be responsible for better damage control. It is not easy to predict demand when market conditions are volatile. Shippers have run into financial squeezes by agreeing to long-term charter rates on a forecast of freight rate spikes. Creditors tried to restructure the shipping industry earlier, but legislators in the southern coastal region, which benefits from the shipping business, opposed the move.

The realignment of the two industries should start from an objective evaluation of the fundamental causes. They must be fixed. Executives must be replaced, and owners should share the burden. Legislators must step aside and let the market decide which and how many companies should be saved or go under. The government should only come up with measures to cushion the fallout. It should not bring in the central bank for further bailouts. Industrial restructuring cannot work without fixing the root causes.

JoongAng Ilbo, May 9, Page 28

*The author is an editorial writer for the JoongAng Ilbo.

Kim dong-ho
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