The donation trap

Chaebol owners coughing up their own money to help troubled businesses has a long history.

President Kim Dae-jung took office just as the country had to accept an international bailout during the currency and liquidity crisis of the late 1990s. During his presidential transition in January 1998, he called in the heads of the top five conglomerates and floated the idea of them parting with some of their own wealth to appease angry workers and taxpayers disgruntled about the bailouts of large companies important to the Korean economy.

The LG and Hyundai dynasties protested the idea, saying they had little to give. But they had no choice. The Lotte Group founder and chairman, Shin Kyuk-ho, paved the way by surrendering 16 billion won. The families controlling Samsung, Hyundai, Hyosung and Daelim followed suit.

Kim called their donations an act of “burden-sharing.” On the surface, it was voluntary. But the money was more or less squeezed out of the families.

“It wasn’t as if their businesses would definitely be saved if the money was handed over. But if it wasn’t, they definitely felt that they would be shut down the next day,” a businessman recalled. Almost all owners of companies subject to corporate restructuring had to surrender such so-called contributions.

Financial Services Commission Chairman Yim Jong-yong revived the legacy. He had creditors dog Hanjin Group Chairman Cho Yang-ho to come up with 1.2 trillion won ($1 billion) to help out Hanjin Shipping, threatening to send the shipbuilder into court receivership if he did not comply. Yim could be running out of patience. The union was turning recalcitrant, and banks cannot afford to lend more.

Local rival Hyundai Merchant Marine is in an equally tight spot. But its liquidity woes eased slightly after it earned 1.2 trillion won by selling its shares in Hyundai Securities. Hanjin cannot even afford the charter fees on its fleet. The company needs at least 1 trillion won to stay afloat for another year. Creditors are demanding Cho cough up some cash, but arm-twisting an owner to chip in to save a troubled company is hardly professional.

Intimidation cannot work on the entrepreneurs of today. It will only spark resentment. Authorities should instead entice chaebol owners to invest through inventiveness and incentives. Even President Kim did not rely on muscle alone. He offered tax deductions and exemptions.
Yim spoke of some incentives. He offered Cho a priority right to purchase stocks in Hanjin Shipping, which would allow him to buy back shares taken by creditors after the company is on an even keel. That was how Kumho Asiana Group Chairman Park Sam-koo regained control of Kumho Industrial and Asiana Airlines after a debt workout. But strictly speaking, the Hanjin Shipping case is different.

Cho does not have any responsibility over the company’s ruin. He took over an entity that his sister-in-law wrecked after she assumed control following his brother’s death. He poured in 2 trillion won of his own money to turn the company around. He did not collect any dividends out of his investment.

Cho cannot afford to put up more. His own group is wobbly. Flagship Korean Air incurred a 174.9 billion won net loss even after generating a 323.3 billion won operating profit due to its exposure to Hanjin Shipping. Even creditors admit that Hanjin is in too pitiful a state to demand more from Cho.

There is a way out. If the state-run Korea Development Bank assumes the debt of two shippers, it would become their owner. The bank could consider putting both under one holding company and then invite stake purchases in the new entity. The investor would be making a legitimate investment instead of pouring money into a troubled company with a dubious outlook. The owner would not be liable for misappropriation.

For Cho, it would be less risky than putting money into Hanjin Shipping. Instead he could one day become a large shareholder in the country’s single largest shipper. He would have made a good investment with his money.

No official from a free economy can tell entrepreneurs what to do with their money. Voluntary contributions to a company go against the market principle of responsibility according to stake-holding. Practices and customs transgressing the law and regulations are brutal and mean, regardless of the justice it feigns to represent.

JoongAng Ilbo, June 16, Page 30

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

Yi Jung-jae