Who are the stakeholders?
*The author, head of the Economic Research Institute of the JoongAng Ilbo, is an editorial writer.
The hyenas are encircling Korea. Greedy multinational hedge funds looking for quick cash smell easy prey in Korea’s big business groups. They are the princelings inheriting family-run corporations that have grown huge over the span of two to three generations. The heirs throw back the bait but the hunters do not back off. Those who used to fear the kings of the corporate jungle crawl to the side of the alien predators.
A generational shift has picked up among the biggest Korean conglomerates after LG Group Chairman Koo Bon-moo passed away. Others of the same generation are bedridden or hardly spotted on the business scene these days. With the ascension of Koo Kwang-mo, adopted son of the deceased chairman of the fourth largest conglomerate, the average age of the top chiefs of the five largest chaebol has been lowered to 52. The younger generation inherits corporate empires that have become multinational but face a myriad of challenges. They have to confront management challenges from foreign capital that owns nearly half of Korean equities and pressure from state authorities. Their management skills are doubted and closely watched. One slip up can cost everything, as was seen by the heiresses of the Hanjin Group, which operated Korea Air.
These scions are obliged to safeguard the businesses their fathers and grandfathers built. They were taught that losses in their businesses are tantamount to losses in the national economy. They also have a duty towards the younger generation as top chaebol remain dream workplaces for the young. All these onuses fall on the shoulders of the young executives. In order them to add vitality and talent to their traditional business, management rights must be secure.
Large companies must please their shareholders, pay generous cash dividends as well as buy back shares and cancel them to bump up stock prices. They are following the rules of U.S. market capitalism. Korea Inc. is also pressed to comply with global standards set by U.S. capital. The bellwether blue chip Samsung Electronics vowed to share half of its net earnings with shareholders. It would spend 10 trillion won ($9.3 billion) to 20 trillion won to indulge shareholders — half of them foreign. Hyundai Motor Group in seeking an overhaul of its ownership structure offered to cancel 1 trillion won worth of treasury stock, a move that would end up mostly enriching foreign shareholders.
Chaebol need to think of their shareholders even if they are from foreign lands. The question is: do the foreign shareholders invest in Korean stocks with long-term confidence in the company and management? That is unlikely. There are, of course, many types of investors, but most of them usually pack up once their investment target is achieved. Foreigners usually sell aggressively when buyback programs are in progress.
A new mind-set is needed. A corporation is not owned by shareholders alone. Employees, creditors, suppliers and partners, consumers and regional communities all have stakes in a publicly trading company. They are the ones who cannot abandon the company at troubled times — as shareholders can.
The young captains of Korea Inc. should run their businesses with broader visions that recognize the interests of all stakeholders — not just the shareholders. The late chairman of LG earned respect from his employees and peers because he was not the typical high-handed and inapproachable boss. He was appreciative of shareholders but, nevertheless, did not neglect social responsibility. He preached that managers must communicate more and broadly and make a work environment fun to encourage innovation. He stressed that a company that loses the confidence of the people and society cannot last.
What is the biggest social return a large company can offer? The answer: aggressive investment and hiring. It should spend half of the money it uses to indulge foreign shareholders on creating jobs for Korea’s young. When a young person gets into a big company, pride is endowed on his or her entire family. Anyone in this land would come to the defense of a company that has worked hard to create jobs and value for society when it comes under attack from foreign speculative forces.
The business community is pleading for legal protections for management after Hyundai Motor came under the attack of U.S. activist hedge fund Elliott Management. They ask for defense mechanisms like a dual-class stock system or a “poison pill” shareholder rights plan common in advanced markets. Such changes are possible through the legislature. Lawmakers act upon public demand and sentiment. Chaebol must win the hearts of people of their country, not people outside, to ensure management security.
Some of the young scions are regarded as spoiled brats. They must take the silver spoons out of their mouths and connect with Korean society to prove those critics wrong.
JoongAng Ilbo, May 25, Page 28