Reshaping business to create social value
No matter whether he is speaking at public or private events, Chey, whose group is worth 218 trillion won ($187 billion) in assets, is guaranteed to mention either corporate social value or happiness, if not both.
As a result, the biggest issue for the chief executives of SK Group affiliates has become finding a business model that can generate both social and economic value.
“It is difficult to maintain a good business under fierce competition at home and abroad,” the CEO of an SK affiliate told the JoongAng Ilbo. “It gives me a headache because I also have to pursue social value and take care of employees’ happiness, all at the same time.”
“This is the first year where affiliates’ management accomplishments are partly evaluated on how much social value they have created,” said an executive at SK Group. “I’m anxious about the results.”
Another CEO of an SK affiliate says the sudden change in direction is too hard for them, especially as until now they have been racing to create profit without looking back.
In 2017, SK amended the articles of association for affiliates and replaced the purpose of the company from “generating profit” to “creating social value.”
“Without deep change, there is neither growth nor survival,” said Chey.
Chey’s order to CEOs is simple: “Facilitate deep change, otherwise the company can’t grow or survive.”
On Oct. 18, the chairman told some 80 CEOs who gathered for the group’s CEO seminar in Jeju to think differently and completely change the way they generate profit.
“Shifting a company’s business model is equivalent to changing the company’s identity. It’s not about adding digital features to current status,” said Chey.
“Our goal should be to change from the ground up into a digital company. For instance, energy companies should try to become environment companies and telecommunications companies should try to become AI companies.”
Changing a business model requires coming up with a new “game plan,” Chey added.
“So, how do we become a digital company? From now on, we must think about how to play the game,” Chey said. “We can continue to increase sales and cut costs to play the game of generating maximum profits, or we can play an entirely different game.
“We must be brave enough to say, ‘I will pursue growth. I don’t care about losses. Because I will wage a war to raise the market cap of the company.’ So what should you do right now? You guys need to be thinking: ‘I will move on from existing resources in three years.’”
Four years have passed since Chey started talking about deep change. Already, changes are visible in the group.
SK Energy has transformed its gas stations into delivery hubs. ICT affiliates including SK Telecom created a portal where anyone can access the companies’ application programming interfaces (API). The move was intended to share SK’s tangible and intangible assets with society.
Active investments are being made into future technologies such as new energy, semiconductors, lithium-ion batteries, the bio industry and mobility. The group’s top management organization SK Supex Council, headed by Cho Dae-shik, formed an energy solution task force at the start of this year. It aims to find a business model that combines SK’s main energy business and telecommunications business.
Chey is at the center of this change. SK Group’s focus on social value started from an analysis that argued that “the company could face sudden death if it only focuses on generating profit.” The chairman saw the writing on the wall and pushed the social value agenda, calling for affiliates to revolutionize their approach to business.
Chey’s drive for change couldn’t come a moment too soon. In fact, the business models of SK Group’s key affiliates could face serious trouble within the next decade if left unchanged.
SK Telecom, for example, may have held close to a 50 percent market share in the mobile carrier market for years, but its market capitalization (19.10 trillion won) was surpassed by Naver (27.11 trillion won) some time ago. The group’s petroleum and chemical affiliates are still deeply invested in the declining fossil fuel markets, and will need to dramatically diversify in order to ensure sustainable growth. SK Hynix, which enjoyed huge success last year, depends on DRAM memory chips for more than 80 percent of its semiconductor business.
Looking at the group’s entire business portfolio, Chey’s sense of urgency grew that the business needed to look to long-term sustainability, not short-term gains.
The future is digital
Typically, companies use mergers and acquisitions to push their business forward. But rather than pushing for constant expansion, Chey insisted on a focus on social values and happiness. When asked why he is so focused on social values when it’s already difficult to run a business, Chey replied that social value is the very essence of business.
“For a company that has reached its growth limit, social values are like a blue ocean essential for survival,” Chey added.
“[Chey’s call to] pursue not only profit but ‘values’ such as protecting the environment and the coexistence of AI and humans for the company’s survival is not actually that surprising considering that it came from an entrepreneur,” said an official from the group.
Jang Yong-seok, a professor of public administration at Yonsei University and an outside director at SK Holdings, has been discussing the innovation of company and society with Chey for years.
“In the era of ‘zero transaction cost,’ where single-person media can exert a greater influence than a giant broadcasting station, Chey worries that SK Group won’t be able to survive unless it changes,” said Jang. “Some companies might view the change caused by the technological innovation as a risk, but Chey is determined to take [the risk] as an opportunity.”
The reason behind SK Group securing AI technology and focusing on its digital transformation, as well as establishing a central training center dubbed SK University, is to build a foundation crucial for finding emerging markets as they develop.
“Any company that can’t utilize AI and digital technology will be reduced to a subcontractor. A company that can use those tools will take all the customers,” said Chey at SK Icheon Forum in August.
Chey emphasized expanding partnerships in order to facilitate deep change.
SK Telecom and Kakao’s recent equity swap, worth 300 billion won, was possible in this context. Kakao, which grew by neutralizing telecommunications company’s text message and phone services, engaged in fierce competition with SK Telecom every time it started a new business such as navigation and AI speaker.
But when Kim Beom-su, founder of Kakao, called up Chey and said “let’s meet” about two months ago, the SK chairman gladly accepted the request and approved the swap.
A global trend
SK Group’s new direction is increasingly reflected in business management around the world.
In August, Business Roundtable, a group of about 200 leading executives from companies including Apple, Facebook, Walmart, Pepsi and JP Morgan, made a resolution to manage business not only for shareholders’ interests, but for the interests of society.
“There is a growing acceptance among business leaders of the need to broaden the pursuit of shareholder value to one that is based on inclusivity, sustainability and purpose,” explained a Financial Times article on Oct. 28. “Responsible capitalism requires new standards.”
In recent years, the capital market has been focusing not only on corporate profit but also on a company’s impact on society.
“Society is demanding that companies, both public and private, serve a social purpose,” said Larry Fink, chairman of BlackRock, one of the world’s biggest investment management corporations in a letter to CEOs.
“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”
These international voices reinforced SK’s new management direction.
“As it has been confirmed that the group’s direction is in line with the global trend, Chey’s determination became stronger,” said an official from SK Group.
In Korea, 28 public institutions and SK’s Center for Social Value Enhancement Studies (CSES) are putting their heads together to reflect social values on the evaluation of public institutions.
Chey believes that “it is necessary to continue measuring and evaluating accomplishments, though it may be imperfect.”
Inside and outside the business world, Chey is seen as opening a new chapter of management by making “social value” the buzzword of the industry. For the past 10 years since Chey became chairman at the age of 38 in 1998, the focus was on external growth.
“A company’s role is taking care of consumers’ inconveniences, and doing it well is the core of management,” said Shin Hyun-han, a professor of finance at Yonsei School of Business. “Chey’s ‘management toward social values’ offered a new way of dealing with customers’ needs, ultimately redefining ‘the role of a company.’”
The group’s former chairman, Chey Jong-hyun, 30 years ago changed how the business was managed through the concept of Supex, or super excellent, a word that to this day is used to brand everything from the company’s management oversight committee to the signature kimchi available at its 5-star hotel.
For Chey Jong-hyun, Supex represented the highest standard that something can reach, and the idea was held up as the ultimate goal for SK employees. Chey Tae-won, on the other hand, believes that the ultimate goal to ensure the happiness of employees, stakeholders and society is by pursuing social and economic value.
“Change or die.”
In a Korean chaebol, if a chairman gave such an order, the entire corporation would jump to follow it even if they had to decimate the company to do so. SK’s Chey used to be one of those business leaders.
But everything changed when he returned to management in late 2015. Chey rolled up his sleeves and took a more practical approach to win over people inside and outside the company. By opening various forums such as the Icheon Forum, Social Value Connect and ICT Tech Summit, Chey created an environment where real discourse on social value could happen. In most of the forums, Chey spoke about shared infrastructure, social values and sustainable growth.
Unlike most chaebol heads, Chey insists on directly communicating with staff twice a week. At the start of this year, he pledged that he would hold “happiness talks” with employees 100 times by the end of this year to discuss the “happiness of members,” which is a management goal for SK Group. Currently, the count stands at 90.
Chey is known for enjoying debates with the CEOs who are the chairmen of the seven councils under SK Supex Council.
After former council chairman Kim Chang-geun, one of the first-generation SK employees, stepped down, the majority of SK Supex Council members were filled with CEOs born in the 1960s, younger than Chey.
“SK’s management level is global considering that chairman Chey exchanges opinions very freely with the executives of affiliates when making big decisions and listens to their thoughts,” said professor Shin from Yonsei School of Business.
Cutting the dead weight
Despite the focus on social value, SK Group hasn’t stopped M&As. In fact, it’s become bolder.
According to the Fair Trade Commission in May, SK Group was right behind Hyundai Motor Group at second in asset size among conglomerates as of late 2018, narrowing the gap to only 5.5 trillion won. Just one year ago, the gap was 33 trillion won.
The business is changing most rapidly for energy affiliates, where growth has been driven by fossil fuels. SK Innovation, which grew through the success of its refinery business, is now focusing on batteries for electric cars and shale gas, a substitute for oil.
In order to make investments in future businesses, the company is selling off stable assets that guarantee profits worth hundreds of billions of won.
Last September, SK Innovation sold a mine in Peru, a production site of natural gas and crude oil, for 1.2 trillion won. Chemical company SKC in August carved up its chemical business, which accounted for 75 percent of its operating profit, and sold half of its shares overseas. The move shifted the company to focus on battery materials.
SK Group in the past sold off SK Shipping and SK Securities to buy semiconductor technology companies such as LG Siltron, OCI Materials and DuPont’s wafer business, and the holding company SK Holdings is making significant investments in shale energy in North America.
“In the era of low growth and hyper competition, even big companies should reduce non-core and non-essential businesses and proceed with business reshuffles preemptively and voluntarily to invest on future engine for growth,” said Song Jae-yong, a business management professor at Seoul National University.
It was Chey who decided to invest 4 trillion won in Toshiba Memory and 120 trillion won in the company’s Yongin, Gyeonggi, semiconductor cluster.
Making value and money
But challenges remain. Chey must prove his theory that management toward social values can also improve economic value, or, in other words, increase profits.
In August, the Economist expressed concern over the recent trend that puts the “goal of the company” more on social contribution than profits, saying it might lead to results where the CEO, who is no more than a representative of shareholders, can actually undermine shareholders’ interests.
Unlike Korea’s National Pension Fund, which is influenced by the government, private institution investors seem to be against the trend.
“Demanding companies to grow through technological innovation and make more contributions to society is a global phenomenon,” said professor Jang of Yonsei University. “Companies are going through a phase where their identities are not only about pursuing profit, but also providing other values.”
It remains to be seen whether SK Group can actually act quickly enough to “move on from existing resources in three years,” as Chey demanded, and the company is yet to prove that establishing social value and economic value go hand-in-hand.
Can SK Group become a major player in the global market by focusing its management on social value? Chey is asking the market to focus on social value, and the market is asking Chey to prove it works.
BY PARK SU-RYON [email@example.com]