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Family Feuds: Korea’s Love/Hate Relationship with Chaebols

Most everyone has by now probably heard the story of the Korean Air (KAL) “nut rage” case. For those who may have missed it, though, in December of last year Ms Cho Hyun-Ah—a KAL senior vice president and daughter of the company’s CEO—demanded that the plane she was on return to the gate at New York’s JFK airport so that a flight attendant and supervisor could be removed. This caused a 20-minute delay in the flight as well as confusion among the other passengers. The source of her anger was the serving of pre-takeoff nuts in a bag rather than on a plate in the plane’s first-class section. After an attempted cover up by KAL, the story broke and Ms Cho was heavily criticized in both Korean and international media, as well as across the blogosphere. The affair highlighted the status and abuse of power many regular Koreans see in the behavior of the families that control Korea’s famous Chaebols.

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A Chaebol, in its simplest terms, is a South Korean business conglomerate that is owned by a single family. Usually a global multinational, Chaebols are in most instances family founded, owned, and operated for generations.

Korean attitudes about Chaebol vary between admiration for what the groups have done for the Korean economy and revulsion for their elitist behavior and corrupt practices. So where did this distinctly Korean business structure come from?

Traditionally, the Korean economy was dominated by agriculture. After World War II ended the country’s Japanese occupation, Koreans mainly looked inward. Syngman Rhee, the first president of modern South Korea, focused mainly on imports to sustain his impoverished country. The economy at that time was driven by agriculture, consumer goods, and light industry. A military coup in 1961 installed General Park Chung-Hee to power.The general was interested in modernizing the Korean economy, and that meant a new strategy. The first 5-year plan began a government-guided policy that would advantage larger business groups and focus on exporting. This also meant a shift away from light industries and into heavy industries such as chemical production, shipbuilding, steel production, and construction. To achieve this new path, the government would funnel foreign loans as well as provide loan guarantees and other “favors” that would give the emerging Chaebols huge advantages over small and medium-sized enterprises. By the 1980s, the Chaebols had stabilized their operations, grown to a considerable size, and had entered a wide variety of business lines. Direct government intervention was reduced, but so too was government leverage. By the 1990s, the Chaebols were right in the middle of the booming electronics and high-tech industry. While many Koreans are proud of the development of such globally respected brands as Samsung, Hyundai, and LG, there is also resentment at the dominance that these companies have over the economy. The 1997 Asian Financial Crisis exposed the weakness of the Chaebol system. Of the 30 largest Chaebols, 11 of them collapsed between 1997 and 1999. Daewoo had over US$80 billion in debt at the time of its bankruptcy. The Chaebol’s business structure is unique, and in many ways it encourages poor governance. Cross holdings of subsidiary companies and the use of preferred shares allows family control with little actual equity ownership. Minority shareholders suffer in this system as a small group of family members can exert complete control. This leads to a closed decision-making environment where decisions do not always represent what is best for the company or the larger shareholder base. The Chaebol system has been compared over the years to Japan’s keiretsu system. While both systems create large, interconnected businesses, there are a number of big differences.

  • Chaebols are usually controlled by the founding families, while most keiretsu groups are run by professional managers.
  • Chaebols exhibit a highly centralized structure, whereas keiretsu groups are much more decentralized.
  • Chaebols have traditionally been much closer to the government as they are prohibited from owning or aligning with a bank, while keiretsu groups have less need for governmental financial help as many of them are in banking or aligned to strategic banks.

Over the years there have been attempts to reform the system, particularly after the 1997 crisis. President Kim Dae-Jung instituted several new policies. These included:

  • Rather than compete in every industry, Chaebols were pressured to focus on core businesses and spin off unrelated business.
  • Chaebols were encouraged to decentralize their management and to hire professional managers.
  • Accounting regulations were strengthened to limit the ability of Chaebols to hide losses and debt at underperforming subsidiaries.
  • A crackdown on antitrust laws and inheritance taxes was implemented to impede the ability of families to retain generational control over their Chaebols.

While the new policies had some impact, Chaebols continue to dominate the Korean economy. Additionally, Chaebols (via The Federation of Korean Industries) have resisted government-mandated changes. And yet when the economy weakens there is a tendency by the government (and society at large) to look to the Chaebols for solutions. Admired and loved by Koreans while also despised by them, this is Korea’s Chaebol system.

For more on topics such as this, head over to the ALSANJ site.