Asia

Can South Korea's family firms maintain their grip?

Hanwha group chairman Kim Seung-youn Image copyright Getty Images
Image caption Kim Seung-youn has been jailed twice

In the annals of business crime, the events of 8 March 2007 still stand out as particularly bizarre.

On that date, one of South Korea's richest and most powerful men led a posse of bodyguards and personally beat up bar staff who had previously attacked his son.

According to the evidence in court, Kim Seung-youn, head of the Hanwha corporation, only let his sidekicks take over the beating when he "got tired".

He said he had been a foolish father. The judge said: "The violation of the law is big and serious."

Kim was sent to prison for 18 months. Despite that, he was then pardoned by the country's president.

There was a row, with allegations that the pardon showed there was one law for the heads of South Korea's big family firms - the chaebols - and another for ordinary people.

Now, he is the focus of the same argument again.

In 2012, he was found guilty of corruption for illegally diverting funds from healthy affiliates in his business empire to weaker companies.

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Media captionFamily feud, South Korean style

This time, he was sent to prison for four years but released early on grounds of ill-health.

But the conviction for the crime remained. Now, though, he may be pardoned a second time.

Business leaders are campaigning for it and the country's president is considering it.

His company biography glosses over these darker aspects of his past but talks of how he sees management as a "sacred responsibility".

It also mentions his roles in Korean and Asian boxing federations (which might throw light on his earlier escapade of fisticuffs).

Hanwha's defence of its errant chairman is that his latest financial transgressions were not "anti-social" but to strengthen the company.

As a convicted criminal, he is barred from running the company.

But, as one insider told the BBC: "If the chairman is granted a pardon, he will be able to legitimately participate in the management of Hanwha Group, and Hanwha Group will be able to enhance its investment activities and create new jobs by his solid and expeditious decision making."

Presidential dilemma

Kim Seung-youn is a personification of the dilemma faced by the current president of South Korea.

The president, Park Geun-hye, came to power vowing to treat errant businessmen as toughly as ordinary citizens.

She has indicated that this month she may pardon some criminals as a conciliatory gesture to mark the 70th anniversary of Korean independence from Japanese rule.

Will Kim, the diverter of funds and beater-up of his son's enemies, be among them?

Woochan Kim, a professor of finance in Seoul and the chairman of the Center for Good Corporate Governance, told the BBC that a pardon would breach the president's election promise: "It would be a special favour from the government."

Image copyright AFP
Image caption Chey Tae-won was found guilty of embezzlement

But business leaders are campaigning for the pardon. The head of the country's Chamber of Commerce appealed for pardons "for the sake of national harmony".

Apart from Kim, there is another business leader who may be cleared by presidential decree.

Chey Tae-won, who according to Forbes is the sixth richest person in South Korea with a wealth of $4.6bn, is serving four years for embezzling $47m.

The chairman of the Korean Chamber of Commerce and Industry, Park Yong-maan, told Korean newspapers: "If they are excluded because they are businessmen, that is reverse discrimination."

If President Park accedes and pardons the two pillars of Korean business, the already hot controversy over chaebols will surely be given further fuel.

Samsung battle

There has already been much material to stoke the flames.

There was, for example, the recent "nut rage" fuss where the daughter of the chairman of Korean Air was sent to jail for ordering a plane in her father's fleet to turn back so a cabin crew member could be put off the plane.

The daughter of the company head had been enraged because she had been served nuts in a bag not a bowl.

The two sons of the ruler of Lotte, the global retail chain, are jostling in an unbrotherly fashion for control as their aged father, who founded the empire, declines.

And Samsung, the biggest chaebol of all, has been in the spotlight over a controversial merger of two of its companies.

Image copyright Reuters
Image caption Heather Cho, also known as Cho Hyun-ah, was jailed for a year over the "nut rage" incident

Its critics say the merger, which has just gone through despite fierce opposition, serves the ruling family well and other shareholders not so well.

Samsung's chairman, Lee Kun-hee (who inherited control of the company from his father) is currently very ill.

Nobody outside the inner circle knows quite how ill, only that he had a heart attack in May 2014. Since then, he has not moved far, if at all, from a hospital bed.

In the absence of the father, his only son, Lee Jay-yong (also known as JY Lee) is running the show. With the chairman of Samsung incapacitated, inheritance is being prepared and Samsung is being reorganised.

The Lee family do not in fact own that much of Samsung, but they do control it because of an immensely complicated, Byzantine structure.

Image copyright Reuters
Image caption Lee Kun-hee is very ill

Samsung isn't just an electronics company. It consists of more than 60 companies, including Samsung Electronics but also Samsung Life Insurance, Samsung Heavy Industries and a string of others which often have stakeholdings in each other.

But the crucial Samsung company is Cheil Industries, because this is controlled by the Lee family.

As the family's holding company, Cheil owns chunks of other Samsung companies so the family exerts much control over the whole group, despite owning only 2% of the shares.

Some of the current restructuring has been opposed by shareholders who are not in the family and not Korean, in particular by a US billionaire investor, Paul Singer.

He felt that one particular merger of two Samsung companies (in which he owned shares) was not on particularly good terms and designed to cement family control.

There were two court battles, both of which his company lost and which Samsung won.

Anti-Semitism

Some of the Korean media mentioned that the US billionaire was Jewish.

One Samsung company published cartoons on its website depicting the American as a hook-beaked vulture.

There was a row over what was alleged to be a classic anti-Semitic image in a Samsung publication.

Image copyright Reuters
Image caption President Park pledged to crack down on errant business

The company promptly removed the cartoon and issued a statement saying it deplored anti-Semitism.

It is also understood that it has withdrawn advertising from publications which had anti-Semitic coverage.

South Korea's chaebols:

  • The word chaebol means "business family" or "monopoly" in Korean.
  • The chaebol structure can encompass a single large company or several groups of companies.
  • Each chaebol is owned, controlled or managed by the same family dynasty, generally that of the group's founder.
  • The structure originated in the 1960s, following the seizure of power of President Park Chung Hee.
  • Previously the South Korean economy had been small and mostly agricultural, but favourable government policies towards the chaebols led to rapid industrialisation, and eventually created global multinationals.
  • Several dozen large corporate groups fall under this definition. Prominent examples include Samsung, Hyundai and LG Group.

Samsung also engaged in an unusual wooing of small, non-family shareholders. For instance Samsung employees turned up at shareholders' homes and offices, sometimes with gifts of water melons in a bid to sweeten the attitudes of voters.

Samsung wouldn't confirm that gifts were given, but said that if they were they would have been small, "in accordance with all legal requirements" and "in the best interest of the company and our shareholders".

At the end of all this litigation and controversy, the Lee family is achieving the restructuring of Samsung which the company says will improve it for the benefit of shareholders but which their critics say will strengthen their hold on it.

But there is a bigger issue: is hereditary leadership the best way for the South Korean economy?

And, in the case of any presidential pardon for the two chaebol chiefs: can an economy - and a democracy - perform well if the people at the top are perceived to operate under different rules from those below?

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