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| Youngjae Ryu |
15 August 2011
Irony of Corporate Inheritance
by Youngjae Ryu
During the regime of Kim Ilsung, the father of Kim Jungil and the founder of North Korea, there were various predictions made by South Korean experts studying North Korean politics on how long the North Korean regime could survive after Kim Ilsung’s death. The prediction said that the regime would fall apart in just three seconds, or if longer, three months. However, their prediction turned out to be wrong. Kim Jungil still has been dominating the hermit country for the last seventeen years. What is more, he intends to turn the power over to his son, Kim Jungeun. It seems like the revival of a feudal society.
We can easily find out similar feudal examples in South Korea. Korean big churches are one of the examples. Many Korean pastors of big churches, who are seemingly known to pursue spiritual enlightenment and salvation in the next life, have failed to disguise their secular greed. Even after their retirement at seventy, a rule clearly stated in the Korean church law, they try to act as regents of the church and bequeath their positions to their sons. Several years ago, a heated controversy was aroused when the pastors of the two largest Korean churches did exactly the above.
We can also see similar cases in the Korean conglomerates quite frequently. A number of Korean major conglomerates are on the process of adopting the third generation management, in which three successive generations of the founding family have ultimate power. Samsung’s Lee Jaeyong and Hyundai Motor’s Chung Eisun, each being the grandsons of the founders, are searching for loopholes around the law in order to succeed their fathers.
The two cases above, where the eldest son receives the father’s wealth, or position, are the remains of Confucianism in Korea and bring about serious problems in contemporary society. North Korean regime’s inheritance is clearly reversing the universal development of democracy and mankind. At the same time, it paralyzes and ridicules human’s rational thinking and reasonable judgment.
Korean churches’ inheritance stems from the private ownership of churches. Inheritance of the church can be justified only on the premise that the wealth of the church belongs to the founding pastor. This premise, however, contradicts the basis of Christian values which states that all churches belong to God. Thus, this sort of church inheritance denies God’s ownership of the church and gives this right to the pastors instead.
When it comes to corporate inheritance, the ownership of the corporate belongs to the shareholder according to Korean commercial law. The controlling shareholder, therefore, has the right to bequeath the firm by paying the inheritance tax and obeying the law. However, what the Korean conglomerates are doing are far from legal. Korean conglomerates have wrong perceptions when it comes to corporate ownership. In other words, they believe that the controlling shareholder is the ultimate and only owner of a public company.
This sort of thinking directly goes against the basic principle forming public companies which states that the company does not only belong to the controlling shareholder, but also to other institutional and individual investors who hold the shares of the company in the stock market. Power elites working for the conglomerates fail to nurture this right perception. Rather, they try to find loopholes around the law that would help the inheritance process. Samsung’s issuing of the convertible bond, and Hyundai Motor and SK’s wealth transfers, are all the successful outcomes of their work.
There are two solutions to this problem. First, it is the change of perception on the part of the third generation. Many of the third generations have received the Anglo American education growing up abroad, and studying renowned, foreign MBA courses. If they have the right mind, they would have hopefully nurtured the rationality to denounce their fathers’ steps and establish a new paradigm of democratic capitalism.
Second, it is the perception change of Korean institutional investors. They should claim their own ownership of the company and think of themselves as a key part of corporate governance. They should make voice and seek to change the misleading behaviors of conglomerates before the third generation conforms to the inheritance system.
While I strongly oppose to the inheritance of the North Korean regime and the Korean major churches, I agree to the concept of corporate inheritance with the premise that the controlling shareholders receive acceptance from other institutional and individual investors and abide by the law throughout the process. If this is possible, then this problem currently inciting furious controversy might instead develop into a way to revive one positive side of Korean tradition in the capital marke.
VIPsight Archives Asia - South Korea
15 April 2011
Korean Chaebol’s Wealth Transfer
Korean 20 Chaebols(Conglomerates) allegedly used inter-group transactions with their unlisted subsidiaries as a means of wealth transfer. The case has been revealed right after Ministry of strategy and finance had announced that it would impose tax on the profit made by conglomerate’s unfair allocation of purchasing deal to its subsidiaries. In particular, most of the subsidiaries are owned by the controlling shareholder’s family.
On the 4th of April, DART of Financial supervisory service and Chabol.com, the only websites for evaluating the share value of Korea’s Chaebol, said that among the unlisted subsidiaries of top 30 Chaebol groups in asset size, 20 subsidiaries in which offspring of the groups’ chairmen holds a major shares, have close to 50% of inter-group trading ratio. This ratio is far above the average inter-company trading ratio (28.2%) of the whole subsidiaries including 20 listed-subsidiaries of the Chaebols. In one sense, it is questionable whether subsidiaries of Chaebol Group deliberately gave large portions of the deals to the unlisted companies owned by Chairmen’s offspring.
The disclosure of Chaebol’s inter-group transaction was meaningful as a first attempt to make such information public while there has been rising criticism against the Chaebol’s controlling shareholders transferring the wealth using family owned unlisted subsidiaries.
Thanks to the enormous support from the Chaebol’s core business, sales of the Groups’ unlisted subsidiaries increased by 3.27 times compared to 2006. JANG, Sejun, the first son of JANG, hyungjin who is YOUNG POONG, CORP’s chairman, owns the 33.3% of YOUNG POONG DEVELOPMENT CO., LTD. The total sales of the YOUNG POONG DEVELOPMENT CO., LTD were 13.2 billion KRW while inter-group sales were 13 billion KRW which account for 98.1% of the total sales. Last year, the company’s net profit was about 1.8 billion KRW which resulted in high dividend of 30,000 KRW per share.
For LOTTE, the first and the second daughter of the chairman owns 18.5% of LOTTE FRESHDELICA CO., food and beverage company. Its inter-group sales account for 97.5% of the total sales, 58.4 billion KRW. LOTTE FRESHDELICA CO. grew so fast that its sales have increased by 16 times over the past 10 years.
Inter-group transaction ratio for the top-2 Chaebol Groups is no different.
Samsung SDS whose major shareholder is LEE, Jaeyong, the first son of LEE, kunhee and the CEO of Samsung Electronics, has 36.7% of inter-group sales ratio. Hyundai Amco.Co.Ltd whose major shareholder is JUNG, Yisun, the first son of JUNG, Mongkoo and the vice chairman of Hyundai motors, has 57.3% of inter-group sales ratio.
Among the 20 unlisted companies that were researched, 10 companies gave dividend last year.
JUNG, Yisun’s dividends income from Hyundai Amco’s share was 12.5 billion KRW while LEE, Jaeyong had 3 billion KRW and LEE, Haewook, the vice-chairman of Daerim, received 2 billion KRW as dividends income from Daerim I&S. This year, Hyundai Amco’s cash dividends were around 50 billion KRW which makes the company’s dividend ratio 74.3%.