It’s hard not to be a watchdog for Korean facing issues that
grow in concern and could potential have a global impact on the organizations
and clients I support.
In an interview for an upcoming segment for the Korean media
show “Koreascape” on globalization, I was also asked for my opinion on the
recent drama within Lotte, Korea 5th largest chaebol over control of
the Group. The host Kurt Achin, a seasoned journalist, shared concern over the
bold move by one of the Founder’s son to take control of the Group, which has
drawn considerable media and popular notice to the ongoing issue of succession
among the chaebol. This media attention has not only been limited to Korea, but
showed up on Page 1 of the WSJ as well as AP and the other leading wire and new
service. [BTW Lotte is Korea’s largest retail, distribution, tourism and
construction Group with a growing international presence and annual sales estimated
at more than $100 billion. Also, Chaebol
is a common South Korean term for their conglomerates, often multinational,
global enterprises led by a Chairman and in most instances family controlled.]
This brings us to a media summary on the topic of Korean
Family Succession, as well as a FAQ sharing my thoughts.
To prefix my comments, in her book, How to tell your story so the world listens, Bobette Buster author
and USC Adjunct Professor notes:
“It has been said that Industrial
Age ended after the end of World War Two. Then, it was superseded by the Age of
Information via the computer, the 1960s boom in Madison Avenue advertising…and
television. Then with the Internet boom of the 1990s, there followed in 2003
with viral explosion of the social media. With this a new deceiving conceit
arose: anything worth knowing is available at our fingertips. This immediacy
has curiously, made people less curious about discovering the world, at least
to any depth.”
The author then
points out; we often “… know the facts,
but not the context in which they happen.”
Let’s start with what we know and specifically fueling so
much concern, and then I will share some context in a FAQ.
An editorial on the Lotte controversy in Yonhap, the Korean newswire service, writer
sums up popular sentiment:
“Koreans are sick and tired of
these internecine fights when the managerial control of a chaebol moves between
generations.” More so, “who will
succeed a family decision, rather than a formal shareholders' meeting.”
Fuel to the fire…
In July, amid considerable media attention, Samsung C&T and
Cheil Industries agreed to an $8 billion merger that essentially consolidated
the Samsung Group’s Lee family sway over Samsung Electronics, the Group’s
flagship. This move sparked the ire of activist shareholder Paul Singer, CEO of
U.S. hedge fund Elliott Associates. The
American firm publically felt the deal would undervalued their substantial
stock holdings in Samsung C&T while overvaluing Cheil to the benefit of the
Lee family successor. Samsung rallied their supporters to win over Elliott in a
heated vote.
Noting, I have prepared a three point FAQ look at context
behind Korean succession, past and present.
1. What’s driving Korean family succession?
Looking back, Korea’s chaebol model is
strongly rooted in their past. Neo-Confucianism, the dominant secular ideology
of the nation going back to 1392, required all government officials and bureaucrats
to pass rigid civil service examination for local, provincial or court positions. The Korean monarchy was the exception, male
primogeniture used to determine the next ruler. Likewise, within Korean families, the eldest
son and his descendants take precedence over siblings and their descendants.
Elder sons took precedence not only over younger sons, but all sons took
precedence over daughters—even elder daughters.
With the modern era and end of Japanese
Colonial Rule, Korean business groups emerged. Family run, they gained
considerable momentum during the 1960s, 1970s, and 1980s under the state-run
policies mandated by the government.
At times this was a love/ hate relationship
between the Groups and Government—with transfer of family wealth becoming an
issue as the first generation of Founders handed over control to their
children.
It is here we also see the first
controversies surface. Following Korean
traditional Confucian norms that dictated the eldest son be granted control
over the family holdings as the next patriarch in some cases as with Samsung
and Hyundai, a sibling or relative other than the eldest was selected by the
Founder. In some instances, the elder
sibling(s) fell out of favor of Founder, while in other cases a younger son
assumed the role following the death of an elder son or if there was no son, a
relative would take control.
2. How is the recent
merger at Samsung associated with succession?
A second set of issues with wealth
transfer centers on inheritance taxation—a tax levied up to 50% of the
patriarch’s assets. To avoid the hefty
tax, defacto holding companies allowed the second generation to gain control
over the Groups with a marginal investment and little direct inheritance of the
patriarch’s holdings.
As we move into a 3rd
Gen of family control Groups like Samsung and Hyundai Motor have been engaged
in similar lengthy and well orchestrated fiscal moves to transfer wealth and
control. Much of this is through merging
smaller companies, which the future successor has a substantial interest, with
a larger Group’s firm, gaining control with no investment of monies. i.e.
Samsung C&T and Cheil Industries.
A second method is work funneling.
In this process, Korean chaebol families have considerable
ownership stakes in many of the privately held sister companies.
Next, the other subsidiaries give
these smaller companies a huge amount of business to increase their revenue.
Finally, these smaller companies grow considerably over time and can move to an
IPO or sell some of their holdings to outside investors. i.e. Hyundai Glovis and Innocean Worldwide.
The families can then use the
revenue stream to buy stock in other key publically traded subsidiaries and
their chaebol’s defacto holding company.
In both cases, ownership stake
along with circular, cross and pyramid (radiant) shareholdings give them direct
and indirect control over the entire Group.
3. Noting public
sentiment regarding succession, how likely is it for the South Korean President
Park Geun-hye to toughen corporate laws?
As I note above, there has been a
longtime Love/ Hate relationship between the chaebol and the Government. Despite the chaebols' dominance and
influence, they are increasingly coming under pressure from new laws and
regulations designed to increase financial transparency and accountability of
family members.
For instance, the government
recently enacted a “deemed inheritance tax,” so that family members can’t get
around South Korea’s inheritance tax laws, and has revised commercial laws to
tighten requirements for reporting internal transactions.
This said, at time when addressing
Korea’s sluggish economy is a priority for the current administration, few feel
President Park Geun-hye will lash out at against the Groups. I see pressure being exerted on Lotte to
resolve their family differences. I also see succession plans by Samsung and
Hyundai continuing, with the reins of control and ownership transferred as
planned—with hope to draw as little attention as possible.
To conclude, as a colleague expressed recently that for
succession plans still in the works, their transition will come late in the
cycle. As others bring attention to the issue, transitions that must and
will occur from the current and aging leadership to the next generation will gets
more a legal focus and public scrutiny.
I’d add this means focus and resources the Group’s
leadership should have on running their business will be re-directed to dealing
with succession. Decisions impacting
their global operation could be delayed as well as the approval process, which
require a high level sign off.
Question? Comments?
Or, Direct Questions to questions@koreabcw.com
Links
How to tell your story
so the world listens, Bobette Buster
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