Insights from the Conviction of Daewoo Founder Kim Woo Choong

Just back from a week in Seoul. Elections and football (soccer) mania dominated popular society. With regard to Korean big business the conviction of Daewoo founder Kim Woo Choong warrants study.

Korea Times
A Seoul district court Tuesday imposed heavier- than-expected penalties on Kim Woochoong, the disgraced former chairman of disbanded Daewoo Group. Kim said nothing about the verdict, but appeared aggrieved and disappointed, and his defense lawyers vowed to appeal. They’d better not. The sentence _ 10 years in prison plus $22.5 billion in forfeiture _ is more symbolic than substantive for the bedridden and penniless” onetime tycoon. Essentially, this is a case of principle, not individual circumstances.

The 70-year-old magnate’s merits and demerits have been discussed for a long time. Kim, a role model of rags-to-riches corporate legend, nurtured a small textile exporter to the nation’s second- largest family-run conglomerate, or chaebol. He thus greatly contributed to economic growth, creating jobs and injecting pride and ambition into the younger generation. Kims mistakes are equally grave: He dried up astronomical amount of bailout funds, drove thousands of employees jobless.

Most of all, Kim is not repentant. He has said accounting manipulation was the norm at the time, and the collapse of Daewoo Group was due to the currency crisis, caused by governmental policy failure. It may still be uncertain whether Daewoo’s bankruptcy, the largest in Korean corporate history, is the cause or the result of the 1997-98 currency crisis. But it is certain that Kim’s continuous expansion of the corporate empire in the middle of the crisis worsened the crisis as well as his group.

Moreover, there are numerous victims, including the family members of former Daewoo employees as well as those who worked for their suppliers. Some $30 billion of taxpayers money had to be used to bail out bankrupt Daewoo affiliates, not to mention the $3-billion loss small investors had to suffer. This comes as a stark contrast with the failed chaebol owner, whose family members possess hundreds of millions of dollars worth of properties, which were legally donated and not subject to forfeiture. Is Kim still pardonable?

Kims biggest fault is breach of trust, the most important trait in a mature capitalistic society. He masterminded the creative accounting and embezzling. As shown in the case of Enron, capitalism has innate limitations that rely on moral integrity of owners and executives. Korean capitalism has additional yokes of government-business collusion and nepotistic transfer of wealth and managerial control. Kim should have been bent on nurturing core business capability instead of ostensible expansion.

The old and frail businessman may not spend the rest of his life in prison due to his weak health. Nor may he acknowledge his fault. He may think he did what all others did but on a bigger scale. If so, he deserves the punishment, as the latest ruling is a departure from the Korean way of business over the past half century.