Monday, August 17, 2015

Everything Korea: August 17 Korean Succession, A Commentary and FAQ

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 Then, it was superseded by the Age of Information via the computer, the 1960s boom in Madison Avenue advertising…and television.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. 

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How to tell your story so the world listens, Bobette Buster

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