Tuesday, March 28, 2017

Everything Korea March 27 Episode Chaebol Restructuring and Reform 2017

Reform in South Korean reaches back to the Asian Financial (IMF) Crisis of 1997.

A bailout package from the International Monetary Fund (IMF) shut down insolvent  banks and pushed debt-ridden industrial companies into receiverships. The remaining Groups still standing had little choice but to follow government mandates including restructuring and greater transparency.  

In some ways little has changed 20 years later… regulators continue to pressure the leading Korean groups to take on a more transparent corporate governance structure-- now in the form of a Holding Company model. 

So, what is a holding company?

A holding company is a legal entity that owns other companies' stock. Holding companies typically do not run these businesses, but they do wield control over their affiliates or subsidiaries. In turn, a holding entity collects fees from operating units for the use of the corporate brand, which is considered an asset.

The Korean government has gone back and forth between tightening and loosening regulations on chaebols over the years, and the trend now is toward tightening.  

More so, following the Impeachment and graft scandal involving Former President Park Geun-hye, which pulled in Samsung, Lotte and SK, politicians are calling for even greater reform.  

Complicated Steps
In most cases, the Model is for a Group to split itself, often the flagship company, into an ownership company and an operating company as part of a complicated set of steps.  

This said, South Korean laws mandate a holding company must own at least 30 percent of its publicly traded affiliates.  This poses the challenge.

For example, the Samsung Group were to move towards a holding company model with flagship Samsung Electronics as the entity, it would require the flagship to buy additional shares in some of its affiliate companies at a cost of millions.

All said, Korea’s conglomerates are increasingly being reined in with new laws and taxes that seek to hold family members accountable and to increase the transparency of their organizations.

More significant perhaps is a disruptive public mood and presidential contenders who “pledge to shake up corporate governance as they lay out reform agendas.”

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