Mon, Apr 21, 2008 page10

• ANALYSIS: Reform of South Korea’s ‘chaebols’ was mostly illusion

  STRUCTURAL Backed by state funds, the family business conglomerates powered the country’s industrialization. Now the dominant role they play is creating problems

  • AFP
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  A probe into corruption at South Korea’s biggest group Samsung showed the nation’s mighty conglomerates have a long way to go to reform themselves despite the promises of a decade ago, analysts say.

  Special prosecutors charged Samsung group chairman Lee Kun-hee on Thursday with tax evasion and breach of trust over the transfer of control of the group to his son.

  The charges followed a three-month probe that highlighted “many structural problems” at Samsung, which accounted for more than 20 percent of South Korea’s total exports last year.

  These included suspected illicit transfer of managerial rights, a lack of transparent book-keeping, and direct control over subsidiaries through a strategy and planning agency “whose existence has little legal basis.”

  “The Samsung episode shows little has changed in the decision-making structure built around chaebols’ founding families and their loyalists,” Hansung University economist Kim Sang-jo said.

  The family-run conglomerates known as chaebol, backed by state funds, powered South Korea’s dramatic industrialization in recent decades. But their reckless expansion through borrowing also contributed to the 1997 to 1998 financial crisis.

  Since then they have undertaken limited reforms, greatly improving their financial health and streamlining business portfolios.

  But the dominant role of founding families often remains unchanged and the chaebols’ complex management structure often allows them to control a group through cross-shareholdings, despite holding relatively small stakes.

  “Samsung Electronics’ business performance has since then improved greatly, but the listed company is still held and controlled by unlisted or family-owned firms such as Samsung Life and Samsung Everland,” Kim said.

  The enquiry into Samsung was prompted by accusations it created a massive slush fund to bribe government officials, for which investigators found no evidence.

  The prosecutors said Lee, 66, and nine other executives who were also charged would remain free pending trial. Analysts said they were likely to avoid severe punishment if convicted.

  Some 50 civic groups have rejected the prosecutors’ findings, especially the failure to find evidence of bribery, and called for a new probe.

  Economist Kim Ky-won at Korea National Open University said reform at Samsung would be “cosmetic” as long as the influence of Lee senior and junior remained undiminished.

  “I’m afraid this country has lost a good chance to push through with chaebol reform by failing to give the case a thorough probe,” he said.

  Samsung says it is preparing reforms to be announced this week.

  Analysts say these may include changes to the powerful strategic planning office, which allegedly played a key role in managing Lee’s hidden assets and the dubious transfer of control to his son.

  “Through personnel changes, professionals’ roles are likely to be strengthened and transparency in decision-making is expected to be enhanced,” said Kwak Byung-ryul of Daishin Securities.

  Economist Yun Chang-hyun at the University of Seoul said corporate governance centered on a charismatic patriarch had worked well in pulling the chaebol out of the financial crisis.

  “But the problem is that this system is long overdue to graduate,” he said.

  He said Lee Kun-hee was likely to maintain his powerful grip until the group established a new corporate governance system.
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