Sun, May 21, 2006 page12

• S Korea chaebols struggle for grip on accountability

  The bind that Hyundai finds itself in is the result of Koreans investing too much trust in family ways of doing business

  • NY TIMES NEWS SERVICE
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  The assembly workers here are models of industrial efficiency, rolling out a gleaming new sedan once every 57 seconds.

  But the ultimate test of their company's mettle comes now. Their boss, the charismatic chairman of Hyundai Motor Co, is in jail, accused of the old-style corruption that this rapidly modernizing Asian nation hopes to leave behind.

  With the formal indictment on Tuesday of the chairman, Chung Mong-koo, 68, after his arrest last month, the mighty Hyundai industrial group has been thrown into near paralysis, forcing it to postpone construction of factories in West Point, Georgia, and the Czech Republic.

  More importantly, the corruption charges at Hyundai and a similar investigation earlier this year at the Samsung group are raising new questions about the management of Korean companies, just as some are joining the top ranks of global corporate players.

  The indictment of Chung on bribery charges is also casting doubt on how much South Korea has actually changed its once-closed and collusive economy, spotlighting one of the most controversial legacies of the nation's economic miracle: the control of huge swaths of the economy by a few wealthy and secretive families.

  "Samsung and Hyundai are the crown jewels in the Korean economy," said Lee Dong-gull, former vice chairman of the Financial Supervisory Commission, the nation's financial watchdog. "They are too precious just to be in the hands of single families."

  South Korea has watched transfixed as the heads of the Hyundai and Samsung groups have come under investigation in recent months on suspicions of buying political influence and inventing elaborate schemes to retain family control of their business empires.

  Prosecutors dropped the case against Samsung's chief for inadequate evidence, but they charged Chung on Tuesday with misappropriating hundreds of millions of dollars from group companies, some of it reportedly to pay bribes.

  Chung's arrest has clearly left the group in disarray, a testimony to his strong personal control over operations. Routine operations are continuing, and the company has appointed a vice chairman as Chung's stand-in.

  Employees and analysts say, however, that big decisions, like plans for hybrid vehicles, are stalling as bosses wonder what to do.

  Analysts said the Hyundai group's reliance on Chung reflects the extent to which its companies rely on family leadership, and the failure to groom a cadre of professional managers or an independent board of directors capable of making big decisions. Asked if the group could keep functioning without Chung, analysts were adamantly pessimistic.

  "It is impossible," said Lim Chai-gu, an analyst at Kyobo Securities in Seoul. "These companies don't run on professional management. Even now, important decisions have to be run by Chung as he sits in jail."

  Hyundai is not alone. Earlier scandals at Samsung and other groups have highlighted the paradox of South Korean companies boasting cutting-edge products and efficient daily operations, but also run as the private assets of powerful families.

  Spokesmen for the various groups say the controversy is unfair. They point to the groups' remarkable success as proof that the founding families are competent stewards and should not be unfairly vilified.

  The Chung family, for example, turned a small auto repair shop that it opened in Seoul in 1945 into what is now the Hyundai group, with 40 companies and 85 trillion won (US$91 billion) in sales last year.

  But critics, led by shareholder activists, say family-controlled groups are out of sync with the times and far too clannish, closed and corruption-prone as South Korea's economy and politics strive to be more open.

  The problems have their roots in the years after the 1950-1952 Korean War, when successive military governments sought to lift their country out of the rubble by concentrating scarce capital and technology into a few select hands. This spawned family-run enterprises that grew along with the economy into sprawling industrial combines known as "chaebol."

  Today, the chaebols dominate almost every business sector in South Korea, with their names proudly displayed in places like high-rise condominiums, supertankers and cellphones. According to the Bank of Korea, the central bank, the nation's 30 largest family-owned industrial groups account for almost 40 percent of the nation's US$965 billion economy, the world's 14th-largest.

  Experts say family control is not in itself the problem. Rather, they say that what South Korea needs is more openness so all shareholders of these companies can see what is going on. Experts say this is probably inevitable, but family resistance could delay it for another decade.

  "I have no problem with the daily operation of these companies, which is very modern," said Kim Sun-woong, a lawyer at the Center for Good Corporate Governance, a research group that monitors chaebols. "I even have no problem with the family ownership. The problem is that there's currently no oversight of what the family does. Is the family running the companies for the interest of all shareholders, or just themselves?"
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