Any examination of corporate behaviour in South Korea must start with the role of the giant conglomerates dominating the landscape

Arguably the history of corporate responsibility in South Korea began with an announcement in 2004 by the influential business lobby group, the Federation of Korean Industries.

The influential FKI convened a meeting with the biggest 20 Korean conglomerates (known locally as chaebols). At the end of the meeting, the leading 20 chaebols (which control more than three-quarters of South Korea’s corporate landscape), agreed to hire about 40,000 new employees that year, support their legion of SME suppliers with fairer contracts and contribute more money to community welfare projects.

Additionally, the companies agreed to implement more robust corporate governance, particularly in relation to the traditional giving and receiving of gifts as part of business deals and the establishment of ethical codes of conduct.

This announcement came at a moment in South Korean corporate history when public concern over the power, influence and scope of the seemingly omniscient chaebols had reached a new peak following a series of scandals and the determination of the Seoul government to crack down on their persistent wrongdoings. But since then the South Korean economy, the chaebols and corporate responsibility have travelled a very rocky road.

To analyse the success or failure of corporate responsibility in South Korea it is necessary to understand the nation’s chaebol system.

Chaebol means “business family” or “monopoly”, but is most often used simply to mean “conglomerate”. The chaebols dominate the Korean corporate landscape with several dozen large family-controlled companies at the very top that have now become international brand names, including Samsung, Hyundai and LG.

Chaebols mostly started in core South Korean industries. They were the businesses that lifted the country economically after the devastation of the Korean war (1950-1953), such as shipbuilding, engineering, electronics assembly and automotives. Now these chaebols have penetrated deep into the new Korean economy of financial services, consumer goods, communications, technology, the internet, tourism and property.

Relations between the government and the chaebols have always been close, with a high degree of inter-dependency.

Chequered history

However, while the chaebols were largely responsible for South Korea’s amazing recovery since the war and the nation’s elevation to Asia’s fourth largest economy and the world’s 14th biggest, their rise has been controversial.

Persistent issues of chaebols’ influence in the nation’s fractious politics, fraudulent accounting, lack of transparency, soft lending practices and blatant bribery have all marred their reputation.

Initially these problems were seen largely as a nasty, but necessary, side-effect of rapid growth. South Korea had one of the world’s fastest growing economies from the early 1960s to the late 1990s. Along with Hong Kong, Singapore and Taiwan, South Korea was one of the so-called “Asian tigers”.

However, the massive hit South Korea took in the 1997-98 Asian financial crisis revealed systemic weaknesses in national corporate governance. The meltdown in South Korea’s economy was undoubtedly exacerbated by the previously largely hidden problem of non-performing loans at many of Korea’s merchant banks – a culture of lenient lending that had led to an inherent weakness in the system.

In 1997, the IMF approved a $21bn loan, part of a massive $58.4bn bailout plan linked to a raft of austerity measures the Seoul government was grudgingly forced to accept.

Reforms deal

Benefiting from the fallout of the Asian financial crisis and a hardened public mood against the chaebols and their excesses, the highly populist government of Kim Dae-jung, president between 1998 and 2003, was able to force some changes on Korea Inc:
 

  • Instead of competing in every industry, the chaebols would focus on core businesses and to spin off unrelated enterprises.
  • The chaebols would partially decentralise their management and hire more professional managers.
  • Accounting regulations would be strengthened to limit the ability of chaebols to hide losses and debt at underperforming subsidiaries.
  • New antitrust laws and inheritance taxes would curtail the ability of families to retain total and unfettered control over chaebols.

Both Kim Dae-jung and his successor as president, Roh Moo-hyun, have found reforming the chaebols problematic. Today the chaebols continue to dominate South Korea’s economy and scandals are still commonplace. Hyundai and SK Group have both been implicated in scandals involving their presidents while Samsung’s president and chief executive, Lee Kun-hee, was forced to resign amid charges of tax evasion and breach of trust in April 2008.

Last year, South Korea was the world’s sixth largest exporter and the 10th largest importer globally. The country was one of the few developed nations able to avoid a serious recession during the global financial crisis (though its currency and markets did still take a hit), while the country’s economy remains prone to fluctuations due to the belligerence of North Korea in times of crises. The erratic actions of Pyongyang can have an adverse effect on Seoul’s financial markets.

But South Korea’s economic and corporate landscape remains dominated by the chaebols. Their tentacles still extend far and wide in society, perhaps employing as much as 15% of the total Korean workforce. Many more workers are employed by companies that are essentially within the “keiretsu”, or network of interlocking business relationships (from the Japanese word) that spread out from the chaebol system.

Quite simply, as the chaebols go, so goes the Korean economy and Korean corporate responsibility.

  

References:

 

Socio-economic statistics obtained from recent publications from the CIA Factbook and the Human Development Index.

Guideline and standards statistics obtained during February 2011 from official website of each initiative.

 



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