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President Roh Moo-hyun, right, invited Korea‘s tycoons to the Blue House on Jan. 19, 2004. Among the participants are Samsung chairman Lee Kun-hee, second from right, and Hyundai Motor chairman Chung Mong-koo, third from right. Chongwadae Press Corps
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Conglomerates find variety of ways to ensure family power (2)
While some large corporate conglomerates, such as Samsung and Shinsegae, have recently announced they will establish a more transparent management transfer system, many Korean companies are still not freed from suspicions of illicit wealth transfer. Although it is natural for the company head's shareholdings to be weakened after a series of transactions to pass control to heirs, the companies are still trying to maintain grip on their sprawling conglomerates through unorthodox measures, or by using other family members to hold shares among their affiliates. Currently, the time is approaching for the succession of managerial control among these large firms, or chaebol, as the third generation is set to inherit what the second generation in turn inherited.Maintaining grip through cross-shareholdings Doosan Group, which just marked the 110th anniversary of its foundation, employs a so-called "dispersed ownership system" that allows the group’s founding family members to share small portions of stocks in each affiliate. The founding family’ shareholdings were scattered after Doosan Group’s third honorary chairman Park Yong-gon passed the group’s control to heirs. Doosan Industrial Development is 1.14 percent owned by Park’s eldest son, Park Jung-won, 0.75 percent owned by Jung-won’s brother, Park Ji-won, who is a vice president of Doosan Heavy Industries and Construction, and 0.83 percent owned by Park Jin-won, son of former Doosan Group chairman Park Yong-sung and an executive vice president of Doosan Infracore. In this case, shareholdings of chaebol family members were reduced as they divvied up stocks to heirs, sold new shares and paid inheritance taxes. So, to keep control resting in its founding family's hands, chaebol owners thus allow members to own each subsidiary’s largest stake. Family members holding Doosan Industrial Development control Doosan Corp., which controls Doosan Heavy Industries and Construction. In turn, Doosan Heavy Industries and Construction controls Doosan Industrial Development. Another stereotypical example of this kind of practice is the Dongbu Group. Dongbu Hannong Chemicals controls Dongbu Fine Chemicals, which controls Dongbu Steel. In turn, Dongbu Steel controls Dongbu Hannong Chemicals. Dongbu Group chairman Kim Joon-ki owns a 14-percent stake in Dongbu Fine Chemicals and Kim’s son, Kim Nam-ho, has a 21.1-percent stake in Dongbu Fine Chemicals, the result of steady stock transfers. Kim Nam-ho, 31, who is now a student in New York, is a de facto owner of Dongbu Group. Illicit transfer, inheritance deals Owners of Samsung and Hyundai Motor Corp. have been accused of transferring their wealth and management by selling shares of non-listed affiliates at below-market prices to their children. Chey Tae-won, chairman of SK Group, gained control of SK Corp. and SK Telecom by buying shares of non-listed affiliate SK C&C at below-market prices. The KCC corporation, which is currently passing control from the second generation to the next, is also being criticized on suspicion that its president, Chung Mong-ik, the second-oldest son of KCC chairman Chung Sang-yung, gained a profit windfall by buying a 20-percent stake in a non-listed unit, Korea Auto Glass, at face value. Shinsegae’s vice president Chung Yong-jin, eldest son of Shinsegae chairwoman Lee Myung-hee, was sued by the People’s Solidarity for Participatory Democracy for suspicions surrounding illicit deals at Gwangju Shinsegae. An owner of Hyosung is accused of illegally transferring wealth to his three children via an unlisted unit, Hyosung Construction. Transition to holding companies A holding company system has emerged as an alternative when chaebol owners are banned from passing controls of their conglomerates to heirs by other means. At present, 31 companies, including four financial firms, were registered as holding companies under fair trade laws. The 31 holding companies include LG, GS, STX, Pulmuone and Lotte Corp. LG chairman Koo Bon-moo holds a 10.33 percent stake in the group's holding company, while Koo Kwang-mo, who was adopted as Koo Bon-moo’s son, owns a 2.8 percent stake in the holding firm. As Kwang-mo is steadily buying stake in the holding company, observers in the business circle expect the elder Mr. Koo to pass the group’s control to his son by allowing him to gain control of the holding company. GS is 5.41 percent owned by chairman Heo Chang-soo, and his eldest son, Heo Yoon-hong, is in managerial training as an assistant manager of GS Caltex. In late 2004, Dongwon Group chairman Kim Jae-chul split the group into financial and food holding companies and allowed his two sons to oversee management of the two holding firms. In 2003, Nongshim group chairman Shin Joon-ho set up a holding company named Nongshim Holdings and passed the group’s control to his son. Other chaebol such as Hanwha, Kolon, SK, Doosan, Lotte and others are showing signs of transforming their groups into holding companies. Hanwha Group is considering reorganizing the group into financial and non-financial holding companies. Doosan Group, which has been plagued by a management feud among members of its founding family, announced it will switch to the holding company system in three years. However, concerns about side effects of the holding company system are emerging. "Current holding company system can be exploited as a tool for chaebol owners to control more affiliates with less capital, with the risk that the chaebol system can be expanded and its survival ensured," said Choi Jung-pyo, an economics professor of Konkook University. Along with a transparency of wealth transfers, experts said the chaebol heirs’ management capability needs to be checked. It is common for them to become chief executive officers in about 10 years without objective verification of their skills. The Hankyoreh found that third-generation heirs of 14 chaebols became executives of their affiliates at an average age of 31. Kia Motors president Chung Eui-sun became an executive vice president in 2001, a senior vice president in 2002, a vice president in 2003 and was promoted to his current post in 2005. CJ Entertainment is also under spotlight. CJ Entertainment vice president Lee Mi-kyung, sister of CJ chairman Lee Jae-hyun, started her career as an executive in the company in 1998, and was promoted to the current post in five years.
