 |
|
Members of the Solitary for Economic Reform pose for a press photo just before it's inauguration.
|
Kim Yeong-bae, reporter for the Hankyoreh 21
Twenty or so easy chairs formed an impermeable line in an empty office in the Gangu Building near the Seoul National University of Education subway station. On each chair lay a handout: "Conference for the Establishment of the Solidarity for Economic Reform." At the front of the room was a large placard, inscribed with the same text.
As the clock approached 7 pm, the seats began to fill, one or two at a time. Here and there were old familiar faces, people renowned for their activities under South Korea’s flagship liberal activist group, the People’s Solidarity for Participatory Democracy. Arriving late was professor Jang Ha-sung, dean of the business school at Korea University, known for his previous work in spearheading a campaign to restore rights to minority shareholders in large South Korean companies. Surveying the assembled participants, he guffawed, reciting a well known bible verse in parody, "though thy beginning was tranquil, yet thy latter end should greatly increase" [Job 8:7.].
Under the gavel of Hansung University professor Kim Sang-jo, the charter and composition of the organization were settled in quick succession. Professor Kim was formally appointed as the first chairman of the newly inaugurated group, inheriting the post from Professor Jang. With the resolution of several final budgetary matters, the room filled with thunderous applause, marking the death of the Participatory Economy Committee and the birth of the Solidarity for Economic Reform. While the former, which had once led the movement to reform South Korea’s large conglomerates, or chaebol, conducted its activities under the banner of the People’s Solidarity for Participatory Democracy, the new organization is independent.
On this day, with the launch of the Solidarity for Economic Reform, the chaebol reform movement was faced with a new situation. The movement’s most representative pursuit had been the minority shareholders’ campaign. But now, apart from breaking itself away from the People’s Solidarity for Participatory Democracy, internal changes in the movement appeared underway, as well.
The Korea Corporate Governance Fund, also known as the Jang Ha-sung fund, had helped induce the Participatory Economy committee’s split from its mother organization. Professor Jang Ha-sung’s chaebol reform movement is being changed from one centered on minority shareholders’ rights to one focused on institutional investment as a means to reform. The group plans to pursue this specialization, having joined forces with the Center for Good Corporate Governance, which compiles documentation essential for the chaebol reform movement.
Officially started in 1996 under the Economic Democratization Committee of the People’s Solidarity for Participatory Democracy, the chaebol reform movement, which sought legal and systematic changes as well as the promotion of the minority shareholder’s rights campaign, has thus come to a crossroads some 10 years later.
Though the economic reform movement carried out under the People’s Solidarity for Participatory Democracy has received its share of criticism, the participants evaluate themselves as having achieved various successes. They won the first derivative suit ever, against Standard Chartered First Bank Korea. Their subsequent achievements include victory in a lawsuit against Samsung Electronics to nullify its issue of convertible bonds worth W60 billion (US$62 million) to Samsung chairman Lee Kun-hee (1997-2003), as well as leading the movement for the legislation of the securities class action system (2000-2003).
The derivative suit against current and former employees of Standard Chartered First Bank Korea was not only the first legal instance of securing the rights of minority shareholders, but by clarifying directors’ responsibility for illegal activities causing damage to companies, it is seen as having changed managerial practices. The lawsuit against the chairman of Samsung Group Lee Kun-hee and his son Lee Jae-yong also had the result of making public the illegal transfer of authority in large family-owned firms. The class action system was also seen as a step forward in reform.
Both sides of the minority shareholders movement
Chairman Kim Sang-jo, who has lead the Participatory Economy Committee since 2001, said, "Through the minority shareholders’ campaign, our nation’s corporate management has improved greatly." He added, "I think the Participatory Economy Committee played a decisive role in this."
"For example, from here on out, there will be no corporations issuing convertible bonds, as Samsung Everland did. This shows [our] beneficial influence on corporate governance." Chairman Kim continued, "After the financial crisis of 1995, nearly all reform in the commercial and fair trade sectors was influenced by the People’s Solidarity for Participatory Democracy."
With such results as a background, Chairman Kim said, "instead of just campaign slogans, I worked to achieve tangible results. As [corporations’] actions were judged to be illegal, they will most likely not take place again. If the law changes, then so does...behavior. It is on this point that I judge the contribution of the Participatory Economy Committee to be the greatest. Instead of having a large goal in the distant future, we changed things through small but concrete achievements, but so that there can be no going back."
Despite such successes, some indicate clear limits to the model put forth by the Participatory Economy Committee, the most apparent in regard to the minority shareholders’ campaign. Those taking up the banner of minority shareholders should be minority shareholders themselves, but this is not the case. Rather, civic groups such as the economic committee have stepped forward in their place. This difference between those taking action and those benefiting will make it hard for this sort of movement to persevere in the long term.
Also, action is taken only as minority shareholders raise an issue; thus, some see the campaign as being merely a forum for problem presentation, rather than a comprehensive means of following through to a solution.
The economic committee’s chairman, Kim Sang-jo, said that "the effort to improve corporate governance is originally the responsibility of institutional investors. If the institutional investors do their part, then there is no need for civic groups to intervene." He said that the Korea Corporate Governance Fund provides a model to encourage institutional investors to do their share. The current movement is not something that can last indefinitely, he explained, in part agreeing with some of the criticisms of his organization.
Redistributing the wealth of chaebol to the upper classes?
Aside from the limits of the economic reform movement, another criticism is coming from the very progressives who normally support the People’s Solidarity for Participatory Democracy. The left wing, including the Association for Economic Justice, which supports democratic and autonomous development, refer to the reform movement’s minority stockholder model as "stockholder capitalism," calling it neo-liberalism that aggravates the polarization of wealth.
Kookmin University professor Jeong Seung-il of the Association for Economic Justice stated in his article, "The Implications of Shareholder Profit Expansion," published in the book, "The Korea Economy Disappears," that "the economic democratization asserted by the minority shareholders’ campaign is merely wealth redistribution among some hundreds of thousands of stock market investors and some ten to twenty thousand American and British investors. The minority shareholders’ campaign has clearly reached some partial level of economic democratization, but it has merely resulted in the even redistribution of wealth and property that was once monopolized by a privileged group of chaebol and top officials to...members of the upper class. Economic democratization occurred, but it only impacted some hundreds of thousands of people."
Professor Jeong added, "the progress of stockholder capitalism is resulting in the polarization of investment and income, and as a result, low levels of investment and growth without an increase in jobs." He also pointed to the movement as contributing to the increasing income gap as well as the dearth of steady jobs.
The former policy chief of the People’s Solidarity to Surmount Unemployment, Lee Gong-sun, said that the People’s Solidarity for Participatory Democracy’s minority shareholders’ campaign is merely a "securing of rights for an exclusive few," functioning as a foundation for "[foreign] capital to be used in speculation." In August of 2004, when Lee was still serving as the policy chief of the People’s Solidarity to Surmount Unemployment, he said that "the People’s Solidarity for Participatory Democracy’s minority stockholders movement is one of securing rights for those already holding the right of ownership." He made this comment at the national conference on speculation capital hosted by the Financial Economy Institute. At the conference, he went on to say that "the minority stockholder’s campaign was limited exclusively to the shareholders from the beginning. This resulted in the People’s Solidarity for Participatory Democracy’s approach to changing laws and securing rights."
Criticism from other left wing groups such as the Alternative Politics and Economy Alliance focus on an issue brought up by Professor Lee, the "nationality of capital." The Participatory Economy Committee has focused solely on illegal and unfair actions as they unfolded their reform movement, ignoring the wrongs committed by foreign capital.
The Association for Economic Justice defines foreign capital as a "target to be attacked," asserting that appropriate regulations must be enacted to publicize the ill effects of foreign capital. Related to this is the criticism that the People’s Solidarity for Participatory Democracy’s reform model will harden the vicious circle of "foreign capital’s request for too much dividend payments leading to a contraction in investments, which in turn leads to economic stagnation and wealth polarization." As the unsavory details surrounding the speculation committed by New Bridge Capital and Lone Star have been made known to the public, the issue has found its way into the public sphere.
The burden of regulation in this area has been left wholly at the feet of the Solidarity for Economic Reform, which is now independent of the People’s Solidarity for Participatory Democracy. And foreign capital aware of the Solidarity for Economic Reform’s so-called Jang Ha-sung Fund are now broadly investing in it. In fact, the fund initially was only able to attract largely foreign investors, due to the disinterest of South Korean investors. The fund is armed with capital gathered by Jang Ha-sung, but it is managed by a large American asset firm, Lazard Asset Management. The fund draws its investment of W130 billion from some 10 institutions, including the University of Virginia and Georgetown University. The scale of the fund is projected to grow within the year to W200 billion.
There are two sets of investment strategies for the fund. One is to consider some 10 to 30 companies as targets for investment and pick two with poor managerial practices and aggressively invest in them to gain some clout on the shareholders’ board. The second strategy is "passive investment" in order to support companies with good managerial structures. In most cases, the second method has been used.
The Jang Ha-sung Fund made a public announcement on August 23 that it had its acquired 68,406 shares, or 5.15 percent, of Daehan Synthetic Fibers. The Fund requested of the company that it "improve the rights of minority shareholders, establish an independent board of directors, increase the transparency of transactions between the company and its affiliates, augment dividend payments, and sell idle assets that hinder shareholder profits." It is their attempt to change the management structure of Daehan Synthetic Fibers’ parent company, Taekwang Industrial Co., Ltd.
The fund and foreign capital
Despite the fund’s recent efforts, there is a high probability that the dispute surrounding the "nationality of capital" will intensify. Though the Solidarity for Economic Reform and the Korea Corporate Governance Fund act separately, they are seen as one and the same, in light of their identical motives and their shared particants. And as the fund is comprised largely of overseas capital, the managers will no doubt face criticism that they are in the end "feeding the bellies of foreigners."
Chairman Kim Sang-jo said, "ten years ago, as well, when carrying out the minority shareholders’ campaign, we endured all sorts of criticism that we’re left-wingers and socialists." But for the sake of a new movement to improve corporate governance, he said, "we must be willing to bear this sort of criticism."
At the same time, there are inherent risks to carrying out this new movement so closely tied to foreign capital. The citadel that the People’s Solidarity for Participatory Democracy has assembled in the last 10 years may even tumble in the process. Thus we are left with the question: Has the Solidarity for Economic Reform and the Korea Corporate Governance Fund taken in its hands an enterprise which will yield positive results, or one that will do as much harm as good? Only time will tell.
This article was written by reporter Kim Yeong-bae and translated into English by Daniel Rakove.
