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Woo Ki-hong, chair of the Korean Air general shareholders meeting on Mar. 27, announces that Chairman Cho Yang-ho will not be reappointed as an inside director. (photo pool)
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Cho Yang-ho’s failure to be reappointed could be alarm bell to other conglomerate families
Hanjin Group Chairman Cho Yang-ho failed to be reappointed to the board of directors at Korean’s Air’s general meeting of stockholders on Mar. 27. This marks the first time that stockholders have blocked a chaebol leader from sitting on a company’s supreme decision-making body because of the damage caused to corporate value and stockholders’ interests by their imperious and even illegal behavior. In that sense, this episode opens a new chapter in the history of the country’s chaebols. This has set off the alarm bells at the country’s chaebol families, who have plagued companies with so much abusive and illegal behavior via hereditary rule that it’s prompted the coinage of the term “owner risk.” Chaebol chairmen and their families have long been criticized in Korean society for exercising their authority without being held accountable for their actions. They’ve customarily been allowed to continue to control group management even after breaking the law and being convicted in criminal trials. There has been a vicious cycle of these leaders bowing to public criticism by temporarily stepping down and then being reinstated to their positions after public memories have faded. In one of the best-known examples, Samsung Group Chairman Lee Keun-hee let go of the reins of management in 2008 after being charged with amassing a slush fund only to return to his position two years later. But Cho’s expulsion from the board of directors has called into question the “imperial management” that chaebol owners have typically exercised. “Symbolically speaking, this is quite significant because it shows that illegal actions by a chaebol chairman can become an issue during a general meeting of stockholders,” said Ju Jin-hyeong, former president of Hanwha Investment and Securities. Moving forward, Koreans are likely to see the removal of several more figures like Cho. South Korea’s National Pension Service (NPS) adopted a stewardship code last year. Since it played an instrumental role in blocking Cho’s reappointment to the board of directors by actively exercising its rights as a stockholder, it’s likely to apply the same criteria to similar motions in the future. Another significant aspect of this incident is that it was triggered by the collective action of employees at Korean Air responding to the domineering and abusive behavior of Cho’s family members. After a string of family scandals, employees created a new labor union and took “ownership” of the company by holding demonstrations demanding that the controlling family be removed from power. These scandals included the “nut rage” incident in 2014 involving Cho Hyun-ah, a former vice president of Korean Air ((who stopped a plane from taking off because her nuts weren’t served to her liking), and the “water rage” incident last year involving Cho Hyun-min (who threw a cup of water at an employee in tantrum), a senior executive and Cho Hyun-ah’s younger sister. The Cho sisters’ father is none other than Cho Yang-ho. “There was widespread doubt inside the organization about whether the chairman would really step down, but I think we’ve got our proof that that’s possible,” said Park Chang-jin, former cabin crew chief for Korean Air and chapter head of the employees’ union. Park was the victim of the “nut rage” incident. How will Cho’s fall impact reappointment of Samsung Vice Chairman Lee Jae-yong? One looming question is what impact this may have on Samsung Electronics Vice Chairman Lee Jae-yong, whose tenure as an internal director at the company will be ending this October. Both at a district court and on appeal at a high court, Lee was found guilty of giving massive bribes to former president Park Geun-hye and her confidante, Choi Soon-sil. Though the Supreme Court’s decision is still pending, the prevailing opinion is that Lee is very unlikely to be acquitted since he’s ensnared in the influence-peddling scandal that brought down Park and Choi. If the NPS applies the same standard to Lee as it did to Cho, it could hardly vote in favor of Lee’s reappointment to the board. Presuming that the NPS opposes the reappointment motion and Korea Corporate Governance Service (KCGS) and Institutional Shareholder Services (ISS), a proxy advisory firm that is influential both in Korea and abroad, advises stockholders to vote against the motion, the vote is likely to be fiercely contested. As of September 2018, the family of Samsung Electronics Chairman Lee Kun-hee, Samsung group affiliates and company executives and other allies of Lee only controlled a 19.54% stake in Samsung Electronics. The NPS has a 9.25% share, while foreign investors hold more than 50% of the company’s stock. Some of the chaebols are expected to launch their own reform initiatives by increasing management transparency and accountability in order to prevent episodes similar to what transpired at Korean Air. “The Cho Yang-ho incident will drive chaebols facing what’s called ‘owner risk’ – the risk of corporate value and stockholder interests being harmed by the owners’ illegal activity – to devise their own countermeasures,” said Kang Jeong-min, a researcher at Solidarity for Economic Reform. Candlelit revolution in the capital market? Some are even comparing this to a “candlelit revolution in the capital market” and making the rather hopeful prediction that the curtain will soon fall on “imperial management” at the chaebols. “I hope this will be a starting point for economic democratization and chaebol reform and a chance for the chaebol heads to correct their dictatorial management practices,” said Chae I-bae, a lawmaker in the National Assembly. But there are reasons to doubt that chaebol reform is just around the corner. The business community used the expression “pension fund socialism” to caution against letting the attitudes that fueled Cho’s ouster at Korean Air to spread. “The NPS’s decision failed to take into account the efforts that Cho has made to improve shareholder value at Korean Air. The NPS needs to take heed of market concerns about ‘pension fund socialism,’ in which pension funds like the NPS dominate the management of companies in the private sector,” the Federation of Korean Industries (FKI) said in a statement signed by its executive director, Bae Sang-geun. By Kwack Jung-soo, business correspondent Please direct comments or questions to [english@hani.co.kr]
