By Kim Jin-bang, professor at Inha University
The practice of large corporation heads passing control down to their relatives is inappropriate, as companies listed on the stock exchange are public rather than personal. Managerial rights are not property ownership rights, so it makes no sense that these large conglomerates, or chaebol, would continue the practice of founding families passing the corporate reins to their heirs. If a chaebol’s founding family owns a quarter of stake in a listed affiliate, the family can directly manage the unit. This is precisely what happened at Shinsegae. At Samsung, only 5 percent owned by its founding family and a significant influence on the national economy, it would be highly inappropriate if the family was able to name the group’s successor. Traditionally, in the United States, entrepreneurs generally started their own businesses and grew into conglomerates by inviting in outside financial capital. When the founders had retired, their shareholdings were passed to financial companies. After the financial firms sold their shareholdings with higher prices to the public, no controlling shareholders existed. This allowed many companies in the U.S. to have professional managers. A system was thus developed to install professional managers who could be kept in check, instead of controlling shareholders.The situation is somewhat different in Europe, where there are controlling shareholders. In Germany, two or three families who have influential stake in a conglomerate can either control their company directly or build up friendly shareholders by holding stake in other companies bearing no conflict of interest with theirs. It is common for controlling shareholders to exert influence in appointing a chairman of the company’s board and a chief executive officer, but they do not directly take part in the company’s management. Although they own a larger percentage of shares than the chaebol patriarchs in Korea, they are less influential. In the U.S. case, Carnegie and Rockefeller gave their shareholdings to businesses to invest in public interest. At that time, they sold their shareholdings to institutional investors at market prices, in order to show that they were not reaping a “management premium,” meaning no room to enrich themselves in an abnormal manner. Korean chaebol should learn a lesson from this story. Before talking about the succession of management rights, the first mission is to ensure that chaebol owners cannot exercise a management premium. To put an end to this, boardroom and shareholder meetings must fulfill their roles. Of course, it is not easy for chaebol owners to change their insistence on family control because of the complicated familial cross-shareholdings among affiliates. The limit of outside directors is obvious. In addition, there is little impetus for mergers and acquisitions due to these tangled cross-shareholdings. Let’s solve the problems in steps. For example, If Hyundai Motor Corp. was damaged by financially supporting Glovis, shareholders of Hyundai Motor, Kia Motors and Hyundai Mobis should use their rights to thwart this support. Still, in practice, it is difficult for shareholders to file a lawsuit. It is possible if the government introduces a system that allows shareholders of a parent company to file suit against an executive of the company’s unlisted affiliates. The scope of class-action lawsuits should thus be widened. In the long term, institutional investors are needed to play an active role as shareholders. However, because most big securities firms are units of the chaebol or their clients, this role may not be an easy one to fill. So, the chaebol must be banned from getting involved in the running of financial institutions, and institutional investors should insist on their independence from the chaebol. By doing so, a lot more ordinary shareholders will have their voices heard.
