Chaebol

A chaebol is a family-controlled South Korean conglomerate. While the founding families do not own majority stakes in the companies, Korean culture allows them to maintain control out of respect for their long associations with the businesses. Among major chaebol are Samsung, LG, Hyundai, and SK Group. Chaebol produce nearly two thirds of South Korea’s exports and attract 70% of foreign capital inflows. South Korean government-chaebol cooperation has been termed an unholy alliance, with rampant favoritism and corruption and little transparency. While that cooperation has been credited with fueling the nation’s growth and transformation, critics say it also has led to monopolistic and oligopolistic concentration of capital and economically profitable activities. The chaebol culture is now accused of stifling creativity, amassing political power for leading families rather than maximizing profits, providing an unfair playing field for small and medium-sized enterprises, and excluding women and divergent voices from management. Chaebol payoffs to former South Korean presidents Chun Doo Hwan and Roh Tae Woo were estimated to be in the hundreds of millions, and perhaps billions, of dollars, subsequently leading to the convictions of those leaders.

Webs of cross-shareholdings enable families running the chaebol to covertly transfer funds from healthy companies to weaker ones in the group. As a result, investors in high-performing companies in the chaebol are forced to subsidize survival of frail members. In addition, the South Korean government has pursued a “too big to fail” doctrine, with governmentowned banks regularly rescuing large firms despite continuing huge losses, resulting in chaebol acquiring massive debt. Foreign investors have long applied a “Korea discount” of 20% or more to Seoultraded shares, showing reluctance to pay high valuations on companies that may be secretly controlled  by insiders.

In 1997, following devaluation of the Korean won, the International Monetary Fund bailed out South Korea with an aid package worth almost $60 billion. That aid came with strict conditions that South Korea reform its economy and the chaebol. The chaebol situation was the key issue in the 2002 South Korean presidential race, with Roh Moo Hyun, a crusading civil rights lawyer, riding into office on a wave of reformist sentiment.
Avariety of reformative measures have been taken. For example, Chey Tae Won, chairman and CEO of SK Group and heir to the company’s founding family, was arrested in 2003 and jailed on misappropriation charges. He was convicted of accounting fraud and breach of his fiduciary duties and sentenced to 3 years in jail. Nevertheless, he served just 3 months in prison and remains at the head of the chaebol. Laws implemented in 2004 limit the amount conglomerates may loan or invest in their affiliate companies, require disclosure of shares held by members of the top executives’ families, and permit the Bank of Korea to investigate the assets of owners’ family members to prevent concealment of assets. Largely because of reform efforts, 12 of Korea’s top 30 chaebol prior to 1998 no longer exist as coherent entities. Nevertheless, some critics argue that reform has been slow, tentative, and incomplete, hampered in part by recent scandals surrounding Roh Moo Hyun’s aides and donors. Reform may also face opposition since forced closure of loss-making chaebol businesses would result in cutting 200,000 or more jobs and because of the still massive power of the chaebol.

http://www.englisharticles.info/2011/07/24/chaebol/