ABSTRACT
Individual firms belonging to chaebol show unique patterns of corporate behavior which often betray the interests of ordinary shareholders and effect breaches in regulations and laws for governing private economic activities. On a legal level, each firm is supposed to be accountable to its direct shareholders, but myriads of mutual/circular/pyramid stock ownership among CAFs defy any clear sense of the complete shareholding structure of each firm. One thing is certain: the artificial entity of conglomerate head, usually with an ad hoc title of “group president,” assumes a ruling force over CAFs (whose status of affiliation itself is artificial), which operate as his/her strategic tool in the control of each concerned firm. Thanks to his/her supposed control of such CAFs, the conglomerate head does not have to disclose whether his/her individual shareholding is sufficient for the exclusive corporate control of each concerned firm. It is even possible for the conglomerate head to control an affiliated firm without owning a single share. Given this complex structure of corporate governance, I argue, CAFs usually manage their undertakings according to the following three unique operational goals (besides the universal goal of profit-making): (1) the growth of corporate size (usually sales volume); (2) the expansion of the conglomerate head’s (or his/her family’s) ownership and management control of the concerned CAFs; (3) the maximization of the conglomerate head’s (or his/her family’s) individual financial benefits involving various acts of rent-seeking in respect to CAFs. The latter two goals often betray the legitimate interests of ordinary shareholders. Even the first goal is often problematic as each CAF ’s corporate profit (and dividend) is sacrificed in favor of the growth and expansion of the concerned chaebol, which in turn serves various strategic interests of the conglomerate head. First, CAFs, like any other firms in a capitalist economy, are thirsty for profit, but they often indulge in corporate size aggrandizement by expanding or entering seemingly loss-making operations. In the early years of state-led export promotion, such seemingly loss-making operations involved various export industries for which the concerned firms were publicly subsidized by the state with preferential loans, tax benefits, exclusive import licenses, under-priced raw materials, etc.22 The gradual disappearance of such diverse forms of government-arranged subsidies did not fully discourage CAFs from aggrandizing their corporate sizes through loss-making operations. Size matters not only in many conventional senses (i.e. market share for monopoly or oligopoly influence, economy of scale in production and marketing, brand image, etc.), but also in a political economic sense. That is, each chaebol’s (as well as each CAF ’s) overall
business volume and standing in the national economy often turn out to be critical determinants of its political economic status by which access to political leadership, associability with bureaucracy, and influence over media are determined.23 These leverages of the major chaebol result in exclusive public contracts and business licenses, preferential administrative treatment and protection, inside information on policy changes and new policies, etc. Many conglomerate heads receive presidential courtesy as only the president seems to have the authority, albeit informal, to call them up to his office. More importantly, as related with the third operational goal of the CAFs, the chance for the conglomerate head’s arbitrary, illegitimate or illegal managerial intrusion for the sake of his/her (or their family’s) exclusive interests increases in proportion to each CAF ’s business volume and scope. Frequent instances of such intrusion include, among others, personal abuse of managerial prerogatives, embezzlement of corporate expenses, and illicit transfer of corporate assets.24 Not a single head of the largest chaebol conglomerates has been an exception in such instances of what is, literally speaking, corporate robbery. The national business leadership, organizationally housed in the Federation of Korean Industries (Jeongyeongryeon), has been constituted to a great extent by “ex-con” conglomerate heads with various convicted charges of economic crimes. Second, while the head (along with his/her family) of each conglomerate usually owns a surprisingly small portion of CAF stocks, this does not necessarily indicate a vulnerable status as corporate ruler, but rather attests to the maximum extension of corporate control (both in terms of ownership and management) given a certain amount of capital in his/her hands. One of the most significant attributes of a CAF ’s portfolio is to ensure the conglomerate head’s current corporate control over itself and sibling CAFs and, when necessary, to enable the head’s expansion or his/her heir’s inheritance of corporate control over existing and new business operations. The CAFs’ unique practices, such as the (earlier) preference for loans – policy loans, if available – over stock-based financing and the reciprocal/circular investment (stock ownership) and debt underwriting, have been engendered as each conglomerate head has attempted to expand his/her business operations without losing the control of corporate ownership and management. In fact, most of the crucial decisions on CAF portfolios appear to have been made in secret meetings in the conglomerate head’s presidential office (hoejangsil), the legal status of which is not clearly established. The offices of the conglomerate heads are often disguised under such names as “the planning and coordination office” and “the headquarters for structural adjustment,” while some use more frank names like “the secretarial office of the president” of the business group. Whatever their names are, CAFs are subject to managerial rule by a sort of legal ghost housed in these masterminding offices. Many decisions made in such offices serve the conglomerate head’s interest at the expense of that of other shareholders of CAFs, and thus cause controversies and conflicts, in particular at the year-end shareholder meetings. Naturally, the South Korean government keeps issuing orders for the disbanding of such extralegal organizations, but no official would think they can replace the conglomer-
ate head’s de facto governance system with whatever de jure systems of corporate governance they may conjure up. Third, the maximum extension of the conglomerate head’s corporate control over CAFs then becomes the main basis for managerial decisions and practices that are designed to aggrandize the head’s (and his/her family’s) exclusive privileges and benefits. A sort of rent-seeking regime governs CAFs from outside – i.e., by the conglomerate head’s office. Managers of CAFs, and sometimes conglomerate heads themselves, have been repeatedly blamed for and charged with such notorious practices as (1) accumulation of secret funds (bijageum) earmarked for strategic managerial actions, but too often embezzled for the head’s private interests, sometimes including his/her expenses for living, leisure, and even gambling; (2) abnormal expansion of the head’s (or his/her family members’) stock shares through irregularly issued convertible bonds or through outright preferential selling of company-owned shares; (3) unjust transactions with the head, his/her family members or other firms they own, involving products, parts, raw materials, and corporate assets; and (4) unreasonable support for other CAFs (which, by definition, are controlled by the same head) thorough investment and debt underwriting. The unjust perks generated through the stealthy practices ranging from (1) to (4) constitute a unique set of internal rents exclusively usurped by the conglomerate head. To such internal rents are added the ordinary remunerations of a manager’s salary and individually allocated business activity expenses (pangongbi) and a shareholder’s dividend. These ordinary and legitimate remunerations of the conglomerate head seem to have been miniscule as compared to the extraordinary material benefits that are basically rents realized through the abusive managerial actions unique to chaebol.
