Just Don’t Take Away My Expense Account

Chaebol Object to Shareholder Activism: Not Shocking

This almost hilarious article appeared in the FT Beyond BRICs blog. Koreans have long known that the chaebol dominate Korean life. Shareholder rights is, for the most part, a foreign concept. Financial efficiency may be a stated goal but is not seriously pursued. That should be the demand made by shareholders. The funny thing is that the article tries to point out the NPF is being criticized for being a silent partner of the chaebol. That is a fact. More importantly, the problem is that the status quo affects not only current and future shareholders, but also affects disaffected employees, and Korean society as well.


Korean Corporate Personnel Practices are a Mess
Korean corporations perform an annual re-shuffling at the higher echelons of the executive ranks. At the end of each calendar year, horse-trading occurs in earnest. Executives lobby and politic to obtain new roles, or to keep their existing ones. In addition, this promotion process includes the promotion (or not) of junior executives to become senior executives. To native Koreans with working experience at a chaebol, this is nothing new. It is an age-old, antiquated process in which the level of executive productivity drops to…almost zero. All day, all night, at dinner, and thereafter, this process dominates everything. This type of deal-making, in which executives are shuffled among divisions or departments, occurs in a way that would make the team owners of the U.S. NFL or English Premier League jealous.
On an individual level, the effort of an executive to obtain job security for the next year is understandable. As a senior person rises in the ranks of a chaebol, the number of alternative jobs at different companies declines precipitously. Therefore, that executive wants to, needs to, secure himself for the coming year. Given that there are relatively few large Korean corporations, the options are very limited, which means that if there is no position, then there is almost certain unemployment (after a transition period), without the sophisticated pension plans that exist in the U.S. or Europe. Without an economic structure that supports small-business creation, the choices of alternate employee are few and far between. It is no wonder, then, that an individual executive must be involved: he has virtually no other choice.

Shareholders Should Be Appalled
While an individual employee may be acting in his own best interest, the shareholder should be appalled at this annual practice. At the end of each calendar year (in Korean language newspapers), an announcement by each of the largest chaebol which reports the names of the new heads of particular divisions. Given that this process lasts for at least a month and more likely six weeks, this is more than 10% of the entire year is used for this archaic practice.
This, of course, is only the tip of the very large iceberg. Executives at the largest chaebol have had, and continue to have, expense accounts from which dining and entertainment, of all sorts, are paid. The efficiency at the largest chaebol have been called into question for a long time. The compensation of these executives in shares of the company are relatively low. It is the view of the Seoul Gyopo Guide that this practice, i.e. low equity participation by employees, is one source of the continued divide between the rise in stock prices and the lack of increase in Koreans’ wealth. When coupled with inflation, the Korean corporate employee’s real earnings (nominal earnings adjusted for inflation) has made life even more stressful for the “salary man” in Korea. Given that the employees own little stock in their own company, why would this person challenge the status quo to improve the financial performance of his/her company? It would be almost foolish to do so.
The “greater good” of the Korean economy as a whole has been used to excuse the obvious missteps of certain Korean chaebol. Samsung Everland convertible bond, SK Corporation accounting: these are just two, but not the only, famous cases where obvious wrong has occurred but in which management remains. Another company is being charged now of keeping accounts outside the corporation for personal use. The Seoul Gyopo Guide’s only statement about these and other similar events is that native Koreans are well-aware of these practices, therefore it is no wonder that an everyday Korean believes that he/she is powerless against the status quo, and that conformity is the safer, more prosperous route.

“Shareholder Rights” is a Foreign Concept in Korea
The FT blog points out the NPF to be the largest shareholder of many of Korea’s largest companies. That is a fact. However, the issue that the article does not make is that as the largest shareholder, and one of the most important investors in the world, it is not using its voting power to demand greater improvements in efficiency and performance of its largest holdings. The implications are two-fold at the minimum. First, outside investors would find Korean companies even more attractive investments if there were greater transparency and efficiency at the corporate level. The NPF, as the article has mentioned, has been accused of being a silent partner of chaebol management. Second, the Korean population has grown immune to this entire practice as “the way it is.” Koreans have little belief, systematically, that their savings are being properly, efficiently managed. Korean employees do not want their earnings invested in their own company’s stock, because they see and understand how great the inefficiencies are, and how much they affect the company during the year.

Of course, there are exceptions to all of these statements. Nevertheless, everyday Korean life is full of an incredible amount of stress. Part of that stress can be attributed to the knowledge of large, systematic issues facing Korean life, and perhaps more importantly, the lack of hope for future changes to these fundamental issues. It is the opinion of the Seoul Gyopo Guide that the lack of shareholder rights and the lack of exercise of those rights when obtained is a systematic barrier to the fundamental improvement of the Korean economy. Perhaps some of the observations above are news to those unfamiliar with Korea. Korea itself is a country full of contradictions and is widely misunderstood: the Seoul Gyopo Guide exists to remove some of that misunderstanding. However, everyday Koreans are well-aware of the statements made in this post; perhaps it will require greater shareholder activism from foreign investors to help improve the situation. Clearly, those that benefit from the status quo aren’t interested in changes, and this blog has made that clear on numerous occasions. Perhaps the FT Blog article will help in some small way. Until the largest shareholders begin to demand fundamental changes on behalf of their clients, that change is unlikely.