SK Group: Korea’s Corporate Governance Litmus Test?

Korea’s SK Group Under Potential Investigation
Recently, this nondescript article appeared on Yonhap; $88 million in possible embezzlement, allegations unproven, perhaps mere speculation. Move on, nothing to see here, next…hold on a second.

SK Group Maybe Second in Charge
While Samsung Electronics rightfully grabs most of the international headlines due to its internationally-acclaimed LCD TVs and Galaxy smartphones, it is SK Group that stands at the center of some of the more vital economic sectors. SK Telecom is the dominant telecom network operator in Korea. SK Energy is one of just the few largest energy companies. While the rest of the world watches Samsung, Hyundai-Kia Motors, and LG Electronics, due to their consumer-oriented products, it can be argued that SK Group is equally, if not more important in sectors that are dominant in the Korean economy, and has grown links with the pan-Asian world which are more important for Korea’s economic future.

Korea’s Corporate Governance Track Record: Pitiful At Best
It is good to be rich, and it is good to be born into a rich family. That is true in any country, in any era. That is especially in Korea, developing from a third-world country into the upper echelons of the first world. Why? Well, let’s see. Samsung’s Lee Kun-hee has evaded taxes, sold securities of a family-owned subsidiary to family members at below-market prices (Everland Group), and has forked over untold billions of Korean Won in order to keep an illegitimate child born out of wedlock (to a household servant) out of the news. Let’s see, what else? Well, everyone knows about the Starbucks in Myoung-dong, right? It is the only privately-owned branch of Starbucks, forked over as part of the divorce settlement to the ex-wife of Samsung’s chairman-to-be. The rest of the Starbucks in Korea are owned by a holding company in a licensing agreement with Starbucks (a common structure in Korea). Note: this blog is authored outside of Korea, which has allowed The Seoul Gyopo Guide to continue, and not be shut down by Samsung Electronics, as a Korean-based blog was, when it reviewed the Galaxy II).

Korea’s education system must be clean, right? Wrong. The owners of all of the largest hagwons in Korea? The owners of the largest handful ALL had a stay in Korean jails due to suspicion over tax evasion. If you want to be suspect tax evasion at any individual business? Find one that accepts only cash or checks. Hagwons (private tutor centers)? Exactly. Admittedly, the largest hagwons are now subject to accounting standards due to their public listing on stock exchanges. Small, private hagwons? Cash and checks only please. Ahem.

Savings banks? Where do we start? Not only were ill-advised loans made, but before losses were completely revealed, insiders withdrew their savings out first. Clearly, this is the watered-down version, but the main point remains. The facts are not all out, and those responsible have not yet formally faced charges, but no one in Korea doubts that those charges are coming. Whether or not real punishment will be doled out is another matter entirely.

Chaebol management structure is difficult to understand, but it is a commonly-known fact that upper management has expense accounts: cash is deposited in accounts for use at dinners and for uh, business relationship-building. How is that for delicate euphemism? If you cannot connect the dots, just continue reading.

SK Group Has Been Down This Road Before
SK Chairman Chey Tae-Won has faced allegations in the past. In fact, he has served time in jail in the past for misdeeds at SK Energy. Not widely publicized is that SK Energy’s problems were so large, that it could easily have dwarfed Enron. While the size of the accounting problem in the energy sector may not have been as large (not published), there is no doubt that SK Energy’s relative influence and importance in the Korean economy was much, much larger to Korea when compared to Enron’s size in the US. Enron was one of many, many, global energy traders. However, SK Energy is one of very, very few Korean energy companies. At the time this was occurring, the world economy was teetering, Korea’s was one of those on the brink, and the Korean government essentially put concerns over the Korean economy above corporate governance. SK Group was too large and too important to the Korean economy as a whole to survive its potential collapse at that juncture. You can slice it and dice it anyway you want, but that is the bottom line, and this is not rumor-mongering in the least.
By the way, Jeffrey Skilling, Enron’s CEO, remains incarcerated.

Korea’s Economy is Stronger Now
Korea’s corporations enjoy unprecedented global recognition today. From E&C (engineering and construction) to automobile manufacturers to shipbuilders to consumer electronics, you cannot go anywhere in the world without seeing or hearing of a Korean company in a leading market position. Many in the world do not even know that the company is Korean. It doesn’t really matter; in a perverse way, it has actually helped because Korea has kept out of the headlines as a result. However, Koreans onshore understand, and have blithely accepted that corporate governance is weak at best, and pathetic at worst. While Korean companies have flown under the global radar, it will not be able to do so forever. It has attracted the attention of the global economy, and with it, it will be scrutinized using global standards of many kinds. Global investors will also have their say, using their own methods of communication. The most liquid of these is money, which can travel from one country/company to another very easily. If there are problems at the leadership of a company, global investors will not be pleased, and they effectively vote by selling shares. Ask Hyundai Heavy how it was treated when it was revealed that it was considering a takeover of Hynix Semiconductor. The Seoul Gyopo Guide pointed out the lunacy of that idea here.

SK Group and the Korean Economy Cannot Ignore This One. Maybe.
When Korea was an insignificant competitor on the international stage, it was easy to make excuses. Companies and the Korean government have maintained, and are continuing to maintain, a delicate symbiosis to keep the Korean economy growing, despite misdeeds of different sorts. However, Korea has attracted some unwanted, and unsavory attention. The Financial Times has a blog called Beyond Brics, which reports on emerging markets countries (a new phrase will need to be coined). The Wall Street Journal has also done the same. The KEB/Hana/Lone Star debacle has attracted attention for years. We have seen many headline from Korean president Lee regarding corporate behavior, empathy for the working class, war against inflation, war against social ills, etc. Perhaps this is the President’s farewell gift. It may very well be that SK Group, and Korean corporate governance practices will not be able to escape the crucible this time. Its early doors (as the British would say), so we will see.

Last note: some of the information here isn’t in the normal, English language press. Nevertheless, it is accurate. Native Koreans in particular circles know these facts as true. Any disputes over any of it, even a single sentence, can be played out here, in full unedited view. Bring it.