The Hyundai Motor Group, the Hanwha Group, and the Shinsegae Group have the weakest corporate governance structures among Korea’s 30 largest business groups. Some claimed that unless improvements are made to corporate governance structures, a second Elliott Associates incident may take place.
“44.5 percent of shares of listed companies of Korea’s largest business groups are friendly to the biggest shareholder families,” said Park Joo-geun, the CEO of CEO Score in the Deloitte Anjin-CEO Score Corporate Governance Policy Forum held in the Federation of Korean Industries HQ Building in Seoul on Sept. 9.
“44.5 percent may look stable. But excluding those of minor subsidiaries, the percentage drops below 31 percent, making the biggest shareholder families susceptible to attacks on their managerial rights.” According to Park, the Hanwha Group, the Hyundai Motor Group and the Shinsegae Group have the weakest corporate governance structures, since the percentages of children of their owners stand at 30 or lower, each. Hyundai Department Store and OCI may have trouble defending their managerial rights, too.
“Big Korean companies still have a long way to go in terms of BODs, the protection of minority shareholders, audits and accounting,” Park said. “Foreign private equity funds take advantage of these elements.”
Chaebols control companies via cross-shareholding and multi-stage investments, among others. This makes their companies vulnerable to professional corporate raiders of foreign capital. For instance, the U.S.-based fund Elliot Management took issue with Samsung Corporation’s merger, while announcing its participation in the management of the company. Elliot knew such weakness of big Korean companies. Back in 2004, the U.K.-based fund Hermes demanded that the management of Samsung Corporation retire preferred stocks, after securing 5 percent of its shares. In Aug., the World Economic Forum (WEF) downgraded the competitiveness of Korean companies in terms of corporate responsibility, the protection of minority shareholders, the operation of BODs, and audits and accounting.
Park took a critical stance about the composition of outside directors at large Korean firms as well. For example, 74 percent of outside directors at Fortune 100 companies are from the business sector, while government officials-cum-outside directors account for only 10 percent. Businesspeople-cum-outside directors account for 16 percent of total outside directors at 187 listed companies of the 30 largest business groups, but 39 percent were government officials before becoming outside directors.
Park picked out SK Energy, Jeonbuk Bank, and Daum as companies with excellent corporate governance structures. SK Energy runs an outside director recommendation group. Jeonbuk Bank records what directors say during BOD meetings in an effort to encourage them to be more responsible about them. Daum expanded the responsibilities and power of auditors.
Park expected big companies to expedite their plans for a transition into a holding company to establish their corporate governance structures. In fact, holding company-based groups account for 81 percent, up from 71 percent in 2012. 54 out of Korea’s 100 largest groups already finished adopting holding company systems.