A university professor has pointed out that the holding company system that was introduced to curb the concentration of economic power by large conglomerates is being utilized as a means to maintain corporate control and aid corporate succession by owning families.
Shin Young-soo, a professor at Kyungpook National University, made a presentation on the impact of the introduction of the holding company system on Korean business groups and the policy environment at an academic conference on the 25th anniversary of the holding company system in Korea, according to the Korea Fair Trade Commission (KFTC) on Nov. 5.
This year, the number of holding companies stands at 174 in Korea. Compared to 127 in 2013, the number has increased by 27 percent to 47 in 10 years.
By type, 164 are general holding companies and ten are financial holding companies. There are three fewer financial holding companies from a decade ago, but 50 more general holding companies.
In 1999, when the holding company system was introduced, the Korean government predicted that not many business groups would actually convert to holding companies even if they were allowed to do so. However, as related laws such as the Fair Trade Act and the Tax Act were revised several times to reduce burdens on holding companies, the number of holding companies grew faster than expected.
The first holding company was founded in 2003 when LG adopted the holding company system, and the number of holding companies increased by five to seven every year until 2007. Since 2007, when the relevant debt-to-equity ratio limit was raised and the subsidiary equity ratio requirement was eased, the number of holding companies has increased by around 10 a year.
Prof. Shin explained that over the past two decades, the holding company system has been viewed as an advanced corporate governance structure, resulting in a prolonged period of favorable policy conditions and a large number of corporate groups converting to holding companies.
In practice, however, the holding company system has been frequently used as a means of strengthening owner families’ control system or corporate succession, so concerns are growing about this, Shin said.
While the advantages of the holding company system can be maximized in an ideal situation where controlling shareholders are dedicated to their holding companies only, and the holding companies pursue independence and industry specialization while maintaining high percentages of shareholding in their subsidiaries, but if some of these conditions are not met, the holding company system may generate adverse effects, Shin added.
Shin pointed out that in the current situation where the holding company system is used as a means of strengthening corporate governance, it is a big challenge to exclude the possibility of side effects such as an infringement of minority shareholders’ rights and interests and a concentration of economic power. The professor emphasized the need to review the entire holding company system from an equity perspective.