Wednesday, October 23, 2019
Number of Conglomerates’ Cross-holding Links Decreases Sharply
A Result of Governance Reform
Number of Conglomerates’ Cross-holding Links Decreases Sharply
  • By Jung Min-hee
  • September 6, 2019, 11:25
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The number of cross-holding links among affiliates of conglomerates has decreased sharply as a result of the government's push for governance reform.

As the Moon Jae-in government has been pushing for chaebol reforms and strengthening regulations on corporate governance reforms after taking office, the number of cross-holding links among affiliates of conglomerates has decreased sharply. The number of companies subject to regulations designed to prevent heads of business groups and their family members from pursuing private interests has also reduced. However, the number of firms which are used by owner family members to enrich themselves but are not subject to the regulations has not fallen.

Three out of 59 largest conglomerates in South Korea by assets – Hyundai Motor, Taekwang and SM – owned 13 circular shareholding structures as of Sept. 5, according to a report released by the Fair Trade Commission (FTC). The figure showed a sharp decline from 282 in 2017 when the Moon Jae-in administration took office and 41 in 2018. The 59 conglomerates were designated as a business group subject to public disclosure on May 15 this year.
 

Moreover, the number of subsidiaries subject to regulations on preventing group heads and their family members from pursuing private interests stood at 219, down 12 from 231 last year. The average shareholding rate of owner family members in the 219 subsidiaries was 52 percent. A listed subsidiary becomes subject to the relevant regulations when business groups’ heads and their family members hold more than a 30 percent stake in it. For an unlisted subsidiary, the ownership threshold is 20 percent.

Jungheung Construction and Hoban Construction saw the number of subsidiaries subject to the regulations decrease sharply to 22 and 12, respectively, while Hanjin, HiteJinro and Hankook Tire showed an increase by 5 each. Hyosung had the largest number of subsidiaries subject to the regulations at 17, followed by Hankook Tire at 14 and GS at 13.

However, the number of companies which are in regulatory blind spots remained the same at 372 under 48 conglomerates. Companies in the dead zone refer to listed firms where group heads and their family members have a 20 percent to 30 percent stakes, and subsidiaries which are owned 50 percent or more by companies where group heads and their family members have more than a 20 percent stake.

The number of listed companies which are 20 percent to 30 percent owned by group heads and their family members was 21 under 29 conglomerates. The average internal shareholding rate stood at 37.2 percent. Hyosung had the largest number of companies in the dead zone at 31, followed by Netmarble at 18 and Shinsegae, Harim and Hoban Construction at 17 each.

The number of affiliates where group heads and their family members had a stake in totaled 420 under 51 business groups, or 21.6 percent of the entire affiliates, with their average shareholding per comapny reaching 3.9 percent.


Hankook Tire had the highest shareholding rate of the group’s head and his family at 48.1 percent, followed by Jungheung Construction at 38.2 percent, KCC at 34.9 percent, DB at 30.3 percent and Booyoung at 24.5 percent. SK showed the lowest figure at 0.5 percent, followed by Kumho Asiana and Hyundai Heavy Industries at 0.6 percent each and Harim and Samsung at 0.9 percent each.

The number of affiliates which are wholly owned by the business groups’ heads and their families was 84 under 30 conglomerates, down 9 from 93 last year.

The number of affiliates in which conglomerates’ heads, not their families, had the stake was 224 and the average shareholding ratio was 1.9 percent. The second generation of founders held the stake in 169 affiliates under 36 conglomerates, showing an average shareholding rate of 0.8 percent.

The shareholding rate of heads in the country’s top 10 business groups over the last 20 decades from 2000 to 2019 dropped from 1.1 percent to 0.9 percent, while that in subsidiaries grew from 41.2 percent to 54.3 percent.

This was because the number of indirect shareholding cases using financial insurance companies, non-profit organizations and overseas affiliates increased.

Meanwhile, the number of non-financial affiliates invested by financial insurance firms increased from 32 last year to 41, while that funded by non-profit organizations rose from 122 to 124 and overseas affiliates from 44 to 47 over the same period. In this regard, the FTC said, “There has been continuous concerns over growing control of conglomerates’ heads and their families by making use of indirect investment.”