South Korea’s antitrust tsar has a good shot at taming the chaebol

AS KIM SANG-JO was preparing last May to make the switch from snappy shareholder activist to a regulatory role as South Korea’s fair-trade commissioner, he had a simple message for the country’s big conglomerates: “Please do not break the law.” Not one to make bosses quake in their brogues, exactly. And yet the chaebol, as the country’s family-controlled empires are known, are responding to his call for reform. Addressing complaints about governance, a few have brought far-flung businesses into a simpler holding-company structure. Others have set up funds to provide support to suppliers, which have long accused the giants of treating them badly. Another group is paying out record dividends to once-disregarded shareholders.

Mr Kim was preaching, if not yet to the converted, then to the disconcerted. The chaebol have had a bruising couple of years. Nine of South Korea’s most powerful bosses, some rarely seen in public, were grilled on television by politicians in December 2016 as part of an investigation into collusion. All denied that they had sought favours in return for the billions of won they paid into charitable foundations controlled by Choi Soon-sil, once a confidante of Park Geun-hye, a former president ousted in March. (Her father, Park Chung-hee, helped the chaebol flourish with state money when he ruled in the 1960s and 1970s.) Both women are now behind bars on charges of corruption—as is the country’s most prominent business scion, Lee Jae-yong of Samsung.

Mr Lee, presumed heir to the electronics-to-theme-park giant, has been Samsung’s de facto boss since his father fell ill in 2014. In August he was sentenced to five years in prison, charged with bribing Ms Park in order to win support for an $8bn merger of two affiliates, Samsung C&T and Cheil, which tightened his hold over the group. (He denies any wrongdoing and is appealing; a first judgment is due in the coming weeks.)

To many, all this marks a watershed in chaebol history; Mr Kim agrees. Mr Lee’s father, for instance, twice received presidential pardons, after convictions for bribery in 1996, and embezzlement and tax evasion in 2008. In 2015 and 2016 Ms Park released from prison early the bosses of SK Group, the third-biggest conglomerate, and CJ Group, another chaebol. Most have been let off because of their firms’ importance to the economy. The total asset value of the five biggest chaebol, measured in April 2016, reached over half of the country’s GDP for the year (see chart).

Moon Jae-in, the left-of-centre president who won by a landslide in a snap election in May, is the first to promise an end to politically-motivated amnesties. He has pledged, too, to abandon what he calls South Korea’s “chaebol-focused growth strategy”. Small and medium-sized enterprises (SMEs) feel squeezed by the national champions, to which many say they are beholden as suppliers or by which some are gobbled up, often for valuable machinery or technology. Innovation and entrepreneurship suffer as a result.

Mr Moon’s resolve to help SMEs means that Mr Kim, whom he appointed, has stronger political backing than perhaps any previous fair-trade commissioner. As an activist, Mr Kim was once turfed out of a meeting of Samsung shareholders for haranguing executives about rumoured illegal political donations. Now that Mr Kim is working in Mr Moon’s graft-busting government, the two men, says Mr Kim, are “totally in agreement”.

His mandate is popular, too. Over four-fifths of adults work in often unproductive SMEs. An advocate for them says that Mr Kim has “a real understanding of the build-up of unfairness”. The Korea Fair Trade Commission regulates monopolies and upholds consumer rights. It found that Lotte, a shopping-and-cinema empire, broke national law on fair competition most frequently in the 18 months from April 2016, on no fewer than 33 counts. During that time Hyundai paid the highest total fines, of 85bn won ($74m). Close to two-thirds of cases handled by the commission involving the ten biggest chaebol were breaches of the fair-trade act’s provisions.

Under Mr Kim, who seems wholly unafraid to live up to his public sobriquet as the “chaebol sniper”, penalty fees are set to double for businesses who break fair-trade rules. A new fine can be meted out to firms that fail to hand over documents requested by the commission; non-compliance is now a criminal offence.

Lee Jae-hyung, an expert on corporate governance at the Korea Development Institute, a think-tank, says such measures matter greatly, because they raise public awareness. Past leniency towards badly-behaved bigwigs means South Koreans have often been oblivious to the seriousness of their infractions. Public pressure is needed to help pass proposed laws on chaebol reform, since Mr Moon’s party lacks an absolute majority. Mr Kim has also raised the possibility of stronger measures against cross-shareholdings.

In the sights

The sniper would rather his targets surrender willingly and is encouraging “voluntary” reform. That approach might last longer than big, forced changes, observers reckon. Mr Kim is also counting on the fact that the younger, third generation of chaebol bosses “sees change as inevitable”, as Chinese competition gnaws at profits and as investors demand a bigger slice of what is left. Fatter shareholder returns should be the yardstick for progress, he says. Simplifying corporate structures, often more complex than a semiconductor circuit, would also help correct the “Korea discount”: the low valuation of firms relative to developed-country peers, thought to stem from investors’ perceptions that they have next to no say in decisions. This year’s shareholder-meeting season, in March, will be a key test of whether the chaebol are moving in the right direction.

Change is undoubtedly in the air. In 2016 Samsung promised to start returning half its free cashflow to investors. Not long ago this was an “unimaginable” step, says Mr Kim. In his first meeting with the “big four”—Samsung, Hyundai, LG and SK—in June, he asked their professional managers to reform supply-chain pyramids (to avoid any whiff of collusion, he does not meet the owner-families). That chain of relationships is widely thought of as an example of gapjil, a term for the bullying of firms lower in the hierarchy. SK Group has since announced a 160bn-won fund to pay second- and third-tier subcontractors directly if a first-tier supplier is temporarily cash-strapped. Mr Kim is confident he can convince the chaebol that the costs of engaging in unfair trade outweigh the benefits.

Some anti-chaebol types carp that Mr Kim now seems to be more chaebol sympathiser than sniper, and that a disarming approach will get firms to play nice only as long as it takes for the government’s reformist fervour to cool. That is unfair, but it is true that obstacles to change remain in a country where the chaebol’s glittering success has given them sway over politics, media, the judiciary and academia. The economy is strong, but future weakness would put pressure on Mr Moon to release chaebol bosses from prison. Dozens of reforming bills languish in parliament. They range from introducing electronic proxy voting rights for shareholders (because conglomerates often schedule simultaneous meetings) to putting limits on the use of treasury shares in mergers, which owner-families often sell to allies (as in the merger of Samsung affiliates).

As for existing laws, loopholes abound, says Park Sangin of Seoul National University: although four of the ten biggest conglomerates have moved to a holding-company structure, dozens of their affiliates remain outside it. According to an estimate by Bloomberg, a financial-information provider, tax-exempt chaebol foundations hold about 13trn won in shares between them; through these, sons and daughters secure shares in key affiliates but dodge inheritance tax. A court ruled in October that Samsung’s $8bn merger was in fact lawful, because “strengthening the control of an individual is not banned by law”. (This ruling does not affect the case against Mr Lee.)

Mr Kim has no intention of giving the chaebol “a completely new face”, he says. That is “not only impossible” in his three-year term, but “not worthwhile” as the firms are a “precious resource” for South Korea. Samsung Electronics, that conglomerate’s darling, thrived in 2017, clocking up record profits, contributing to a surge in exports for the year, all while Mr Lee has been cooped up on criminal charges. Unharmed corporate performance has in the past been taken as a sign that misconduct is so commonplace in South Korean conglomerates that investors do not care. But with Mr Kim now minding the shop, it could just as well be taken as a sign of something better: that the chaebol are becoming more than just a family affair.