Report: South Korea's chaebol trouble

A South Korean court has sentenced Samsung Group president Jay Y. Lee to five years in jail on corruption charges. The latest scandal to rock one of the country’s flagship conglomerates raises questions over whether the hereditary chaebol system of company leadership can keep up with the standards of international corporate governance.

Chaebol – what it means

A chaebol is a form of South Korean conglomerate. Each chaebol is run by a leading South Korean family and chairmanship of the chaebol is passed through familial connections.

Several of the world’s leading companies including Hyundai Heavy Industries, and electronics groups Samsung and LG, are chaebols.

The chaebols are associated with the rapid industrial development of South Korea since the 1960s. The country’s economy, which is based on high-volume tech exports and global shipping, is heavily reliant on these groups, according to consultancy McKinsey. 

When the wheels come off

Several of South Korea’s leading chaebols have had a bumpy few years.

As well as Samsung’s Lee family, four members of the Lotte family, who preside over the $81 billion Lotte Group, were indicted in October last year on charges including embezzlement, tax evasion and fraud.

The accused include 94-year-old founder Shin Kyuk-ho and his sons Shin Dong-Joo, 63, and Shin Dong-bin, 62, whose bitter boardroom struggle over control of the chaebol led to the investigation that resulted in the charges.

Another chaebol, Hanjin, was one of the world’s biggest shipping groups until entering receivership in August last year, citing debts of $5.4 billion. A Seoul court declared Hanjin bankrupt in February.

Hanjin’s former chairwoman, Choi Eun Young, took over the company in 2007 upon the death of her husband, the previous CEO.

Last September, Young told a parliamentary hearing into Hanjin’s collapse that she had no experience as she “had been stuck home as a housewife,” according to a report by AFP Seoul.

Young was investigated last year on suspicion of insider trading after selling her Hanjin shares.

The case for reform

In 2000, the BBC questioned whether the system might collapse after one of the biggest chaebols, Daewoo, went bankrupt and was broken up.

The collapse of Daewoo, shortly after the Asian financial crisis of 1997-98, inspired action. Corporate governance standards were raised and transparency increased. The success of the chaebols was no longer enough to keep them untouchable, as discussed in a paper by Phil Sang Lee, of South Korea University’s business school.

Criticism and accusations of cronyism have persisted. The previous head of Samsung, Lee Khun Hee, the father of Jay Y. Lee, was pardoned in 1997 and 2010 after being found guilty of tax evasion and other financial malpractice. Jay Y. Lee’s lawyers now say that they intend to appeal his bribery conviction.

According to Bloomberg Businessweek, the presiding judge in the younger Lee’s case said it was an example of “the disease of political-business collusion” and “it will be hard to recover from this loss of faith.” 

Arguably, none of the previous scandals have the weight and significance of Jay Y. Lee’s conviction, which was a part of a broader corruption scandal that brought down the previous government.

The new president, Moon Jae-In, was elected in May on the promise of chaebol reform. Experts have emphasized that reform expectations should not be great. Incremental change through strengthening the rights of minority shareholders and directors, however, could undermine the stranglehold that the chaebol families have over the conglomerates.

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