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South Korea toughens up on chaebol law-breakers

Simon Mundy
Yeouido finance district in Seoul, South Korea.
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The prison sentence handed down this month to the daughter of Korean Air's chairman for an onboard tantrum over the serving of a packet of nuts reflected the courts' increasingly stern approach to South Korea's most powerful business dynasties.

Now some in the country's parliament are pushing for new laws targeting the families controlling the chaebol business groups, emboldened by an increase in popular scepticism towards the companies that drove the nation's economic growth.

"Illegal acts by chaebol families are happening frequently," says Park Young-sun, a lawmaker who has secured significant parliamentary support for rules that would allow the confiscation of profits resulting from breach of trust or embezzlement.

The proposed law strikes at a subject that is increasingly fraught as the chaebol undergo a transition to the third generation of family leadership: the methods that have been used to transfer assets to the founders' grandchildren.

Ms Park this week announced the names of 104 lawmakers in South Korea's 300-seat parliament who have pledged support for her law, which she has labelled the "Lee Hak-soo law", after a former top aide of Samsung's chairman.

Areas of concern in South Korean markets

In 1999 Mr Lee oversaw the sale of convertible bonds issued by the IT services company Samsung SDS to the chairman's three children at a large discount to fair value, while undertaking a similar transaction on his own account.

In spite of the 2009 conviction of Mr Lee, Samsung chairman Lee Kun-hee and a third executive for breach of trust, the holdings — now converted to equity — remained intact.

After Samsung SDS's flotation last November, the children's stakes are worth Won3.76 trillion ($3.4 billion) — a key part of the portfolio that will allow continued family control of the group's complex shareholding structure.

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Controversy has also surrounded the succession process at the second-biggest chaebol, Hyundai Motor Group. Its chairman, Chung Mong-koo, was convicted of breach of trust in 2011 for forcing group companies to support the logistics business Hyundai Glovis, the growth of which has created huge wealth for his son Eui-sun, who holds a large stake.

But the law would be difficult to implement and could undermine the push for better governance if it is seen as excessively harsh, says Kim Sang-jo, a professor at Seoul's Hansung university and prominent corporate governance campaigner.

Mr Kim voices similar concerns about a second proposed law that would bar chaebol family members from senior positions within that business group for five years if they are convicted of a crime.

The bill was proposed by Kim Yong-nam of the ruling centre-right New Frontier party, a sign that tougher treatment of the chaebol is gaining support beyond the liberal ranks.

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"There is a need to check these people," says Kim Soo-chul, an aide to Lee Eon-ju, a lawmaker who is pushing to introduce similar restrictions through amendments to an existing law. "When an employee does something wrong within a company, they will be punished. They might lose their job. But this logic doesn't apply to the chaebol families."

Such a law would have had dramatic consequences had it been in force over the past decade, when the chairmen of the three biggest chaebol — Samsung, Hyundai and SK — kept or regained their positions after criminal convictions. Chey Tae-won, chairman of SK Group, was paid Won30.1bn by group companies in 2013, including bonuses of Won20.7 billion, in spite of spending almost the entire year in prison for stealing from two of the companies in question.

However, his imprisonment — along with that of the chairmen of Hanwha, CJ and LIG, and Cho Hyun-ah of Korean Air — suggests a sterner approach from the courts in recent years. South Koreans had previously become accustomed to seeing business leaders receive suspended sentences followed by presidential pardons, on the grounds of their importance to the economy.

Concerns about weak corporate governance are frequently cited by investors as a deterrent to equity investment in South Korea, where major companies typically trade at a significant discount to foreign peers.

But the newly proposed bills "are going too far", says Shin Seok-hun, head of corporate policy at the Federation of Korean Industries, a business lobby group that has campaigned for lenient treatment of chaebol leaders. "They should not try to change the essence of the companies. These are private organisations."