The Fair Trade Commission has toughened its regulation on related-party transactions among subsidiaries of chaebol groups in a bid to expand business opportunities for small and medium-sized enterprises.
Under the new rule, which is to apply starting April 1, a company belonging to a business group with aggregate assets exceeding 5 trillion won is required to obtain prior approval from the board of directors when it places an order valued at 5 billion won or more with a sister affiliate. Presently the requirement applies to deals exceeding 10 billion won in value.
The FTC has also strengthened the disclosure rule, obliging a chaebol unit to disclose its deal with a sister firm when the latter is 20 percent or more owned by members of its owner family. Currently, the requirement applies to a subsidiary where the owner family’s stake exceeds 30 percent.
The commission’s move was prompted by the persistence of related-party transactions among chaebol group affiliates. The commission has found that intra-group deals accounted for 71 percent of the combined revenues last year of the surveyed 20 chaebol units engaged in advertising, logistics and system integration. Of the deals, 88 percent were offered without a formal bidding process.
The survey shows that large business groups failed to practice what they had promised to do. Last year, they pledged to give small companies a fair shot at deals in such areas as advertising and system integration. But in practice, they didn’t.
As long as chaebol groups use intra-group deals as a means of siphoning off corporate wealth to line the pockets of the siblings of owner families, they can no more abandon the practice than a leopard can change its spots.
In this respect, the effectiveness of the commission’s toughened regulations is questionable, although they are well-intended. Chaebol units can bypass them if they put their minds to it.
For instance, the new rule has made intra-group deals worth more than 5 billion won subject to prior board approval. Yet companies can easily avoid this requirement by splitting a deal into smaller units.
Furthermore, most companies have filled their board seats with directors who rarely object to proposals from management.
Today, five chaebol groups ― Doosan, Lotte, GS, Hanwha and Hanjin ― are scheduled to jointly declare their resolve to reduce intra-group deals and treat SMEs fairly. Their move, however, is not entirely voluntary ― they were nudged by the FTC. We hope large business groups reform their outdated business practices voluntarily.
