[Editorial] Corporate leadership

When a conglomerate CEO is indicted on charges of large-scale embezzlement after strenuous investigation by prosecutors, he is normally expected to do three things. The first is to apologize to shareholders for the trouble caused by his personal activities, even before criminal procedures are completed.

The second is to devote all his energy to attaining his group’s business targets, thereby helping recover the tangible and intangible losses inflicted on its finances and image. Third, is to take bold steps to activate the corporate oversight system entrusted to outside directors and auditors in order to prevent mistakes by himself or any others in the future.

SK Group chairman Chey Tae-won was indicted Thursday for diverting 63.6 billion won ($57 million) from the funds of affiliates to cover losses incurred by his futures investment. He was spared from physical detention but his younger brother, group vice chairman Chey Jae-won, was arrested earlier on suspicion of colluding with the chairman in the squandering of corporate funds.

It was Chey Tae-won’s second indictment in nine years. He was arrested in February 2003 on charges of accounting fraud. He was freed on bail and was given a suspended sentence by the Supreme Court in 2008, and was then pardoned by President Lee Myung-bak.

Prosecutors said that the Chey brothers conspired with other group executives including the head of an investment company to funnel funds of major subsidiaries as plain investment and used the money for the chairman’s personal investments in stock futures and options. Losses snowballed in a series of unsuccessful stock market bets and further embezzlements were made to cover accounting discrepancies.

Reports had it that Chey relied heavily in his futures investment on the advice of an individual who he believed had a “divine ability” in reading stock fluctuations. Jae-won allegedly sold his stocks to the investment company at inflated prices and Tae-won released huge bonuses to executives and collected them to create slush funds, according to prosecutors. They said that what the Chey brothers did were typical examples of corporate leaders’ moral laxity and abuse of power.

The luck of the SK empire has not dried up, however, which could be down to the hard work of their employees. The combined sales of SK companies in 2011 amounted to 72.3 trillion won, up 48 percent from the year before. The group exported 45.5 trillion won last year, which exceeded 60 percent of total sales, thus achieving their decade-old objective of becoming an export-oriented conglomerate. The percentage will rise further when SK completes the takeover of Hynix Semiconductor this year.

It is regrettable that the conglomerate’s performance could have been even better if its top management were not distracted by reckless personal stock-market gambling and instead concentrated on leading market exploration, business innovation and R&D promotion. Corporate advancement can be accelerated when the top leader’s good entrepreneurship rides on efficient exercise of governance authority.

The Federation of Korean Industries and other business organizations jointly sent a petition to the prosecution asking for its magnanimous handling of the Chey brothers’ case so they could “engage in conglomerate management as responsible owners at this time of lingering global economic crisis.” Yet, prosecutors who had so much trouble in digging into the murky corporate accounting for months would still believe that correcting errors with legal intervention will have better long-term consequences on the economy than just forgiving them.

Chey Tae-won is now writing his New Year message to all SK employees. Inside sources reveal that the chairman will emphasize business expansion through overseas resources development, securing new growth through the acquisition of Hynix and cooperation with suppliers. He is reportedly planning to spend more than 200 days overseas on business.

Perhaps this internal message will be Chey’s own petition to the authorities for leniency. It will have a little more effect in this regard if he makes a sincere apology to SK’s shareholders and millions of customers. One thing he should not forget is taking concrete steps to improve the management supervisory system, which is notoriously weak in most large businesses of Korea.