The debate on “economic democratization” is intensifying in politics, although the term still remains vaguely defined. In whatever ways the term is defined, one thing is clear ― it involves reforming the chaebol.
The ruling Saenuri Party is expected to step up its push for economic democratization as Kim Jong-in, a key proponent of the elusive concept, has been named co-chairman of Rep. Park Geun-hye’s presidential campaign.
While serving as a member of the ruling party’s emergency committee led by Park before the April general election, Kim called for measures to curb conglomerates’ abuse of their economic power in order to lay the foundations for more sustainable and balanced growth of the economy.
Yet Kim has yet to unveil specific proposals to make the Korean economy more democratic.
The main opposition Democratic United Party has put forward more concrete chaebol reform proposals, such as a ceiling on a company’s equity investment in other companies, a ban on circular shareholding, and a toughened regulation on holding companies.
For chaebol groups, the ongoing debate on economic democratization must be troubling as its main theme is their reform. Calls for reform come not just from political parties. The government is also ratcheting up pressure on them.
For instance, the Fair Trade Commission has unveiled the complex ownership structures of the nation’s leading business groups for the first time in its bid to bring public pressure for governance reform on them.
The FTC’s ownership diagrams show how a controlling shareholder with only small stakes in his firms exercises control over the entire group ― he uses measures such as circular shareholding to secure large stakes in the group firms.
For a controlling shareholder, this separation between control rights and voting rights serves as a powerful incentive to expropriate minority shareholders. Hence the large number of subsidiaries that a chaebol owner can set up without putting up much of his own pocket money.
According to the commission’s report, most business groups have sharply increased their number of subsidiaries in recent years. The diagrams show that many of these firms are engaged in areas that have nothing to do with the groups’ core businesses.
This suggests a need for chaebol groups to realize that the growing reform pressure coming from political parties and the government was partly triggered by their self-centered business practices.
Chaebol groups need to take proactive measures to prevent the situation from getting worse. They need to make efforts to improve their governance structures and to show commitment to shared growth between large and small companies.
