The Blue House will have a new tenant in February. President-elect Park Geun-hye, a conservative, won last month’s election against her liberal rival, Moon Jae-in. The close election proved that Koreans are politically divided, but united in their expectations as both candidates touted pretty much the same social and economic policies, but with differing emphasis and perspectives.
One unifying theme of the campaign was the take on the future of chaebol, Korea’s family-owned conglomerates that control almost half of the country’s economy. Everyone on either side of the political divide expressed desire for some changes to the current status of chaebol.
The role of chaebol cannot be divorced from the fact that Korea is a deeply Confucian society. In edicts of Confucianism, certain relationships are not just important, but they are paramount to how the society and its people function, including that of a father to child, a teacher to student, and an employer to employee. Korea has been successful in molding those edicts into practicality, adopted for the modern times and the county’s export-oriented industrial base.
One aspect of that has been the rise of chaebol, providing a stable and steady increase in employment while the owners feel the weight of responsibilities for their employees, with the government expecting those conglomerates to behave responsibly.
Until the mid 1970s, the Republic of Korea’s economy lagged the North. A combination of political instability, lack of clear direction for the future of the country, and the divide between the have’s and have-not’s prevented the country from excelling. Whether fair or not, chaebol were blamed along the way.
Korea’s economy propelled in the 1980s when it became clear that the two main issues ― politics and direction ― were going to be resolved rationally. Democracy came to Korea, largely due to sacrifices of many activists and in part due to rulers realizing that a change was needed. The direction of the country was also established along the objective of becoming an industrial powerhouse, based on an export-oriented market economy.
To be fair to chaebol, they played a pivotal role in excelling the economy of Korea, before and after democracy arrived. They employed many people, provided a source for domestic suppliers of goods and services, and solidified the international footprint of Korea.
But, it is probably time for some structural changes. At the same time, hastily changing the chaebol eco-system without a clear vision can only be detrimental to Korea. These large conglomerates must compete globally with the likes of Sony, Apple and Siemens. Hampering thee companies with undue restraint domestically is not going to be beneficial to Korea and its population since the critical battleground for those conglomerates is overseas.
In the U.S., a successful way to lower the influence of one clan over the large industrial corporation that clan created has been to separate ownership from management. The family has been able to continue controlling the corporation, mostly through a special series of equity stock. But, managing the corporation has been handed over to professional executives, supervised by an independent board of directors representing all shareholders.
This is a good model for chaebol to adopt gradually going forward.
Even though the family can still exert control over its chaebol, equity participation ought to be more open, allowing Korean institutional investors, mutual funds and private-equity firms, as well as individual investors, to participate in the chaebol’s capital structure.
There is obviously some sensitivity for excessive foreign ownership of chaebol. And that’s where meaningful policies can be devised, without breaching international obligations of Korea to have an open capital market since it is enjoying export as the primary source of wealth creation.
As the economy of Korea expands, the non-chaebol share of the economy must increase through emerging companies. Koreans are among the best entrepreneurs, and once given financial wherewithal, they can start companies that will become significant in their own rights.
That means that paying attention to the middle market is vital in Korea, as opposed to the large-capitalization segment. The new government must adopt policies and initiatives to promote moving emerging companies to the middle market quickly. That ought to be the model for the business landscape of Korea during the next five years of the incoming administration.
For this critical and raging debate about the future of chaebol, sensationalism must be avoided. Clumsily supporting or shoddily vilifying chaebol is not a road map. It is just an instant gratification of disparaging the opposite point of view.
Now that the election is over, thoughtful deliberation is needed. George Bernard Shaw said, “We are made wise not by the recollection of our past, but by the responsibility for our future.” The new paradigm for the chaebol can only be structured responsibly if the future of Korea is debated, not its past.
Jahan Alamzad is managing principal of CA Advisors, a management consulting firm in San Carlos, California, the United States. ― Ed.
