Conglomerates blast profit sharing scheme

Critics accuse former Prime Minister Chung of ignoring market economics


A government-led initiative for profit sharing between large and small firms has sparked fury among conglomerates, politicians and academics who call it a “radical leftist” attempt to encroach on the free market economics.

Chung Un-chan, a former prime minister who now heads the semi-official commission for “shared growth,” announced on Feb. 23 that his team will develop a new index to measure large corporations’ devotion to the goal of mutual growth and curb their rampant mistreatment of smaller partner firms.

He said conglomerates should extend their profits to “not only shareholders and executives but also to their subcontractors.”

It is part of the Lee Myung-bak administration’s priority policy of promoting broader-based growth and wide diffusion of wealth.

Its proponents argue that the nation is in need of retooling its growth model, which is heavily centered on large exporters and has widened income gaps, squeezed domestic demand and hindered the growth of small and medium-sized enterprises.

The remarks by Chung, considered Korea’s leading Keynesian, were met with a mixed response.

Large businesses and conservative pundits instantly slammed the plan for being unrealistic and ignorant of the dynamics of free competition and the globalized outsourcing system.

“Why isn’t the government pressuring local branches of Apple and the like to share excess profits with Korean suppliers?” said an executive at a large business. He asked not to be identified because of the sensitivity of the issue.

Big companies criticized the so-called “win-win index” as an impossible attempt to assess firms in different industrial fields by a one-size-fits-all criteria.

The index will initially measure the performance of 56 corporations in six key sectors. Their scores will be announced as early as February 2012, the Commission on Shared Growth for Large and Small Companies said.

Should the proposal be enforced as planned, large companies will inevitably face increased public pressure to share more earnings with their subcontractors so as to avoid a lower ranking, which would tarnish their reputations.

“Local suppliers sell their products to overseas companies. If the profit-sharing system takes place, Korean companies will surely lose out to their competitors from China, Taiwan and Japan,” an official at a conglomerate said.

Free-market advocates fired salvos at Chung’s proposal in a flurry of articles, blog postings and interviews.

“In a market economy, shareholders should decide how companies will spend their profits,” wrote Chung Gap-young, an economics professor at Yonsei University.

Prime Minister Kim Hwang-sik and conservative politicians joined in rebuking Chung, with some billing him left-leaning and populist.

“(Chung’s) remarks are very much of left-leaning progressive kind, and is quite a surprise given his experience as a former prime minister,” Rep. Hong Jun-pyo, a senior member of the ruling Grand National Party also said.

Some speculate Chung’s political motivation behind his plans ahead of the parliamentary by-elections scheduled for April. Insiders predict Chung’s comments to appeal to voters who traditionally favor the interests of small companies and the socially weak.

The controversy has been brewing since Lee began to put up a fairness mantra in August 2010. In his Liberation Day speech, the president vowed to fix the lopsided relationship between major corporations and their smaller contractors.

The commission was launched in December as the headquarters of the fair society campaign.

It was initially formulated as a private blue-ribbon panel. But it started up as a semi-governmental organization consisting of government officials and private-sector representatives.

Some say it is time for state intervention since large firms have failed to live up to their pledges, repeated over the years, to put their suppliers on an equal footing.

In 2004, the Federation of Korean Industries, the interest group for large businesses, recommended its member companies share profits with their suppliers. But critics say there has been little progress with the only notable case being steelmaker POSCO.

Chung said the shared growth policy is crucial to repairing Korea’s feeble social welfare system.

“The widening gap between rich and poor poses a serious threat to the economy and we can fix this problem only through shared growth,” Chung told reporters.

As controversy boiled up following his address, he defended himself saying this week the plan doesn’t seek to take away cash reserves from local conglomerates.

“It is intended to provide incentives for companies to share their profits voluntarily with such measures like tax exemption. Sharing a small portion of earnings at large businesses may not drive down their profits too much but it may mean big bonuses for smaller players,” he said in an interview Monday.

Chung plans to hold a press conference Wednesday to clarify his stance and resolve “misunderstanding” of his remarks.

Smaller businesses generally welcomed his proposal as they expect the index to act as a powerful tool pushing big corporations to improve their business practices.

“Smaller companies want profits they deserve. I hope big businesses recognize the work of their suppliers at fair prices,” said Kim Ki-mun, chairman of the Korea Federation of Small and Medium Businesses.

“A fair amount of income should be guaranteed for smaller players for them to create jobs and make investment.”

Samsung Economic Research Institute said a shift in public policy should rather encourage networked cooperation among enterprises.

“Well-designed and smoothly facilitating network cooperation helps individual companies accumulate innovation skills and encourage alliance between companies, thereby coping with market volatility,” the private think tank said in a report.

By Cynthia J. Kim (cynthiak@heraldcorp.com)