Park Geun-hye, the ruling Saenuri Party’s presidential candidate, has toned down her party’s chaebol reform proposals. She has, among other things, rejected a plan to penalize existing circular shareholding arrangements among chaebol affiliates. Her decision was prudent but drew fire from opposition presidential runners.
Circular shareholdings are high on the economic democratization agendas of the three main presidential contenders, who include, along with Park, Moon Jae-in of the main opposition Democratic United Party and independent candidate Ahn Cheol-soo.
It is because most big business groups rely on this particular shareholding pattern to maintain their governance structure. The advantage of this arrangement to chaebol families is that it allows a business group to control its affiliates with a relatively small amount of capital.
Companies involved in this scheme form a loop such as A→B→C→D→A. The capital Company A used to hold an equity stake in Company B comes back to it after passing through companies C and D.
This structure helps a group prevent its subsidiaries from being exposed to the threat of hostile takeover bids. It also helps the group diversify into new business areas by establishing new subsidiaries, which does not require much fresh capital.
Yet the candidates all called for curbing this shareholding pattern as it helps big business groups get bigger and wield more economic power. It also allows chaebol affiliates to create an uneven playing field for small and medium-sized enterprises.
Park’s campaign team, led by Kim Chong-in, a leading proponent of economic democracy, called for prohibiting new circular equity investments and, on top of it, restricting voting rights on existing circular shareholdings.
But Park refused to endorse this plan, saying that penalizing existing shareholdings would constitute a retroactive measure against transactions that have been concluded in a legitimate way.
Park has made the right decision. Yet the two opposition presidential candidates, Moon and Ahn, attacked her for backtracking. They said Park took off the “mask of economic democratization” and showed her true colors.
The DUP candidate has proposed a complete elimination of existing circular shareholdings after a three-year grace period, in addition to a ban on new circular equity investment.
Ahn’s plan calls for urging conglomerates to dispose of their circular shareholdings voluntarily. He also pledged to empower the government to order a business group to separate a certain subsidiary when it is found to have been involved in illegal business activities.
It would be ideal if existing shareholding arrangements could be unraveled all at once. But eliminating them requires huge amounts of money. According to reports, it would take up to 66 trillion won for the nation’s top 13 chaebol groups, including Samsung Group, to dispose of their circular shareholdings.
Given the huge costs involved, the wisdom of forcing corporations to undo their present governance structure and build a new one at this time is questionable, to say the least.
Research institutes have presented grim labor market forecasts for next year. Whoever is elected as the next president, the top priority will be the same ― stimulating the economy and creating more jobs.
To stimulate the economy, the next government will have to ease regulations to boost the moribund housing market. And to create jobs, it will have to encourage corporations to expand investment in facilities and R&D.
This means the next president will probably have to put most of his or her economic democratization measures on the back burner for the time being because they would be of little help for job creation.
This is not to deny the need for chaebol reform. But in promoting reform, timing is important. When an economic downturn sets in, the government should react by implementing stimulus measures, not by depressing corporate investment.
Presidential runners and political parties also need to think about whether their approaches would achieve their intended goals. Chaebol reform is designed to ease economic polarization and ensure sustained economic growth.
But will their approaches achieve this? For instance, even if chaebol is reformed as planned, it would not automatically improve the competitiveness of SMEs or create more jobs.
These goals cannot be attained without the voluntary efforts of big business groups and, particularly, the cooperation of labor. Therefore political leaders should pursue a grand bargain among business, labor, government and other stakeholders.
