[Management in Korea] Rather than copy chaebol, Korean SMEs need to create new models of success

Management in Korea is a regular column written by representatives of Egon Zehnder Seoul. It touches on various topics concerning Korean enterprises and business leaders and offers management tips. -- Ed.


Chaebol played a critical role in South Korea’s recovery after the Korean War and then in enabling the nation to become an economic powerhouse. But to remain competitive in today’s environment, it is essential for Korea to also have vibrant small and midsized businesses to drive innovation and develop new and disruptive business models.

The recognition of the increased importance of SMEs led to the creation of the Ministry of SMEs and Startups in 2017, when the body was elevated from its former agency status. The ministry has since worked to enhance the competitiveness of these enterprises by increasing access to capital and investment, supporting the development of innovative products, combating IP theft and fostering more favorable trade conditions.

These are all welcome initiatives, but they ignore a critical requirement necessary to magnify the impact of Korean SMEs. In the Korean business world, and particularly in the minds of SME leaders, chaebol still provide the role model for success. This is true not just in terms of rewards -- there is nothing wrong with aspiring to be a large global enterprise -- but in terms of behavior. As much as SMEs (and the general public) complain about the nepotism, stifling business practices and conflicts of interest that can be found in chaebol, many SMEs act in exactly the same way, with governance focused on protecting personal and family interests rather than advancing the business. 

Many Korean SMEs want to have it both ways, to become agile innovators like those in Silicon Valley or Berlin while retaining the highly hierarchical practices of chaebol. But this approach is doomed to fail, because it overlooks an essential fact: The real source of innovation in Silicon Valley and other innovation hubs isn’t technology but culture. The new generation of enterprises around the world has achieved the results that it has because of a fundamental and deliberate rethinking of organization and authority. This rethinking has allowed new, disruptive products and business models to be developed and brought to market in ways radically different from the times when seniority and conformity to established procedures were prized above all.


Blazing a different trail


For Korean SMEs to reach their economic potential, their senior executives must pursue a leadership vision that differs markedly from that of chaebol. Governance needs to encourage open debate and a marketplace of competing ideas. Leadership succession and professional development must be based on rigorous evaluation of performance and potential against the future direction of the company. And CEOs and other top leaders must continually reinforce their role as guardians of shareholder value, whether those shareholders are private investors or holders of publicly traded equity. The fact that most Koreans assume that chaebol CEOs own the groups they lead, when often their stake is quite small, shows how foreign this concept is.

Of course, Korean SMEs face a particular challenge in adopting more egalitarian, meritocratic workplace cultures: They must do so within Korea’s deeply Confucian society, which places a priority on family and seniority. Admittedly, this is a hurdle faced by few, if any, technology hubs, and clearing it will not be easy. But rather than continue to embrace old ways of thinking, Korea’s SME leaders should see the reconciliation of modern innovation with ancient teachings as an opportunity to fundamentally transform Korean business culture. As they do so, they will benefit from examining how other cultures, such as those in Western Europe, have grappled with balancing the imperatives of family with the competitive realities of modern commerce.

Chaebol were able to succeed as they did in part because they retained a culture rooted in a tradition familiar to most Koreans. Now, however, new cultures and role models are called for. To flourish on the global stage, Korean SMEs need to stop trying to be chaebol and instead chart their own path.


By Eugene Kim and Kim Soo-jin


Eugene Kim is a managing partner at the consulting firm Egon Zehnder Seoul. He can be reached at Eugene.Kim@egonzehnder.com. Kim Soo-jin is an executive assistant at Egon Zehnder Seoul. She can be reached at Soojin.kim@egonzehnder.com. -- Ed.