[The Heirs (3)] Succession gets tougher, or less appealing, for chaebol

South Korea’s largest conglomerate Samsung’s de facto leader Lee Jae-yong made headlines last month by announcing that he would not pass on managerial rights to his children.

Although Lee is the first conglomerate head to officially declare an end to family succession, handing over gigantic corporate empires is getting tougher for other chaebol as shareholder activism grows, regulations get stricter, inheritance tax remains high and family stake shrinks. 

The voice of shareholders, who usually did not take part in management decisions, began to rise since the introduction of the stewardship code here in 2016. The code encourages institutional investors to participate actively in corporate governance by exercising their voting rights in the interests of their beneficiaries.

Now, more than 120 firms, including the National Pension Service, have adopted the code, showing a noticeable change at shareholders meetings. Over the last three years, institutional investors’ opposition to companies’ proposals increased from 2.73 percent in 2017 to 6.02 percent in 2019, according to the Korea Corporate Governance Service.

Regulators have also become stricter.

Fair Trade Commission Chairperson Joh Sung-wook said in October last year in a meeting with leaders from conglomerates that “owner families control a large number of affiliates with a small stake.” She said authorities would strengthen monitoring as unfair intra-trading deals are used for expedient succession.

Most recently, the watchdog imposed a fine of 4.39 billion won ($3.66 million) on Mirae Asset Financial Group for violating intra-trading rules last month. It also began investigating Hanwha Group on suspicion that the owner family gained profits through unfair intra-trading deals. Last year, Daelim Industrial Chairman Lee Hae-wook was reported to prosecutors by the regulator for suspicion of obtaining personal interests.

While shareholder activism is growing and regulations are getting stricter, the stake of owner families has been shrinking.

The stake of owner families of the nation’s 59 largest groups was 3.9 percent on average as of September last year, government data showed. The top 10 conglomerates’ families, including Samsung and SK, had an average of 0.9 percent stake.

This is partly due to the nation’s high inheritance tax rate, which is around 50 percent, the second-highest following Japan among OECD nations.

When late LG Chairman Koo Bon-moo passed away in May 2018, his heirs decided to pay around 920 billion won in inheritance tax over the following five years. Families choose either to pay huge taxes like LG or save tax through legal loopholes, although the gaps are getting harder to find amid stricter regulations.


Governance down the road


“As the generation moves to third and fourth, heirs face mounting challenges over succession, and their attachment to the companies does not seem to be as strong as their parents. Lee’s pledge not to hand over the managerial rights does not seem be optional but inevitable,” said a senior official of one of the nation’s top four groups, asking for anonymity due to sensitivity of the issue.

Debates have been raging whether owners should entrust the executive role to professional managers, by separating ownership and control like the corporate governance more commonplace in the US and Europe. Global tech companies such as Google, Facebook, Apple and Microsoft focus on expertise when choosing the next leaders beyond their founders. Korea’s largest search engine Naver is also establishing a management system centered on professional managers and board members.

Some point to the wrong starting point of the debate in Korea, where the notion of owners and CEOs are usually synonymous, thereby making it hard to differentiate the company’s symbolic representation and actual governance.

“Debates on ownership and control were wrong from the start. Ownership and control are already separated in most chaebol. We often call chaebol chairmen ‘owners’ but this is wrong. One can’t ‘own’ a company with less than 5 percent stake,” said Kim Hyung-seok, a research fellow at the Korea Corporate Governance Service’s policy research division.

To address repeated challenges surrounding succession, he suggested that family members can “entrust” the management to professional managers while “monitoring” and “supervising” different affiliates through a holding firm where they hold a majority stake like Sweden’s Wallenberg family. 

The Wallenberg family is often mentioned here as an ideal governance model that Samsung and other Korean conglomerates may follow. The family has a stake in large Swedish industrial groups, like Ericsson, Electrolux, ABB and SAAB. It controls the group through a holding company, Invester, which controls the subsidiaries, but the management is handled by professional managers.

Some experts suggested less radical ways.

“It is not easy for Korean conglomerates to radically adopt the separation of ownership and control because stakes are intertwined among many affiliates here, unlike more simplified governance systems in Western companies,” said Ahn Sang-hee, head general manager of Daishin Economic Research Institute.

Corporate governance should be gradually changed to strengthen the functions of the board of directors and set up more systematic checks on wrongdoings of owner families, he said.

“In fact, it doesn’t matter who runs the company. What matters is whether they -- either owner family or professional managers -- are ‘qualified’ to run the large business operations,” said Park Sang-in, a professor at Seoul National University.

“A business environment should be made for qualified managers to be ‘naturally’ selected based on their capacity through revisions of commercial laws.”

Currently, nine revised bills related to strengthening shareholder rights and interests and strengthening the functions of the board are pending at the National Assembly.


Heirs pursuing different paths


Meanwhile, some potential successors in midsized companies have chosen not to inherit their parents’ business but are focused on building their own careers instead.

Chung Kyung-sun, grandson of the late Hyundai Group Honorary Chairman Chung Ju-yung and son of Hyundai Marine & Fire Insurance Chairman Chung Mong-yoon, for one, is running his own business, HGI, instead of working for his father’s firm. He is making impact investment -- providing capital to address social or environmental issues -- and doing co-living projects.

Ham Yeon-ji, the eldest daughter of food manufacturing company Ottogi Chairman Ham Young-joon, is currently a musical actor. She majored in acting at NYU Tisch School of the Arts and made her debut with the musical “Gone with the Wind.” She was ranked as one of the wealthiest celebrities with her Ottogi shares worth 31.1 billion won.

There is no such case yet in the nation’s 64 largest groups with more than 5 trillion won in assets, but things may change in the future as succession gets tougher, according to industry watchers.

“The paradigm that children inherit their father’s business is still prevalent in Korea centering on family-oriented management. But, more cases like Chung and Ham will gradually increase in medium-sized and large companies as heirs will emerge hoping to pursue what they want while enjoying their father’s wealth,” said Oh Il-sun, director of the Korea CXO Institute.

By Shin Ji-hye (shinjh@heraldcorp.com)