Boiling point: pressure mounts on S.Korea’s chaebols

March 1, 2017 11:42 am
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Samsung Electronics vice chairman Lee Jae-Yong (C) has been indicted on multiple charges of bribery and embezzlement © AFP/File / JUNG YEON-JE

, SEOUL, Korea, Republic of, Mar 1 – Once a driver of growth and a source of national pride, South Korea’s family-led conglomerates are becoming instead objects of public scorn as a massive corruption scandal puts them under mounting pressure to reform.

Tuesday’s indictment of the heir to the Samsung empire, Lee Jae-Yong, and four of his colleagues on charges of bribery and embezzlement was the latest setback for the world’s biggest smartphone maker.

South Koreans were glued to their television screens as Lee, handcuffed and bound in ropes over his well-tailored suits, repeatedly appeared before prosecutors for questioning last week.

But the wide-ranging scandal that has seen President Park Geun-Hye impeached has also called into question the future of the chaebols, as the family-oriented groups that dominate Asia’s fourth-largest economy are known.

The value of South Korea’s biggest chaebols as a percentage of the KOSPI index © AFP / Gal ROMA

In December, millions watched in astonishment as the heads of the country’s eight largest chaebols were publicly chastised at a parliamentary hearing over millions of dollars of “donations” their companies made to dubious foundations controlled by Park’s secret confidante Choi Soon-Sil.

Lee and the other tycoons, including the leaders of Hyundai, SK, LG and Lotte, all denied providing funds in return for favours — but suggested they regularly came under pressure to do so from high-level political circles.

Many in the crowds at weekly protests against Park in Seoul target their ire at the companies as well as the politicians, as economic and social frustrations mount.

A family feud for controi of the Lotte Group became so bitter that chairman Shin Dong-Bin apologised to the public © AFP/File / ED JONES

“This is becoming like a chaebols’ republic. They are becoming too greedy and too powerful,” Kim Jong-Rae, a 49-year-old life insurance company employee, told AFP.

In the past, chaebols contributed to the country’s fast economic growth, he said, but as the founders’ sons and grandsons took over, they expanded into every corner of business, suffocating smaller companies and hampering innovation.

“The other tycoons must be arrested as well if they did anything wrong,” added Chang Hye-Eun, a 26-year-old accountant. In parliament, she said, “They were not repentant at all although they were uttering well-rehearsed expressions of remorse and contrition”.

– ‘Way too generous’ –

Many chaebol families retain only a small ownership stake in their companies, but maintain control through complex webs of cross-shareholdings between subsidiaries, and rapid promotions for family members — some of whose antics have battered the firms’ images.

Lee Kun-Hee (C), the son of Samsung Group’s founder, had several brushes with the law but was never jailed © AFP/File / JEON HYEONG-JIN

In 2014 Korean Air heiress Cho Hyun-Ah, who was company vice-president at the time, flew into a rage when a flight attendant in first class served her macadamia nuts in a bag, rather than on a plate.

In what was popularly dubbed the “nut rage” incident, she lambasted the chief steward over the behaviour of his cabin crew and ordered the Seoul-bound aircraft back to the gate in New York so he could be ejected.

The chairman of Lotte Group and his brother engaged in a bitter and very public feud for control of the retail giant last year.

Lee’s alleged actions differ little from past moves by chaebols, which have always been close to South Korean authorities, including during the country’s decades of military dictatorship.

His father had brushes with the law and was convicted of bribery in 1996, and of bribery and tax evasion in 2008 but never jailed — only given suspended sentences.

Lee Jae-Yong’s grandfather was also engulfed in a huge case of smuggling by his fertiliser manufacturing company in 1966, but avoided being charged after “donating” the firm to the state.

In contrast, their 48-year-old descendant was arrested.

Korean Air heiress Cho Hyun-Ah received a suspended sentence after an incident dubbed “nut rage” © AFP / JUNG YEON-JE

Older South Koreans, who benefitted from the country’s decades of fast industrialisation from the 1960s onwards, tended to condone token punishments for chaebol leaders found to have committed wrongdoings, said Shim Jung-Taik, who has written several books on Samsung and chaebol corporate culture.

“But we have new generations and now more people believe that our society has been way too generous toward chaebols and that they also need to be held accountable if they did something wrong,” he said.

The accusations against the Samsung chief added to growing demands for changes to “chaebols’ anachronistic corporate governance style”, said economist Lee Phil-Sang.

With a presidential election looming this year even if Park’s impeachment is not upheld by the Constitutional Court, potential candidates even from the centre-right are talking about the need for chaebol reform.

Many of the key heavy industries that powered the chaebols to prominence were now “in decline”, economist Lee said, such as shipbuilding and shipping, while the futures of others, including iron, steel and petrochemicals, were insecure.

After half a century, he said, the chaebol-centred economy had “reached its limit”.

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