Loyal till the end: Lotte probe exposes failings of Korea Inc

SEOUL • Loyalty has been a driving force in the success of South Korea's family-run "chaebol" conglomerates, but it can also shield the failings of its corporate culture and was linked last week to tragedy at Lotte Group, the subject of a sweeping criminal probe.

Hours before vice-chairman Lee In Won was to be questioned by prosecutors, he was found dead in an apparent suicide, leaving a note hailing his boss as a "great man" and denying the company operated a slush fund, reportedly one of a list of prosecutors' suspicions that includes embezzlement, tax evasion and breach of trust.

A prosecution spokesman could not be reached for comment yesterday, while Lotte Group said it was cooperating with prosecutors.

Prosecutors have since June been probing about a dozen units at the retail-to-chemicals chaebol, South Korea's fifth largest, but it would not be the first time that Lotte and similar groups have fallen short of governance standards in Asia's fourth-largest economy.

Many of the family chaebol that dominate the economy have been penalised over the years for conduct that is symptomatic of opaque interlocking ownership structures that can mask improper behaviour, and the fierce loyalty that can allow lapses to go unchecked.

"Under a corporate culture where loyalty towards a boss and an organisation is the most important criterion... a sound corporate governance structure cannot survive," said economics professor Kim Sang Jo at Hansung University.

The attachment of staff to the chaebol is legendary, typically embodied in a career-long service of gruelling hours.

It could explain why the penultimate act of the 69-year-old Mr Lee was to defend his chairman Shin Dong Bin and the company he served for 43 years.

And why Lotte staff had, apparently on their own initiative, begun deleting computer files at the start of the probe, sources told Reuters.

While many chaebol have taken steps to improve governance, South Korea has a long way to go to reform a corporate system that is a legacy of the country's decades of breakneck economic growth after the 1950-53 Korean War, investors and analysts say.

Their complex cross-shareholdings are a big part of the problem and were evident in a run-in Lotte had with the authorities four years ago, when one of the same units now being probed was fined for "unfair support" of an affiliate.

Lotte Group has since slashed the number of cross-shareholdings from a staggering 95,033 in April 2014 to 67 at the end of last year, but that is still more than any other chaebol, according to South Korea's Fair Trade Commission.

REUTERS

A version of this article appeared in the print edition of The Straits Times on August 30, 2016, with the headline 'Loyal till the end: Lotte probe exposes failings of Korea Inc'. Print Edition | Subscribe