Back in 2006, after Chung Mong Koo, chairman of Hyundai Motor and son of its founder, was arrested amid one of South Korea's recurring corruption scandals, I called a friend in the company's public relations office. He answered in a breathless panic. Without Chung in the driver's seat, he assured me, the management of South Korea's largest automaker would be adrift.
At the time, I saw his warning as spin, an attempt to sway the South Korean government to back off from Chung. (If so, it worked: Chung was pardoned two years later.) But in my 20 years watching South Korea's family-run business groups, known as "chaebols", I've come to realise my friend was telling the truth. The much-maligned conglomerates that dominate South Korea's economy may be facing investigations, pressure from foreign shareholders and unprecedented public anger. But unless the culture that binds management, investors and other stakeholders to South Korea's corporate system changes dramatically, the chaebols will almost certainly survive.
Even the most recent blow to the chaebols - the indictment of Samsung scion Lee Jae Yong for alleged bribery - probably won't usher in the changes it should. Lee had sought to modernise Samsung Group's archaic corporate culture, but instead became embroiled in the massive corruption scandal that led to the impeachment of President Park Geun Hye. Critics of the chaebols are hoping a conviction will end Lee's career, force a management overhaul at Samsung, South Korea's most important business house, and teach other chaebol bosses a lesson.
In fact, it's just as likely to prove a fleeting embarrassment. The chaebols have outlasted pressures that would easily have upended companies in other countries. Though they often trade at valuations lower than their rivals - shares of Samsung Electronics trade at a lower price-earnings ratio than Apple's, while Hyundai Motor's are cheaper than those of Ford and Toyota Motor Corp - South Korean shareholders rarely challenge management. Public fury over the boorish behaviour of chaebol heirs hasn't led to any effective efforts to rein them in or reduce the influence of founder families over management.
Presidents routinely pardon chaebol bosses found guilty of assorted crimes and allow them to return to their old jobs as if nothing had ever happened. Lee's powerful father, Lee Kun Hee, himself resigned from Samsung after being indicted for tax evasion in 2008, only to be pardoned and restored to a chairmanship post.
Partly, this has to do with the companies' outsized influence within the South Korean economy; the combined revenues of the five largest chaebols were equivalent to 58 per cent of South Korea's gross domestic product in 2015. Government officials, who regularly pay lip service to the need for reform, worry that destabilising the chaebols will undermine an already struggling economy.
Yet a lack of political will doesn't entirely explain the chaebols' endurance. For that, we need to wander into the somewhat dangerous territory of culture.
I've long resisted cultural explanations for economic outcomes. But in the case of the chaebols, the link seems unavoidable. Confucianism still exerts strong influence in South Korea, and that philosophy, especially the form that took hold there in the 15th century, stresses loyalty to authority. At the chaebols, reverence for the "emperor" translates into obedience to company founders and their families, who are treated like royalty.
In certain chaebols, employees are actively indoctrinated in the wonders of the company's founding clan. I've known Samsung employees who would praise the brilliance of Lee Kun Hee the way the North Korean media lauds dictator Kim Jong Un. What seems to happen is that the top family executive at a chaebol, much like an imperial ruler, becomes a point of focus and loyalty for managers who may otherwise have competing interests. Only he (and it's almost always "he") can arbitrate between those demands and bring a sense of larger mission to an unwieldy conglomerate.
Relationships in business are also critically important in South Korea (as they are throughout Asia). So shareholders, bankers and bureaucrats, who often have longstanding connections to chaebol management, are naturally reluctant to rock the boat. Such ties help explain why, for instance, United States hedge fund Elliott Associates failed to rally shareholder support against a Samsung merger that solidified Lee Jae Yong's control over the group. (Prosecutors allege that Lee also bribed the government to win support from the national pension fund for the merger.)
On paper, more can and is being done to bust up the chaebols. Regulators can force a true unwinding of the complex cross-shareholdings that permit families to dominate chaebol management. Legislators can even the playing field for start-ups and smaller companies, which are typically squeezed out by the conglomerates and their traditional suppliers.
Certainly the public seems fed up with the tangle of collusion between politics and big business in South Korea. But the chaebols won't vanish until those who manage, own and finance them accept that South Korea is better off without them.
BLOOMBERG VIEW
