‘Nut rage’ case highlights governance concerns

http://country.eiu.com/article.aspx?articleid=492759433&Country=South%20Korea&topic=Economy

Posted by YEO Wei Lin, Year 3 undergrad at the School of Accountancy, Singapore Management University

On January 7th South Korean prosecutors indicted Cho Hyun­ah, a former vice­president of Korean Air Lines, on four charges over her widely publicised outburst over how nuts should be served on an plane. Irrespective of its outcome, the trial will mean many months of unflattering media coverage—at home and abroad—of South Korea’s family­run conglomerates, known as chaebol. This is a negative development for both the chaebol and the reliance upon them by the president, Park Geun­hye, as the main engines of economic growth and exports. Further, hints that other jailed tycoons may be freed to rescue the economy will stoke long­standing concerns about governance issues in South Korea.Cho Hyun­ah, whose remit at Korean Air Lines included being in charge of in­flight service, was detained on December 30th after a rage incident earlier in the month on a flight leaving New York (US) for Seoul. She was angry at being served macadamia nuts in a bag rather than on a plate as a passenger in first class, which prompted her to order the taxiing plane back to the gate to evict the chief purser; the flight reached Seoul 11 minutes late. She now faces a minimum jail sentence of one year and a maximum of 15 years on four charges, including violating the aviation security law by changing flight plans, assault on a plane, coercion and interference with duty.

Family succession and related issues

Cho Hyun­ah’s father, Cho Yang­ho, is the chairman of Korean Air Lines, and he apologised along with his daughter for the incident. The “nut rage” episode has raised several broader issues about the power structure at chaebol businesses. One major issue of concern is family succession. At several chaebol, including the two biggest and best­known, Samsung and Hyundai Motor, a third generation is being groomed to take charge. Since the families who own the businesses are often not majority shareholders, family succession entails financial manoeuvring.

For instance, on December 18th the initial public offering (IPO) for Samsung’s de facto holding company, Cheil Industries (known until June 2014 as Samsung Everland), earned W5.9trn (US$5.6bn) for Samsung group chairman Lee Kun­hee’s three children, who are all senior executives at various affiliates. However, the role of Cheil Industries in Samsung’s overall plans remains uncertain, with some speculation that if Samsung were to undergo a restructuring, it would be merged with Samsung Electronics and emerge as the primary holding company.

With the latest IPO, the successors of Lee Kun­hee have cemented their control over the company, but questions about succession in case of family disputes and concerns about the competence of family members to run the business remain pertinent. Lee Kun­hee was stricken by a heart attack last May, and the performance of the group’s flagship business, Samsung Electronics, has since been disappointing. Lee Kun­hee is estranged from his brother and sister, and in 2012 they unsuccessfully sued him for shares worth US$4bn that they claimed were rightfully theirs. Sibling strife also splintered Samsung’s former rival, Hyundai, into several separate business groups.

Collusion concerns

While most chaebol owed their early success to state support, the direction of influence seems to have reversed. Following last year’s Sewol ferry tragedy, which raised issues of lax or corrupt regulation and improper collusion, prosecutors in the Cho Hyun­ah case plan to indict a transport ministry official for leaking details of a probe to Korean Air Lines, and a manager at the airline for ordering employees to delete an initial report of the incident. They are also investigating claims that the airline gave government officials free upgrades. Meanwhile, the purser who was removed by Cho Hyun­ah from the plane claims that the airline pressured him to lie about key details associated with the case.

The “nut rage” affair also comes as a welcome distraction for the beleaguered president. The pillorying of Cho Hyun­ah allows Park Geun­hye to burnish her populist credentials, and helps to distract from a scandal involving strife among staff at the Blue House (the presidential office) that has dented her ratings. While chaebol­bashing always plays well and calls for “economic democracy” helped Park Guen­hye to win the election in 2012, her focus as president switched to boosting lacklustre growth, and big business is seen as vital for that.

On the stump Park Geun­hye pledged that, unlike in the past, tycoons jailed for financial crimes would not receive special pardons. However, in September 2014 both the justice and finance ministers opined that pardons or parole should be considered if this could contribute to economic recovery. In late December 2014 three leading figures in the ruling conservative Saenuri Party resurrected the issue. Its leader, Kim Moo­sung, a likely presidential contender in 2017, claimed that “investment is impossible without the owner’s decision”. Park Geun­hye is keen to cajole conglomerates, who hold a total of W450trn in cash, to invest more to stimulate the economy.

The call for corporate stimulus to revive the economy is being read by some media segments as a signal that Chey Tae­won, the chairman of SK, the third­largest chaebol, will be granted parole soon. Chey Tae­won is almost halfway through a four­year jail term for embezzling W45bn. (This is his second stretch; he first served a jail term for a US$1bn accounting fraud in 2003.) Businesses in South Korea continue explicitly to prioritise financial returns over governance concerns, which continues to dent investor sentiment. Too many chaebol chiefs have convictions for financial crimes, including both Lee Kun­hee and Chung Mong­koo. Korean Air’s Cho Yang­ho was also jailed in 1999 for tax evasion, despite which he heads the organising committee for the 2018 PyeongChang Winter Olympics. Prior to the “nut rage” debacle, Cho Hyun­ah was billed as a potential chairman of the Federation of Korean Industries (FKI), the chaebol lobby group, which on February 10th will choose a successor to Huh Chang­soo of GS Group, the eighth­largest conglomerate.

A conducive and transparent business environment should prompt convicted business owners to step down from positions of power. As Park Geun­hye once grasped, pardoning such individuals sends all the wrong signals. While indicting Cho Hyun­ah, prosecutors claimed that her actions “damaged national dignity”. However, if she is indeed imprisoned while male tycoons found guilty of serious offences are set free, the harm to South Korea and the international reputation of its companies and brands will only be compounded.

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