[Flashback] In rare sign of dissent, investor calls for change at Hyundai Motor; Hyundai Motor Chairman Chung Mong Koo indicted in 2006 for embezzlement and misappropriation of corporate funds to create a $110m “slush fund”; Accounting fraud uncovered at Hyundai Merchant




Posted by Padma LAU Heng Ee, Year 4 undergrad at the School of Business, Singapore Management University

Hyundai Case Shakes Korea

Indictment of Chairman Sharpens Debate Over ‘Chaebol’ Model



Updated May 17, 2006 12:01 a.m. ET

The indictment of one of South Korea’s most respected industrialists brings to a boil tensions that have simmered for years between the country’s secretive corporations and regulators seeking to raise standards of corporate governance.

In Seoul yesterday, South Korea’s Supreme Prosecutor’s Office indicted Hyundai Motor Co. Chairman Chung Mong Koo on charges of embezzlement and misappropriation of corporate funds. Senior Prosecutor Chae Dong Wook said Mr. Chung created a 103.4 billion won ($110 million) “slush fund” that was used to pay for influence among government bureaucrats, financial-industry executives and possibly politicians.Mr. Chae said some of the money also was diverted for personal use. If he is convicted of the charges brought yesterday, the 68-year-old Mr. Chung, who is detained and awaiting bail proceedings, could be sentenced to life in prison. However, prosecutors say that if he is found guilty, his sentence would more likely be four to five years behind bars.


Selected highlights of Hyundai Motor Chairman Chung Mong Koo’s career

1967: Graduated with a BA in industry business administration from Hanyang University, South Korea

1974: Named chief executive of Hyundai Motor Service

1977: Named CEO of Hyundai Precision & Industry, which later became the unit producing autos

1996: Named chairman of Hyundai Group, succeeding his uncle

1998: Became CEO of Hyundai Motor; Hyundai won auction to acquire Kia Motors

2002: Construction of Hyundai Motor’s first factory in the U.S.

Sources: the company; WSJ research

The indictment reflects just one part of an investigation into allegations of corruption involving a number of senior executives in the group of companies affiliated with Hyundai Motor. During the past two months, prosecutors have conducted raids and arrested executives as they look into who might have received money from Hyundai Motor and its affiliates, or what favors might have been exchanged in return. On Monday, one former bureaucrat summoned for questioning was found dead in a reservoir outside Seoul. The cause of his death remains unclear. Prosecutors said there was no suspicion of homicide.

Hyundai Motor declined to comment on the charges or the investigation.

The turmoil at Hyundai highlights South Korea’s painful effort to grow beyond an Asian economic-development model that many see as having outlived its usefulness. For decades, South Korea’s generals and other political leaders nurtured the development of a handful of conglomerates such as Hyundai, known as chaebol, that became the country’s leading companies.

Like the combines of Japan, which were cultivated by Japan’s powerful bureaucracy, the chaebol were protected from competition, assured access to capital and held to low standards of disclosure. The Hyundai chaebol built cars, among other things, while others pursued economic staples from consumer electronics to semiconductors.

Yet many critics are now posing an uncomfortable question: Is the business culture that built postwar South Korea into an industrial powerhouse now holding it back?

Critics have singled out the tight control that founding families maintain over the companies. Mr. Chung, for example, was the son of the group founder, and his son Chung Eui Sun, in turn, became president at Hyundai affiliate Kia Motors Co. The two men own a 60% controlling stake in a group company that has a profitable monopoly on the shipment of Hyundai Automotive group vehicles and parts.

“In some senses, Koreans owe these companies their economic prosperity,” says Chae Su Chan, an economist and member of the National Assembly. But, he says, “society on the whole is ambivalent about the family dominance in running the chaebol.”

Prosecutors said the indictment of the elder Mr. Chung, the man credited with propelling the Hyundai Motor brand into the ranks of top global auto makers, alleges he used receipts for transactions that never took place to embezzle money from the company. The indictment, which wasn’t made public, also accuses Mr. Chung of wrongfully diverting money from financially healthy members of the Hyundai Automotive Group to cover losses at a financially troubled aerospace company, prosecutors said. It names a number of other Hyundai Motor group executives that prosecutors said helped to create the slush funds, including Kim Dong Jin, the vice chairman running Hyundai Motor in Mr. Chung’s absence. Hyundai Motor declined to comment.


History of Hyundai slush-fund investigation

March 26, 2006: Prosecutors raid offices of Hyundai Motor and Kia Motors.

March 28: Prosecutors formally arrest Lee Ju Eun, the head of Glovis, Hyundai’s distribution arm, and charge him with embezzling company money.

April 8: Hyundai Chairman Chung Mong Koo apologizes for the trouble caused by the slush-fund allegations.

April 19: Hyundai Motor says Mr. Chung and his son will donate $1.1 billion of personal assets to charity.

April 21: Mr. Chung appears before prosecutors for questioning.

April 27: South Korean prosecutors request a warrant to arrest Mr. Chung on charges of embezzlement and breach-of-trust.

April 28: Prosecutors grant arrest warrant for Mr. Chung.

May 16: Prosecutors indict Mr. Chung on charges of embezzlement and misappropriation of corporate funds.

Sources: WSJ research; Samsung Securities

Amid the probe into Hyundai’s affairs, the company has delayed plant openings in Eastern Europe and the U.S. That will slow the momentum that Hyundai has built up during recent years, says Takayuki Shimosaka, an auto-industry analyst with Michigan-based forecasting firm CSM Worldwide. “The brand image has suffered, and there has been a double-digit decline in Hyundai’s domestic sales in April,” Mr. Shimosaka says. “They need to bring about a quick return to management stability.”

The 14% fall in the number of cars sold in April, compared with March, was unusual as auto demand in Korea usually begins to pick up in April. Analysts blamed a shake-up in the company’s marketing network and the chairman’s arrest.

But Mr. Chung, who has been incarcerated since his April 28 arrest, could return to his post as chairman in a matter of weeks. People familiar with the matter say the chairman will be seeking release on bail, sometime during the next two or three weeks, and under South Korean rules, there are no legal restrictions on Mr. Chung returning to run Hyundai Motor. “We remain hopeful that the chairman will be released on bail soon, and allowed to resume his duties,” said Hyundai Motor spokesman Oles Gadacz.

Executives of South Korea’s largest companies have been convicted of criminal offenses before, but have often received light sentences and remained at the helms of their companies. The chairman of oil refiner SK Corp. was convicted of breach of fiduciary responsibility in 2003 in connection with an accounting fraud at an affiliated company. He was sentenced to five years’ probation. He won a battle with dissident shareholders seeking to unseat him and still heads the company.

That said, prosecutors are seen by analysts as more independent in recent years, with greater latitude to pursue leads and enforce the law. And their interest in the inner workings of the chaebol extends well beyond Hyundai.

The investigations “have taken on a life of their own…beyond the control of any political leader,” says Mo Jong Ryn, a political scientist at Yonsei University in Seoul.

Many of the conglomerates formed during the 1950s and 1960s are now facing a generational shift, and they are encountering much greater scrutiny than they did during the 1980s, when their founders passed control to their sons, who are today’s leaders. As those men try to hand their groups to a third generation, they are finding that, increasingly, the old rules no longer apply.

In one case, prosecutors say they are examining transactions aimed at transferring control of Samsung Group from its chairman, Lee Kun Hee, to his son. Two Samsung executives were convicted last year of selling corporate bonds to members of the company’s founding family at below-market prices in a transaction that helped Mr. Lee’s children strengthen their control of the group.

A representative for Samsung Group says it has no comment on the prosecutors’ investigation.

Executives of Shinsagae Group, a retailing company, announced last week that the group would adhere to the law and pay applicable taxes, estimated at $1 billion, when control of the company is transferred from the current chairwoman to her son, a process that could start later this year.

December 16, 2004 12:23 pm

Accounting fraud uncovered at Hyundai Merchant

By Song Jung-a in Seoul

South Korea?s financial regulators said on Thursday they uncovered $1.2bn of accounting irregularities at Hyundai Merchant Marine.

South Korea?s second-largest shipping company inflated its net profit by Won1,200bn in 2000 by overstating sales and understating costs, the Financial Supervisory Service said, adding that it also found Won180bn of additional accounting violations.

The FSS said most of the past wrongdoing was corrected in Hyundai?s 2001-2003 books. But the revelation has rekindled fears that the breaches of accounting rules could be widespread in corporate Korea, following accounting problems at SK Networks, Hynix Semiconductor and Kookmin Bank.

?It?s hard to believe that is an isolated case,? said Terence Lim, head of research at Goldman Sachs. ?Big conglomerates which have many cross-unit deals are likely to have accounting problems.?

Last year, regulators unearthed a $1.2bn accounting fraud at SK Networks, a trading arm of SK Group, South Korea?s third-largest conglomerate.

Hyundai Merchant is the flagship unit of the remainder of the former Hyundai Group after the conglomerate spun off Hyundai Motor, Hynix Semiconductor and other businesses.

Analysts said concern over the murky structures of the chaebol and their opaque management has given rise to a ?Korea discount? of about 20 per cent on South Korean companies as investors price in lower corporate governance standards. The government has tried to root out malpractice in big conglomerates, recently passing a controversial bill aimed at improving their corporate governance.

?Progress has been made but they still have a long way to go,? said Mr Lim. ?Lower valuations on Korean shares are inevitable, unless accounting transparency takes root in Korea.?

Shares in Hyundai Merchant closed 1.4 per cent lower on Thursday. The Securities & Futures Commission is expected to deliver a final ruling on the case on Wednesday and decide on possible punishment.

CHRONOLOGY-South Korea’s major financial scandals

Sun Feb 4, 2007 11:57pm EST

(Reuters) – The head of Hyundai Motor (005380.KS) was sentenced to three years in jail for embezzling funds from the world’s No. 6 auto maker, dealing another blow to a company battling a rising won and restive labor unions.

Here is a timeline showing some major scandals relating to Hyundai and other large South Korean firms.

– 1978: Hyundai’s current Chairman Chung Mong-koo and his late father and Hyundai founder Chung Ju-yung are cleared after an investigation into corrupt property deals. Chung Mong-koo is arrested and jailed for 75 days over construction regulations infringements, but freed on a 5 million won ($5,000) fine.

– October 13, 1997: Kim Hyun-chul, the son of President Kim Young-sam, is jailed for three years and fined 1.44 billion won for taking kickbacks worth 3.22 billion won and evading taxes on 3.39 billion won he took as gifts.

– December 26, 1997: Hanbo Group founder Chung Tae-soo gets a 15-year jail term for bribing politicians and bankers to keep money rolling into Hanbo Steel, South Korea’s second-largest steelmaker, which collapsed in January 1997. One of his sons, Chung Bo-keun, gets a three-year suspended sentence.

– August 4, 2003: Chung Mong-hun, Chung Mong-koo’s younger brother and then chairman of Hyundai Asan, jumps to his death while facing trial over an alleged $500 million secret “cash for summit” payment to Pyongyang before June 2000’s landmark North/South summit. He was also accused of doctoring company books and embezzling 15 billion won.

– June 13, 2003: Chey Tae-won, Chairman of South Korea’s biggest oil refiner, SK Corp. (003600.KS), gets a three-year jail term for a $1.2 billion accounting scandal and illegal stock dealings at subsidiary SK Global. SK Group Chairman Son Kil-seung is found guilty of accounting fraud and was sentenced to a suspended three-year jail term.

– June 18, 2004: Hyundai Motor Group vice chairman Kim Dong-jin and Korean Air (003490.KS) Chief Executive Cho Yang-ho are given suspended two-year and one-year jail terms respectively, for raising a slush fund to support politicians in the 2002 presidential race. Both keep their jobs.

– October 4, 2005: Samsung Everland Co.’s former chief executive, Her Tae-hak, and CEO Park Ro-bin, are given suspended jail terms for conspiring in a 1996 deal to help the children of the group’s chairman buy a majority stake in an affiliate at below-market prices.

– February 7, 2006: Samsung Chairman Lee Kun-hee apologises for ‘wrongful’ corporate governance practices and alleged shady contributions to political candidates. Samsung says it will donate 800 billion won — the largest single charitable contribution in South Korean history — to atone.

– November 20, 2006: Daewoo founder Kim Woo-choong ends his appeal, after his 10-year jail sentence for embezzlement and accounting fraud is reduced to 8- years. Once admired as a hero, Kim fled South Korea in 1999 when Daewoo collapsed with debts of more than $75 billion, and was arrested on his return in 2005.

– February 5, 2006: Chung Mong-koo, the head of Hyundai Motor Group, is found guilty of breach of trust and embezzling company funds and sentenced to three years in jail, a move which sweeps aside expectations of a suspended sentence.


In rare sign of dissent, investor calls for change at South Korea’s Hyundai Motor

Thu, Mar 12 2015

By Hyunjoo Jin

SEOUL (Reuters) – A major investor in Hyundai Motor Co (005380.KS: Quote,ProfileResearchStock Buzz) on Friday urged the automaker to improve its governance, as shareholders met for the first time since the Hyundai group paid $10 billion for a piece of real estate in a widely criticized deal.

The decision in September last year to buy the land in Seoul’s affluent Gangnam district at three times its appraised value hit Hyundai Motor’s share price and rekindled investor frustration over opaque decision-making process at South Korea’s family-owned conglomerates.

In an unusual expression of dissent at a shareholder meeting in South Korea, a director at Netherlands-based pension fund APG Asset Management called on Hyundai Motor to revamp its governance structure and assign one of its external directors to “defend shareholder interests”.

“I hope this incident will give an opportunity for Hyundai Motor to improve its governance structure in a rational manner,” the director, Park Yoo-kyung, told the crowded auditorium at Hyundai Motor’s headquarters in Seoul.

Shareholder activism is rare in South Korea despite the predominance of family-run conglomerates known as chaebol that typically trade at discounts to global peers, due in part to governance concerns. Annual shareholder meetings are usually quiet, predictable events.

After its land deal, Hyundai Motor took measures that appeared aimed at soothing investors, including announcing a share buyback and dividend increase.

Claiming to speak on behalf of other institutional investors, Park urged the company – the world’s fifth-biggest automaker alongside affiliate Kia Motors Corp (000270.KS: QuoteProfile,ResearchStock Buzz) in terms of sales – to set up a board committee tasked with bringing governance up to international standards.

“Those proposals are not something unusual in light of global standards. But given the Korean situation, they are very innovative proposals,” she said, reading a statement.

APG Asset Management is Europe’s second-biggest pension fund and manages 490 trillion won ($436.74 billion) in assets, she said. APG owns 0.65 percent of Hyundai Motor, according to Thomson Reuters StreetSight.

Hyundai Motor Chairman Chung Mong-koo and his son, Vice Chairman Chung Eui-sun, did not attend the meeting, as per their practice in recent years.

Chief Executive Kim Choong-ho, who presided over the meeting, said the company was “vigorously considering” proposals to protect minority shareholders and enhance shareholder value.

Shareholders approved all matters that were put to a vote at Friday’s meeting.

The carmaker’s shares are still down about 20 percent since the land bid, which directors approved without knowing the bid price.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s