The “Three Fair Economy Acts” Aim to Tackle Only Owner Risk While Turning a Blind Eye to Union Risk

A Success Story of Owner Management at Samsung, Which Built Up Semiconductors

Snowballing Losses Hidden at Kia, a Worker-Run Company

The so-called “three fair economy bills” passed the Cabinet meeting on August 25. In the upcoming regular session of the National Assembly, the Democratic Party is expected to push them through one way or another. These bills had so many problems that they were automatically scrapped in the 20th National Assembly, but this time there is a high possibility they will be forced through.

As the table below shows, the three fair economy bills refer to the Fair Trade Act, the Commercial Act, and the proposed enactment of the Financial Group Supervision Act. The details involve complicated backgrounds and arguments, but simply put, most of them are means of checking the authority of chaebol owners. Stricter regulation of internal transactions, tighter equity requirements for subsidiaries of holding companies, and limits on voting rights related to audit committee members in multiple derivative suits all focus on curbing the so-called abuses of power and self-dealing by owners.

It is true that Korea’s chaebol system has problems. But what in this world is without problems? Not only chaebol firms but also small and medium-sized enterprises have many problems. The National Assembly, the Blue House, civic groups, and universities are all full of problems as well. Chaebol firms, which must compete in global business, may actually be among the better-run organizations in this country.

The owner power observed in Korean companies is often a powerful means of strengthening corporate competitiveness. But that power is sometimes mobilized for improper instructions or self-dealing. Internal transactions among affiliates can also serve as a means of creating synergy through cooperation between related or unrelated lines of business, though at times they can become a tool for self-dealing. Isn’t that exactly why the prosecution exists—to identify and punish such problems?

Yet under the banner of solving the problems of the owner system, the three fair economy bills seek to neutralize owner power itself. That may reduce the harmful effects of the owner system, but it will also deprive companies of competitiveness. The decisive decision-making of controlling shareholders, so-called owners, was the source of the competitiveness that built Korea’s global companies. Samsung Chairman Byungchul Lee continued investing in semiconductors despite massive losses. Even as losses piled up to the point that the entire group was shaken, the investment continued. Most executives and employees tried somehow to stop him, but they did not dare. The year after he passed away, semiconductors brought Samsung tremendous success. The “New Management” of his successor, Chairman Kunhee Lee, and the quality innovation it produced were reforms made possible only because of owner power.

Hyundai Motor and SK also achieved breakthroughs through decisions that only owners could make. The decisive turning point in Hyundai Motor’s rise as a global automaker was its 1999 decision in the United States to offer Hyundai buyers a 10-year/100,000-mile warranty. It was an enormous gamble. If the abysmal quality of Hyundai cars at the time had not been fixed, repair costs could have become unbearable and driven the company into bankruptcy. And for Hyundai to survive, it had to improve quality so much that repairs would hardly be needed. Chairman Mongkoo Chung launched aggressive quality management and ultimately succeeded. It was a gamble possible only because he was the owner.

SK’s acquisition of Hynix while it was under court receivership was also the result of an owner’s decision. No one wanted to acquire Hynix, but Chairman Tae-won Chey decided to do so and built it into a world-class semiconductor company. Japanese firms, unable to make bold decisions, held meetings and more meetings and in the end surrendered the market to Korean and Chinese companies. Now it seems our own companies are heading in that direction. The three fair economy bills will weaken owner power, and large companies will find it harder to make bold decisions in the future.

An even bigger problem is the strong possibility that large corporations will gradually be turned into something like public enterprises. The vacuum left by reduced owner authority will not remain empty. Labor unions, civic groups, and politicians will fill it. And they will use that power for their own interests or to put left-wing ideology into practice. In place of owner risk, union risk and political risk will emerge. We already learned painfully what that leads to through Kia Motors in the past.

After being reborn in 1980 as a worker-run company, it initially seemed to do well. But over time the workers became complacent, and the executives colluded with the union. Costs snowballed and losses mounted, but they were hidden through accounting manipulation. In 1997, when the losses could no longer be concealed, the company finally defaulted. The event that set the stage for the 1998 foreign exchange crisis thus occurred at a company where the owner had disappeared, a company owned by workers.

If the three fair economy bills are passed, large companies will increasingly come to resemble Kia Motors of the past. Their corporate wildness will disappear, and they will turn into comfortable companies that pay well and generously hand out favors here and there. Such companies cannot possibly have the driving force for innovation. It will also be hard to expect them to survive in the global market.

Our global conglomerates are the most modernized organizations in Korea. If there are illegal acts, the prosecution should step in and root out only those. It is nonsense for civic groups, member of the National Assembly, and the Blue House to step in, claiming they will fix big business. It is, quite literally, like third-rate actors trying to reform second-rate ones. I just want to tell them: mind your own business and do your own jobs well.

Jung Ho Kim, Adjunct Professor, Sogang University Graduate School of Economics

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Original title: 노조리스크 눈감고 오너리스크만 잡겠다는 '공정경제3법'

Author: Jeong-ho Kim

Date: 2020-09-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=19&idx=23082