Michaelsmani

Korea: Daniel Tudor

• In 1961 Park Chunge-hee seized power
• contributed greatly to economy
• in 1950s entrepreneurs close to rhee goverment grew quickly by purchasing asssets abandoned by the japanese such as factories at steep discounts. A firm began producing a certain product the government would block importation of competing goods from overseas.
• firms like samsung benefited from this protectionism
• samsung founder lee byung chul was in japan when park seized power
  • park accused lee of holding illictly acquired wealth, had given political donations, evaded taxes
  • jailed upon return to korea
  • lee offered to donate most of his wealth to the state and use his influence to persuade other entrepreneurs to follow economic plaws park was drawing up.
  • lee made head of new federation of korean industries, an organization that to this day represents the interests of the largest korean firms.
  • park put to use "corrupt corporate swines" in achieving industrial goals.
  • park offfered deal- participate in development plans or go to jail
    • included daehan and samho
    • accused of paying of kickbacks
    • fined, fines were used to reinvest in government.
  • First Five year economic plan 1962- 1967
    • focus was set on areas like fertilizer production, cement, chemicals, oil refining and textiles
    • number of firms allowed to participate were expanded
    • daewoo, originally textile but switched to electronics, cars, ships in accordance with government plans
    • often times industry entrance was against executives will (daewoo)
    • largest firms in korea, but lacked resources to enter such capital intensive industries like shipbuilding and car making
    • govt. flush with cash from U.S. governmentloans and from payments for aprticipating in vietnamese war
    • soft loans and compensation from japan as reparations
    • state favored firms through funding using national banks at rates of interest much lower than 25 to 30 percent interest rates offered on the open market
    • corruption still existed, kickbacks were rampant of up to 10% to high ranking officials when loans were made
    • companies got loands, expanded, officials received compensation
    • heavily leveraged funds
    • high import tariffs created import substitution
    • park wanted companies to export as well
    • bankrupticies were commonplace- gaepung, dongmyung
  • Firms that emerged as successful became conglomerates known as chaebol
    • rigidly hierarchical and bureaucratic, influenced by confucian culture
    • firms expected to treat workers as sons,
    • workers were expected to respond by thinking of chairmen as father figures, absolute loyalty, paternalistic style of management, father-son relationship in confucianism.
    • employees would receive gifts on their birthdays, funeral expenses paid
    • sons of chairmen were accelereted through ranks given subsidiaries to run.
    • all major chaebol today run by family members
    • in 1960s chaebol wages were kept low, unions banned, but headcounts higher than they would have been
    • corporate philosophy of growth together
    • everyone working for goal of national economic development, hit export targets
    • chaebol bosses owned little, most owned by state
    • import tariffs kept high, protect nascent domestic firms
  • Jeong Ju-young
    • park rewarded companies that met goals on time and in budget
    • samsung and hyundai did the best, they still are dominant
  • a system that suited its time
    • privilged insider was lent government money, then did not spend it on intended purpose- hyundai dry docks
    • entire chaebol cities like ulsan
    • system not suited to large, modern economy, but it did despite it sfaults, enable south korea to generate enormous economic growth and escape poverty
    • exports rose from $100 million in 1964 to 10 billion in 1977
    • gdp per capita from 120 to 1040 dollars same period
    • characterized by favoritism and corruption
    • combined power of state with profit incentiv, used confucianism's ability to bring everyone in line under chairmen
  • 1997 Asian economic crisis
    • twenty five chaebol bankrupticies in one year including kia
    • crisis result of corporate debt addiction, began in 1960
    • daewoo went under, 10% ofkorean gdp
    • reform in 1998 passed laws to improve corporate governance, protect minority shareholder rights, cracking down on corruption between politicians and chaebol
    • korea has reduced tariffs in recent years
    • chaebol now ocmpete with foreign firms
    • chaebol chairmen still have so much influence
  • Abuse of power
    • chaebols abuse their power to squeese suppliers and consumers
    • small firms that sell to chaebol have no say in price
    • small profits enough to survive but not to expand
    • chaebol price fixing acts are like sales tax
    • collusions are very common
    • samsung and lg were fined for long-running operatoin in collusion to drive up prices of computers and home appliances
    • fine was only fraction of profit
    • presidential pardons of thousands of convictions
    • kim seung-yeon of hanwha group convicted of abducting and beating bar workers with an iron bar in revenge
    • justification for pardon was that economy needs men
  • Chaebol Culture
    • hours for workers long,
    • outings were compulsory to build up family sense
    • exchange of gifs
    • korean firms hierarchical
    • no on echallenges a superior
    • promotion based on age, time served
    • firms wanted to hire young men who would sacrifice themselves for corporate cause
    • subjected to initiation testsj
    • wages compressed to keep competitiveness of korean products
    • gdp per capita increased from 100 to 289, wage growth only 58%, between 1963-1971
    • workers forced into retirement
  • IMF era
    • 1990s hours were still long 48 hours per week on average, understated,
    • even under more unionization, chaebol were paternalistic
    • companies offered generous benefits such as life insurance, children's tuition expenses instead of higher salaries
    • chaebol heavily debt fueled to fund expansion into as many industries as possible
    • borrowing was 179.4 billion in 1997
    • short term borrowings were encouraged, long term borrowing made bureaucratic
    • short term debt for long term projects
    • debt to equity ratio was 519 percent
    • smaller firms that relied on chaebol fell into trouble
    • employment started rising
    • exchange rate plumetted, debt more expensive
    • 7.9% unemployment
    • imf exacerbated bankruptices thorugh offering high interest loans
    • 10% of workers in 2008 were fired at five largest chaebol
    • crisis of 1998 had wide implications
      • undermined bond betwen employee and company
      • increased inequality
      • bottom 20 percent lost 17.2 percent of income.
      • homelessness increased
      • domestic crime increased
      • adoption overseas increased
    • training programs build loyalty
    • exercises, songs, company values,
    • 70 percent of korean workers would now switch employers if given a better offer
    • korean firms discriminate against women and oldermaels
    • chaebol hire three men for every woman
    • gender pay gap is 35% highest in oecd
    • temporary contracts by employees
    • 16.6y of workers were adjunct
    • less legal rights, taking advantage of labor
    • foreign firms hire women because less competition
    • less press freedom, because media advertising revenue comes from chaebol

Korea and the Great Recession: JOHN HOPKINS REPORT

http://uskoreainstitute.org/wp-content/uploads/2011/05/Chekan_YB2010.pdf

The Effect s of Chaebol Reform on South Korea's Recovery from the 2008 Financial Crisis by Kate Chekan

• becaus eof south korea's reliance on exports and high level integration with global econonmy, whole country suffered
• at the end of 2008 nominal GDP decreased from 928 billion to 821, exports decreased from 433 billion to 374 billion
• GDP growth improved very quickly from -4.5 percent at end of 2008 to 3.2 percent in q1 2009
• kospi grew 42.5 percent from dec 2008 to jan 2010
• partly due to chaebol reform which helped rebound faster after 1997 crisis
• Chaebol Activities leading up to 1997 crisis
  • 1990s expansion and leverage
  • faborable regulations created chaebol-state symbiotic relationship
  • in 1990s chaebol continued to have a large influence in shaping korea's financial liberalization
  • contributed heavily to problems during the asian financial crisis
  • macroeconomic level,  korea saw an increasingly large current account deficit along with loss of price competitiveness in export market due to devaluation of the won
  • rather than raising more equity to have more capital for ventures, chaebol took on more debt
  • taking out loans was easier than raising equity because no govt. supervision
  • access to foreign capital markets enabled chaebol to expand further
  • structure of debt was unhealthy
  • short term loans and foreign portoflio investment accountedf or 68% of the country's debt
  • top five chaebol had average of 473 percent d/e ratio
  • acceptable in economicm boom and in phasers of growth, but cause serious damage if there is financial chaos
• Hanbo Bankruptcy
  • hanbo iron and steel was one of the first chaebol to collapse3 in 1990s as a result of risky business practice
  • company went bankrupt in January 1997
  • hanbo was not able to pay debt on its steel mills
  • ended up in 6 billion in debt, interest payment swere too high
  • bank managers working with hanbo circumvented normal loan review process and chairman added extra incentives to continue providing these bad loans by bribibg company's main creditor banks
  • many chaebol accumulated unsustainable sum of debt after years of easy loans, imprudent expansions, used more loans to pay off debt
  • twelve more chaebol wen tbankrupt that year including Kia
• Asian Financial Crisis
  • foreign investors did not want to invest in Korean ventures and did not roll over Korea's short term loans when asked
  • korean figs credit ratings decreased
  • no more manufacturing boom, no more cash flows, cannot pay debt
• Post Crisis Policies
• Under Kim Dae-Jung and in the wake of the IMF crisis, many reforms were made to the chaebol. Most of these changes pertained to corporate structure, transparency in financial reporting, corporate governance, and debt stabilization. IN 1997, the IMF provided a bailout loan of $60 billion conditional on reform. Distressed financial institutions were to be closed down and those that were deemed viable must be restructured and recapitalized by the levels it set forth. This affected the chaebol because it severely restricted its easy access to financing that led to over leveraged balance sheets. Lenient accounting practices and disclosure rules were to be strengthened and standardized for international practice. Hence, transparency was increased to what would be expected from a public company. The chaebol agreed to be subject to independent auditors and were obligated to provide consolidated financial statements on a regular basis.
• Kim Dae-Jung enacted what is known as the "Five Principles of Corporate Governance". These were enhancement of management transparency, strengthening owner-manager accountability, elimination of cross-debt guarantees among chaebol affiliates, improvement of capital structures, and consolidated core business areas. In his plans, debt to equity ratios were to be below 200%. Subsidiaries of chaebol that were debt-laden or on the verge of bankruptcy were instructed to be either liquidated, sold, or put up for merger. Each chaebol-holding group had to break up its subsidiaries and operations so that they were more manageable. By the end of 1997, each had an average of 26.8 subsidiaries. It was hoped that if there were fewer activities the quality of the businesses would be improved. Many unrelated branches to their core competencies were swiftly shed. If any of the conglomerates failed to meet the conditions by set deadlines, strict sanctions would be passed against them. During the 2008 Financial crisis, many of these reforms ensured the quick recovery of the chaebol. Having had exposure to a massive recession before, the companies learned to cope better than those in foreign countries. Having significantly healthier balance sheets with higher cash reserves, the chaebol nimbly maneuvered through any liquidity issues. Moreover, with fewer subsidiaries they were less exposed to the full scope of the crisis and thus helped keep the Korean economy afloat.
• President Roh Moo Hyun pushed for even more extensive reform. His administration passed stringent regulations on fraudulent accounting, stock manipulation, and irregular wealth succession. The chaebol were forced to improve objectivity on their board of directors. Rather than having the decision-makers be insiders, affiliates, or family members, the chaebol were expected to hold representation who reflected the interests of investors- especially minority shareholders who gained a significant amount of rights. As a result, it became easier for the chaebol to raise capital through equity rather than riskier debt. This is because the new transparency laws and restructuring boosted investor confidence from abroad.
  • chaebol recovered from financial crisis
  • q1 hyundai earned 300 million up 20%
  • reforms helped korea from being damaged for long term
• Corporate structure break upo
  • management of chaebol was concentrated at center
  • companies were large enttites with little connection to entire operations
  • moral hazard of too big to fail
  • chaebol had average of 26.8 subsidiaries by end of 1997
  • breaking chaebol into smaller groups improved quality of businesses
  • there is ap ositive association between akinowledge transfer by parents with foreign subsisdiares and performance of subsidiaries
  • chaebol diversified and extended their geographic reach
  • more simjple and coherent businesses structures prevailed
  • put them in a better position in 2008 than those in the U.S. financial crisis
  • debt to equity was not as much of a concern
  • chaebol increased expansion in wake of crisis and filled production gaps
  • Hyundai $600 million car factory in brazil september 2009
  • 5.85 billion cash offer sandisk samsung
  • kia became more successful through suffering of GM and Chrysler
• improving transparency and corporate governance
  • chaebol were under regulated in terms of what they had to report before 1997
  • led to corruption and mismanagement
  • roh moo hyun pushed reforms harder,
  • firms had to part with fradulent accounting, stock manipulation, irregular wealth succession
  • chaebol improved objectivity on their boards of directors
  • meeting global transparency standards
  • independent board members increased (outside family)
  • higher investor confidence which meant greater likelihood that chaebol could raise capital through equity rather than debt from korean banks
• Policy Reccomendations
  • previous reforms had chaebol consolidate their separate companies and shed non-core businesses which means better control over fewer entities and better coordination as expansion
  • make sure expansion requires significant planning
  • govt. took measures to deleverage chaebol
    • • Korea turned to IMPF, bailout loan was 60 billion
      • many conditions were set forth in IMF stand by agreement drafted in december of 1997
      • many provisions were for chaebol pertaining to corporate structure, transparency in financial reporting and corporate governance, and massive debt levels
      • many banks were highly leveraged and fundamentally unstable
      • IMF said that loan would only be given if troubled figs were closed if deemed viable, restructured, recapitalized
      • important to chaebol because it restricted much of the reckless funding that led to excessive leverage
      • accounting standards and disclosure rules will be strengthened to meet international practice
      • korean companies were more transparent
      • korean companies would be subject to independent auditors and would be obligated to provide consolidated financial statements on a regular basis
      • corporate governance was in dire need of change
      • government gave implicit guarantees of assistance in times of distress that led to conglomerates reckleess investing
      • firms were too paternalistic giving relationships a priority in business
      • chaebol lacked fiduciary responsibility
      • sales and overseas expansion were increasing rapidly, there was little progress in terms of profit margins
      • shareholders interests were not primary concern
    • administration's response
      • Five principles of Corporate Governance
      • enhancement of management transparency
      • strengthening owner-manager's accountability
      • elimination of cross-debt guarantees among chaebol affilitates
      • improving financial structure
      • consolidation of core business areas
      • kim dae jung addressed disproportionate leverage
      • chaebol had to reduce d/e ratio to below 200 percent
      • korean banks had 116 dcompanies on a list created by government recommended for liquidation sale or merger due to ailing health and overwhelming debt
      • chaebol also had to consolidate their oligopolistic corporate structure
      • company hq had to break into smnaller entities so management could better see activities
      • by 199 chaebol completed 80 percent of restructing requirements
      • kim threatened to toughen sanctions against its five top conglomerates if they failed to restructure by allotted deadlines
    • How did IMF reform help

THE KOREAN BUSINESS CONGLOMERATE http://digitalassets.lib.berkeley.edu/ieas/KRM_021.pdf

• Ownership Control Structure

Anger and Envy in the Chaebol Republic  http://foreignpolicy.com/2015/04/09/anger-and-envy-in-the-chaebol-republic-korea-nut-rage-samsung/

• Chaebol families pass down wealth from one generation to another
• through byzantine ownership structures
• top ten chaebol groups equaled nearly 80% of South Korea's GDP
• third generation chaebol
  • parachuted into plum jobs as birthright
• polls suggest koreans unfaborably view superrich
• many calll current tax policy unfairly beneficial to rich and express discontent
• lifestyle sections of newspapers gossip about memebrs of this class with voyeurism especially during a wedding
• pop culture saturated with soap operas aabout fictional chaebol
• presidential pardons
  • lee kun hee received on efor tax evasion because of pyeongchang in 2018
• VERY GOOD FOR DISCUSSING WHITE COLLAR CRIME AND CHAEBOL IN POP CUTLURE

Abuse of Power and Government Ties

Since the inception of the chaebol, the government has been closely involved in its affairs. Many of the reforms enacted over the years, especially those under President Kim Dae-Jung, have cracked down on kickbacks and preferential treatment. Moreover the state is no longer a majority shareholder of any chaebol. But their sheer size and wealth has been used to gain influence. For the most part, the government sees the function of the chaebol as crucial to the Korean economy. When President Lee Myung-Back took office, he pardoned Samsung Group chairman Lee Kun-Hee for tax evasion. President Lee then proceeded to champion pro-chaebol deals, including a massive nuclear energy contract with the city of Abu Dhabi, and loosened laws preventing the conglomerates from owning financial services company. Samsung's leader is not the only chaebol chairman to be excused from a crime conviction. Choi Tae-Won of SK Group, Chung Mong-Koo of Hyundai, Kim Seung-Youn of Hanwha, and Shin Dong-Bin of Lotte Group, are a few examples of chairmen who have been charged, convicted, or are currently serving a prison sentence for white collar crime. Accusations include, bribery, tax evasion, accounting fraud, embezzlement, and violent crime.Typically chairmen of the chaebol are pardoned. August 15th is recognized in South Korea as Liberation Day. This is when the president forgives the chairmen for their infractions in order to ensure they remain in power of their companies. In the rare case that an executive is sentenced to prison, as the CEOs of SK and CJ group were, it is typically a relatively light punishment up to 4 years depending on the charge.

Collusion between members of the chaebol and the government granted preferential statuses to the companies. The chaebol would funnel bribes to politicians and bureaucrats through slush funds and illegal donations. This could help maintain the government's position of power, allowing them to secure contracts for major government projects and provide favorable treatment to the donor firm. Examples of this type of corruption were widespread in the years leading up to the 1997 financial crisis. Many of the firms who benefited from this relationship were too indebted, had poor corporate governance, and were inefficient. There was a huge inflow of capital and bending of regulation in favor of these problematic firms. Hanbo Group, formerly South Korea's second largest steel-maker, is a good example of this. In the 1990s the company paid for special arrangements with high-ranking politicians so that it could secure contracts for large government projects over its competitors. Hanbo went bankrupt in the 1997 after defaulting on debt payments along with other governance issues. Numerous chaebol companies had similar private agreements with the government in this fashion. It would be most common in companies dealing with heavy industries or projects that involved government procurement and urban planning. In the past, most successful political elections were won with the support of the chaebol. Each time a new administration or regime stepped in, it would gear its policy platform towards chaebol revitalization. This was under the claim that in order to be a competitive economy more power must be given to the chaebol. In recent years, the leading political parties of South Korea have reversed their pro-large corporate stance to one of economic diversification. 

Monopolistic Behavior

The protectionist policies and preferable government treatment granted the chaebol the ability to exhibit monopolistic behavior. The absence of a market free of intervention meant that "true competition" became a rarity in South Korea. Especially in the era prior to the IMF crisis, the only products available to the Korean people were those made by the chaebol. Therefore the social fabric of the country lacked an entrepreneurship culture. Massive market concentration exists as is evident from the fact that 80% of the country's consolidated revenues are derived from the chaebol. The largest of the group, Samsung, exports 20% of South Korea's goods and services alone. Although no-longer financially supported by the government, these firms have attained economies of scale at such a grand scale that it is extremely difficult for a start-up or small medium enterprise (SME) to surmount the high barriers to entry. A majority of these smaller companies end up being acquired by the chaebol, only increasing their size and economic dominance. In recent years the trend of selling internationally has been seen among aspiring Korean entrepreneurs.

To this day the chaebol maintain dominance across all industries. Reductions in tariffs and removal of trade regulations designed to protect Korean conglomerates has led to increasing competition from abroad. However, among domestic firms the chaebol have kept their market share intact. All but 3 of the top 50 firms listed on the Korean Stock Exchange are designated as chaebol. Consequently, the chaebol have more bargaining power and oftentimes takes pricing action that squeezes both suppliers and consumers. Typically the firms down the supply chain fail to increase their profit margins enough to expand and thus never see growth. Collusion among the chaebol is commonplace. Price-fixing acts mean consumers pay an inflated value for most goods and services. For instance, in 2012 Samsung and LG Electronics were fined for colluding to raise prices for home appliances.

• muneo kyeongyeong octopus businesses, with subsidiaries
• competition did not exist in the domestic market
• chaebol had to be competitive on international scale
• for korean consumers only choice was chaebol made product
• also often a reverse-engineered, intellectual property rights product copied from elsewhere
• no real culture of entrepreneurship
• most attractive jobs in current society remain with chaebol
• vast majority of kospi are chaebol
• less than ten non-chaebol companies have managed to generate revenues of more than 1 billion dollars
• cahebol no longer supported financiallby by govenrment
• but larger size means they have advantages
• entrepreneurs want to sell to chaebol, or find blue ocean

Workplace Culture

The typical culture at one of these conglomerates is highly paternalistic in nature. Much of the environment is defined by the chairman who acts as a "fatherly-figure" to his subordinates. This can be traced back to the infusion of Neo-Confucian values that permeate Korean society. A chaebol's heads demeanor towards his employee can be described as "loving" while maintaining "sternness and a sense of responsibility". Workers commit to long hours, most notably on weekends and holidays, in order to appease their superiors. Company outings and drinking sessions tend to be compulsory as to foster a sense of family and belonging among employees. Employers believe that enhancing a common bond between them would translate into prosperity and productivity for the company.Other practices that would be uncommon for Western workplaces to engage in include gift-giving to employees and arranging dates for workers in search of relationships or marriage. The chaebol are notoriously hierarchical. As such, it is unusual for an individual to challenge or question the decision-making of his or her boss. This dynamic adds to the culture that orients itself around whoever is in charge;but can lead to undesirable circumstances. For example, the Asiana flight 214 crash led critics to speculate that cultural factors prevented a pilot on board from aborting the low-speed landing and thus straying from his superior's commands. Promotion is rarely merit based. Rather, it is through order of age and time served to the conglomerate. This is reflected by the fact that most executives are far older than their employees. If a worker does not attain an executive or high-management role by the age of fifty, he or she is commonly forced into resignation. Again, this is attributable to the age-hierarchy dynamics in Korean Confucian culture. Loyalty to the firm is heavily emphasized at the chaebol. Signs of this is evident in standard recruiting process, where newly acquired employees undergo intense initiations. Activities in these tests include training camps and singing company unique songs that reiterate the production goals of the firm.

Chaebol Culture

• hours for workers long,
• outings were compulsory to build up family sense
• exchange of gifs
• korean firms hierarchical
• no on echallenges a superior
• promotion based on age, time served
• firms wanted to hire young men who would sacrifice themselves for corporate cause
• subjected to initiation testsj
• wages compressed to keep competitiveness of korean products
• gdp per capita increased from 100 to 289, wage growth only 58%, between 1963-1971
• workers forced into retirement

• training programs build loyalty
• exercises, songs, company values,
• 70 percent of korean workers would now switch employers if given a better offer
• korean firms discriminate against women and oldermaels
• chaebol hire three men for every woman
• gender pay gap is 35% highest in oecd
• temporary contracts by employees
• 16.6y of workers were adjunct
• less legal rights, taking advantage of labor
• foreign firms hire women because less competition
• less press freedom, because media advertising revenue comes from chaebol