Corruption at the chaebols

Yesterday we began looking at the chaebols, the family-controlled conglomerates that dominate the South Korean business world. Here’s a quick overview of three of the very largest chaebols. See if you notice any running themes:

  • lee_kun_hee
    Lee Kun-hee

    Samsung – the largest of all the chaebols, making up no less than 17% of the South Korean economy – is chaired by Lee Kun-hee, son of the firm’s founder. Lee resigned in 2008 after being caught with a secret slush fund that he used to bribe government officials, but was pardoned by President Lee Myung-bak and promptly resumed his chairmanship. He continues to stay in office despite a book, published in 2010, that describes in detail how he stole about $9 billion of Samsung’s money.

Hyundai Motor Chairman Chung Mong-koo attends the company's opening ceremony for the year in Seoul in this January 2, 2012 file photo. South Korea's smartphones and cars may have won global acceptance, but back home Koreans are increasingly disturbed by the influence the chaebol have over their lives. That very public anxiety is coming at a sensitive time for the conglomerates as they prepare the transtion to a third generation of family owners and face a strong, unwelcome, focus of attention in the run-up to 2012's parliamentary election. Hyundai Motor's Chung Mong-koo was sentenced to a three year jail term in 2007 for fraud which was suspended in exchange for community service and a $1 billion charity donation as he was deemed too important to the economy to be jailed. To match Insight KOREA-CHAEBOL/ REUTERS/Kim Hong-Ji/Files
Chung Mong-koo
  • Hyundai is another of the so-called “Big Four” chaebols. Its chairman, Chung Mong-koo, son of the firm’s founder, was convicted in 2007 of embezzling $100 million to bribe government officials, but he was pardoned by Lee Myung-bak and remained in office.

  • choi
    Choi Tae-won

    Yet another one of the “Big Four,” SK Group, is chaired by Choi Tae-won, son of the group’s founder. In 2013, Choi was found guilty of embezzling over $40 million and sentenced to four years behind bars, but was pardoned by President Park Geun-hye and still runs the company.

South Koreans have – to put it mildly – mixed feelings about the families that run the chaebols. They still respect the firms’ very elderly or (mostly) deceased founders who made South Korea rich; but they increasingly resent the outrageous sense of privilege enjoyed by those founders’ children and (especially) grandchildren – who are widely resented for their unearned wealth, their princely airs, their thoroughgoing corruption, and the impunity they enjoy no matter how massive their crimes.

koo-bon-moo
Koo Bon-moo, CEO of LG

The simple fact is that pretty much everybody in the South Korean government is on the chaebols’ payrolls – or wants to be. And the growing popular resentment of this grand corruption is an extremely good sign. It tells us that a people who, not so long ago, were comfortable with a degree of authoritarianism are now impatient for more democracy. People who were accustomed to class division want more equal opportunity. Though grateful to the chaebols for their contribution to South Korea’s development, they’re not happy that those chaebols have developed into arrogant aristocratic dynasties, that they use their wealth to buy off public officials, and that their domination of the economy is impeding further development.

South Korean President Lee Myung-bak speaks to the nation during a news conference at the presidential house in Seoul November 29, 2010. Lee on Monday labelled North Korea's artillery attack on a southern island a crime against humanity and said Pyongyang will pay the price for any further provocation. REUTERS/Ahn Young-joon/Pool (SOUTH KOREA - Tags: POLITICS CIVIL UNREST)
South Korean President Lee Myung-bak

How do they impede development? Well, for one thing, they make it extremely tough for aspiring entrepreneurs to make a go of it. “It’s almost impossible for a small Korean business to take on a chaebol subsidiary – and everything is a chaebol subsidiary,” wrote one observer in 2013. The chaebols’ dominance, reported the Toronto Globe and Mail last year, “is now suffocating the country’s attempt to shift gears and foster a more innovative services-oriented economy powered by small businesses.”

roh_tae-woo_
Former South Korean president Roh Tae-woo

Note well: what we’re talking about here isn’t ordinary crony capitalism or the kind of revolving-door system whereby state officials often go on to become corporate execs. And vice-versa. No, it’s more as if the chaebols are a separate, permanent branch of government, whose political sway is founded partly on decades-long personal ties (Choi Tae-won’s wife is the daughter of former President Roh Tae-woo), partly on those vast slush funds that they use to grease officials’ palms, and partly on everyone’s keen awareness that the country’s fate is inextricably tied to that of the chaebols, the top ten of which account for fully 80% of South Korea’s GDP.

ahn_cheol
Entrepreneur Ahn Cheol-soo

Simply put: at times it can be hard to know where the elected South Korean government ends and the unelected government of the chaebols begins. Not only do the chaebol kings hold sway over elected officials; they also wield extraordinary power over their mid- to lower-level employees – who have little leverage at contract time, because there’s not really anyplace else for them to go. (Chaebols, according to software start-up founder Ahn Cheol-soo, treat workers like “caged animals in a zoo”.) Operating in a mind-boggling range of sectors – Samsung has its fingers in everything from financial services to shipbuilding – they have the reach and resources to effortlessly crush fledgling would-be competitors in any of them.

samsung_shareholders_citiaug12
A graph showing Samsung’s shareholder structure

Last but not least – and this is one bizarre detail that must certainly be unique to South Korea – not even the chaebols’ boards of directors can stand up to the hegemony of the family dynasties, even if the directors hold large stakes in the firms and the latter own almost no stock at all. Indeed, a 2012 study found that eight chaebol chairmen weren’t even on their firms’ boards, meaning that they exercised enormous power without shouldering a concomitant amount of responsibility.

What this means, in practice, is that however criminal or incompetent the head of a chaebol may be, he enjoys invulnerability and unaccountability on a scale unheard of in any other developed democracy. As one South Korean business journal has put it: “At companies in advanced countries, a faulty CEO is replaced. But at South Korean conglomerates, the head of a conglomerate wields absolute authority and is not replaced no matter how grievous his mistakes are.” Or how horrendous his crimes.

samsung-family-tree-korean
A family tree showing the descendants of Samsung founder Lee Byung Chul, color-coding their involvement in different subsidiaries and their intermarriage with members of other chaebol families

No, the situation south of the DMZ isn’t remotely comparable to that in Kim Jong-un’s Hermit Kingdom. But, thanks to the chaebols, South Korea’s business community is characterized by a thuggishness, a creepiness, a crookedness, of which the outside world is almost entirely unaware. And those who continue to prop all this up – either out of some misguided sense of loyalty to dead or dying national idols, or out of sheer personal self-interest – are, quite simply, stooges, aiding and abetting a corrupt system that’s actively preventing the emergence of an even freer, more equitable, and more prosperous South Korea.

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