Another chaebol tale

In what country do the heads of the top half dozen or so corporations get arrested for corruption, found guilty, sent to prison, and then pardoned more often than in South Korea? The answer must be: none.

Chey Tae-won

Case in point: Chey Tae-won, chairman of SK Group, one of the half dozen largest of South Korea’s chaebols, the family-run conglomerates that dominate that country’s economy and whose leaders are part of an intricate network of power that ties them inextricably to the people at the very highest levels of government. In 1988, as if to demonstrate this high-level intimacy, Chey, who was the nephew of SK’s founder, married Soh Yeong Roh, the daughter of South Korea’s then president, Roh Tae-woo. The wedding took place at the Blue House, Seoul’s answer to the White House.

Five years later, in 1993, Chey was found guilty in a California court of breaking U.S. money laundering laws and of “smurfing,” which means “breaking up deposits into smaller amounts to avoid reporting cash transactions of $10,000 or more as required by law.”

Roh Moo-hyun

That was just the start. Ten years later, on February 23, 2003, Chey was arrested in South Korea on charges of insider trading. The arrest came only days before the inauguration of President Roh Moo Hyun, who, like many other South Korean presidents before and after, had declared his intention to reform the chaebols – which, while being credited with turning South Korea from a Third World country to a leading economic powerhouse, are also cesspools of high-level corruption. Among the 2003 charges against Chey was that he had plotted to increase his ownership share in SK by nefarious means and thereby to solidify his control of the conglomerate, which at the time consisted of no fewer than 58 separate firms. That June, after prosecutors uncovered $1.3 billion in accounting irregularities, Chey was sentenced to three years in prison.

Soh Yeong Roh


Once a crook, always a crook. In January 2012, Chey was indicted for embezzling over $40 million, which he sunk into personal investments. A year later, having meanwhile resigned as chairman of SK Group (while remaining chairman of the conglomerate’s holding company, SK Holdings), he was found guilty and sentenced to four years in prison. “The ruling,”
reported Yahoo News, “comes as South Koreans demand a tougher stance on crimes committed by bosses of chaebol.” The Seoul court that sent him to jail described his case as an example of how chaebol bosses “treat company assets as personal property.”

Park Geun-hye

In any event, that “tougher stance” against the chaebols didn’t last long. It never does. President Park Geun-hye – who had passionately vowed to crack down on chaebol corruption, but who is now in prison herself for involvement in chaebol corruption – pardoned him in August 2015. In March of last year, prosecutors questioned Chey, who in the interim had resumed chairmanship of the SK Group, as part of their investigation into President Park.

“To many investors,” the Seoul Herald commented a couple of years ago, Chey “seems to embody what’s wrong with Korea’s chaebol-controlling families.” Well, South Koreans are very big on two things: family and continuity. It could be argued that Chey, by retaining the respect of his clan and hanging on to control of SK no matter how many terms he serves behind bars, embodies those values, too.

Oases of privilege: the chaebols today

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Samsung headquarters in Seoul

The current South Korean corruption scandal (which we’ve been discussing this week) has blighted the images of the Brobdingnagian conglomerates – among them Samsung and Hyundai – that are known in that country as chaebols. Once admired – even revered – for helping transform South Korea into a respected powerhouse of technological production, the chaebols are now increasingly seen as oases of inherited wealth and privilege whose position of dominance and massive competitive advantage are unfair to start-up entrepreneurs and extremely unhealthful for the economy as a whole. That the chaebols have been shown again and again to be infected by immense levels of corruption at the loftiest levels has only further darkened their public image.

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SK Group headquarters, Seoul

So has the staggering degree of impunity enjoyed by the highest-ranking chaebol executives and their families. As we noted in September, “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 businessman 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.”

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CJ Group headquarters, Seoul

One of the matters being investigated in connection with the current scandal is the charge that President Park Geun-hye, in 2013, ordered her then economics secretary to pressure CJ Group (one of the largest chaebols) to fire its chairwoman, Miky Lee Mie Kyung. Lee, the granddaughter of Samsung founder Lee Byung Chul, had apparently angered Park by producing entertainment programming that was “unfavourable to the government.” In a clandestinely recorded conversation, Cho darkly warned CJ Group executive Sohn Kyung Shik “that there would be consequences if the request was not followed.”

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Choi Tae-won

As we’ve seen, prosecutors have been interrogating some of the top guys at the very biggest chaebols. But prosecutors aren’t the only officials who want to talk to the chaebol honchos: on November 21, the ruling and opposition parties in the South Korean parliament agreed to summon the heads of the seven largest chaebols to testify as witnesses in that body’s own investigation of the scandal. Among them is Hyundai chairman Chung Mong-koo, who nine years ago was pardoned by then president Lee Myung-bak after being found guilty of embezzling $100 million to bribe government officials. Another prospective witness is SK Group chairman Choi Tae-won, who three years ago was pardoned by President Park after being found guilty of embezzling over $40 million. These guys, in short, are old hands at being caught with their hands in the till – and then being set free so they could resume their thievery.

Their testimonies are scheduled for the parliament’s first hearing on the scandal, on December 5; eight days later, Choi Soon-sil herself, the woman at the center of the whole shebang, will be questioned at another parliamentary hearing along with other suspected participants. We’ll be sure to keep our readers updated on developments.

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:

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    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.

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    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.

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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.”

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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.

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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.

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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.

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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.

What are the chaebols?

Corruption takes a variety of forms. In Brazil, as we’ve seen, innumerable politicians have grown rich by ripping off the state-owned oil firm, Petrobras. In neighboring Argentina, a gang of Kirchner cronies diverted billions from infrastructure projects into private offshore accounts. In Gabon, President Bongo plays it simple: he treats the national treasury as his own piggy bank and buys himself mansions, yachts, limos, and planes while the average Gabonese citizen scrapes by on $12 a day.

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Seoul

Then there’s Korea. Not Kim Jong-un’s Hermit Kingdom, which is undoubtedly the most totalitarian corner of the planet. No, today we’re talking about South Korea.

“South Korea?” you ask. “Benign, prosperous, democratic, free-market South Korea, America’s steadfast ally and Ground Zero for the East Asian economic miracle? How corrupt can South Korea be?

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Samsung headquarters

This corrupt. In South Korea, as it happens, the power structure consists of two intimately interlocking parts: on the one hand, the president and other duly elected government leaders; on the other hand, a small number of huge family-run conglomerates that are uniquely South Korean in their origins, configuration, and societal significance, that have not been elected to anything by anybody, and that are, in effect, themselves the corporate equivalent of dictatorships.

These companies – among them such world-famous enterprises as Samsung, Hyundai, and LP – are known as chaebols, from the Korean words for wealth (chae) and clan (bol). They function like no other companies in the world.

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Samsung chairman Lee Kun-hee was Fortune Korea’s CEO of the Decade

In English-speaking countries,” explains a Seoul professor of public administration, “there really are no business groups, but singular companies that own [their] subsidiaries 100 percent. In Europe, conglomerates are never as big as the chaebols and ownership and management [are] usually strictly divided.” A chaebol, by contrast, consists of “multiple companies with robust internal transactions, all controlled by a single, near all-powerful chairman that act[s] as both manager and the de facto owner of the entire enterprise.”

It’s no exaggeration to say that the chaebols made South Korea. Over the last half century, they led the way in turning a poor agricultural backwater into an international technology center and economic powerhouse. In the process, they assumed a role in South Korean society that can be hard to explain to outsiders. The members of the families that run the chaebols are national celebrities; the companies themselves are mighty, majestic, nearly mythical colossi, looming above the everyday world of ordinary citizens in such a way that their very names almost carry a touch of magic.

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SK Group headquarters

Look at it this way: elected officials are mere mortals who come and go; the chaebol clans, like so many royal families, stay on forever, never yielding power or stepping down from Olympus.

As Iain Marlow wrote last year in the Toronto Globe and Mail, “all South Korean mothers dream of their children working at chaebol companies.” And yet even those mothers realize that the chaebols – which a generation ago were universally revered for having effected South Korea’s miraculous transformation – now pose a threat to their country’s continued growth, to its people’s economic and political freedom, and to its attempts to achieve full legitimacy and recognition on the world stage.

They realize, indeed, that these conglomerates that liberated them from poverty now – in a very real sense – are enshackling them.

How so? We’ll get around to the fascinating details tomorrow.