Challenging the Chaebol

SEOUL – When asked to identify Samsung’s fiercest enemy, most people would name Apple, given ongoing patent lawsuits in various countries. But Samsung, the largest of South Korea’s chaebol (vast, politically connected, family-run conglomerates), has bigger problems at home. In the run-up to the December presidential election, the chaebol have become a target of growing popular anger.

The chaebol played a crucial role in transforming war-torn South Korea into a wealthy, dynamic economy in less than four decades, supporting the impoverished population in the name of economy-first politics. (The economic consequences of military-first politics, the alternative path taken by North Korea, have proved disastrous.) Some of the world’s most recognizable brands – such as Hyundai and LG – are chaebols.

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But the conglomerates’ gluttonous business practices have suffocated small and medium-size firms, stifled innovation, undermined job creation, and left much of South Korea’s population in relative poverty, while catapulting their founding families to extreme wealth. As a result, what had once been a fount of pride for South Koreans has become a source of contention.

Chaebol reform is a defining issue in this year’s presidential campaign, epitomized in popular bumper stickers reading, “It’s the chaebol, stupid.” Past presidential candidates pledged to reform the chaebol – from cracking down on corruption to restructuring corporate governance – but delivered little, instead favoring short-term political gain from maintaining the status quo. Nevertheless, many anticipate that this year’s election will catalyze change, and that the cycle of greed and corruption that is weakening South Korea’s economy will finally be broken.

The three leading candidates – Park Geun-hye of the ruling Saenuri Party, Moon Jae-in of the main opposition Democratic United Party, and the independent Ahn Cheol-soo – are united in vowing chaebol reform. Their anti-chaebol rhetoric, together with calls for “economic democratization,” has won strong support among voters – and has rattled the chaebols.

Park’s father, former President Park Chung-hee, helped the chaebol to flourish during his 17-year autocratic rule, allowing them to drive the country’s rapid economic development – the so-called “Miracle on the Han River.” Now, Park is using her father’s economic accomplishments to differentiate herself from her opponents, both political novices, while presenting herself as a moderate (contrary to the positions that she has taken previously).

At the same time, Park is working to placate discontented supporters and attract swing voters by blaming the conglomerates’ greedy business practices for breeding anti-chaebol sentiment. Kim Jong-in, an architect of economic democratization who has been vocal about the need to tighten regulations on the chaebol, is among Park’s leading advisers. But, given that the Saenuri Party is traditionally pro-business, Park limits her reform pledges to harsher sentences for convicted chaebol executives and new restrictions on circular equity investment through chaebol affiliates.

Moon, who was liberal former President Roh Moo-hyun’s chief of staff, is a more forceful critic. He advocates stricter enforcement of the sum-caption rule for equity investment (barring top chaebol from investing more than 40% of net assets in group subsidiaries) and the cross-shareholding restriction rule (banning additional cross-shareholding of group subsidiaries for chaebolwhose assets total more than two billion Korean won). In fact, he opposes all kinds of cross-shareholding arrangements, which enable families with minority stakes to maintain control over their empires.

Ahn, who has been in the running for only two months, has attacked Samsung, LG, and other major corporations for treating their subcontractors and employees “like caged animals in a zoo.” He has vowed to overhaul the chaebol corporate-governance structure in order to create a business environment in which small and medium-size enterprises can thrive.

Public-opinion polls indicate that the hard line championed by Moon and Ahn is more popular than Park’s more conservative approach. As the gap between the haves and the have-nots has widened, resentment of the chaebols has become widespread. For example, an investment-banker friend jokingly described South Korea’s social-safety net – one of the weakest among OECD countries – as a “hammock for the country’s richest people.”

Voters complain that outgoing President Lee Myung-bak’s pro-business government – which issued pardons to scores of convicted chaebol executives – gave up on distributive justice and participatory democracy. South Koreans no longer fear brutal dictatorship; they fear economic monopoly, and the resulting dearth of opportunity.

As a result, many observers predict that this election will mark a turning point for the government’s deep-rooted collusion with the chaebol, and South Korea’s corporate dynasties are getting nervous. Given the extent of the proposed reforms, the election’s outcome could lead to significant destabilization of the chaebol.

Whoever wins the presidency, both the chaebol and the new government will be on edge in the election’s wake. The chaebol will not easily abandon their efforts to maintain – and strengthen – the corporate-governance structure that has allowed them to dominate South Korea’s economy, while Park, Moon, and Ahn are ready to leave their mark on South Korean history. The country’s voters now must determine who will challenge the chaebol on their behalf.