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(originally published by Booz & Company)


What’s a Chaebol to Do?

The existence of all-powerful chaebol also makes it difficult for startups and small or midsized businesses to flourish — a significant concern, because in most advanced economies such companies drive economic growth and employment. When interacting with small and medium-sized enterprises, chaebol seek total control, leaving the smaller companies with enough to survive but not enough to prosper. As Ahn Chul-soo, founder of AhnLab, an antivirus software startup, put it: “The chaebol are squeezing small companies for every penny. We have no room to breathe.”

The chaebol are by no means the only barrier holding back Korea’s economy. Hostile labor unions and an overactive government bureaucracy also hamper foreign direct investment and the emergence of a healthy small and midsized sector. And of course, the chaebol are not necessarily bad for Korea; a chaebol subsidiary that commands world-class leadership in its market, such as Samsung Electronics, often holds a competitive position that is not soon likely to be eroded by global rivals and emerging Chinese companies. In other words, Korea needs more Samsung Electronics, but less Samsung.

Yet, given their leadership role, the chaebol carry particular responsibility for Korea’s success or failure. In August 2006, the Korean newspaper JoongAng Ilbo and the East Asia Institute, an independent thinktank, published research on Korea’s most powerful organizations, based on the perceived level of influence and trust. Four of the top five organizations were chaebol, led by Hyundai Motor and Samsung, and they ranked above NGOs, government, and political parties.

For the chaebol to help unleash much of the Korean economy’s hidden potential, they must seek partnerships with multinational companies, drastically reform their corporate governance practices, and eliminate their command and control management style. Some companies have demonstrated that these recommendations, although foreign to Korea, are not impossible to implement there. For example, LG’s decision to institute transparent corporate governance through a holding structure that eliminates cross-shareholding, significantly improves transparency, and ensures board independence, and the privatized Korea Telecom’s recent efforts to strengthen the role of outside directors and return excess cash to shareholders, prove that world-class corporate governance can work in Korea. Daewoo Motors, which collapsed under $16 billion of debt in 1999 and was subsequently taken over by General Motors, is selling more cars today than it did as part of the Daewoo Group. It may have been a major change for Daewoo managers to deal with Detroit supervisors, but their jobs are more secure and the Korean economy is clearly better off.

As Korea’s largest, most successful, and most powerful chaebol, Samsung is the trendsetter for corporate Korea. The group accounts for 8 percent of Korea’s tax revenues, 22 percent of exports, and almost one-quarter of stock market capitalization. The leadership position at Samsung is reserved for Jay Y. Lee, the newly appointed chief customer officer and son of chairman Lee Kun-hee. The father is making sure that his son receives more rigorous business training than the average chaebol “prince,” and the younger Lee’s new position puts him closer to the customers — and to understanding the type of openness that they require — than most Korean executives ever get. Perhaps all of this will drive him to eventually streamline Samsung’s portfolio, transform its culture and management style, and establish a world-class corporate governance system. If that occurs, he may not only pave the way for Samsung’s success, but also set a course for Korea’s economy as a whole. As an LG executive acknowledged: “Samsung’s future is Korea’s future.”

Author Profile:

Tariq Hussain ([email protected]), formerly with Booz Allen Hamilton, is a management consultant in Seoul, Korea. He is the author of Diamond Dilemma: Shaping Korea for the 21st Century (Random House JoongAng [Korean] and [English], 2006).
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  1. Bernard Black, Hasung Jang, and Woochan Kim, “Does Corporate Governance Predict Firms’ Market Value? Evidence from Korea.” Korea Development Institute School of Public Policy and Management Working Paper Series, Working Paper No. 02-04: Based on a large sample of listed Korean companies, the authors quantify the link between corporate governance and share price. Click here.
  2. Arie De Geus, The Living Company: Habits for Survival in a Turbulent Business Environment (Harvard Business School Press, 1997): Investigates the reason some companies have survived and thrived much longer than others. Click here.
  3. Tariq Hussain, Diamond Dilemma: Shaping Korea for the 21st Century (Random House JoongAng [Korean] and [English], 2006): Facing key educational, commercial, and corporate governance challenges, Korea must open up to the world and embrace global practices. Click here.
  4. Kim Wan-soon, “Foreign Direct Investment in Korea: The Role of the Ombudsman,” in Sustainable Recovery in Asia: Mobilizing Resources for Development (OECD and Asian Development Bank, July 2000): Summary of the tremendous impact of foreign direct investment on Korea’s economy, both quantifiable (e.g., new jobs) and less tangible (e.g., new skills). PDF Download.
  5. World Economic Forum, The Global Competitiveness Report, 2006–2007: An annual guide to the most productive countries with the best commercial sectors, and a companion report on how they achieved this. Click here.
  6. Diamond Dilemma Web site: The author’s blog, addressing Korean competitiveness issues. Click here.
  7. East Asia Institute Web site: Research by JoongAng Ilbo and the East Asia Institute on Korea’s “power organizations” ranks Korea’s companies by perceived influence and level of trust. (In Korean.) Click here.
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