hankyoreh

Cho Hyun-bum, the chairman of Hankook & Company Group, arrives at Seoul Central District Court on Jan. 11, 2024, on charges of breach of trust and embezzlement at an affiliate. (Yonhap)

Not many readers have made it through “Anna Karenina,” the sprawling novel by the great Russian writer Leo Tolstoy. But many remember the novel’s famous opening line: “Happy families are all alike; every unhappy family is unhappy in its own way.”

If Tolstoy had known about Korea’s chaebol — huge conglomerates typically controlled by a single family — he might have adapted that line as follows.

“Every underprivileged individual is unhappy in their own way, but chaebol family members are all alike in their happiness: their parents control the chaebol.”

My topic today is the privileges and pleasures appertaining to the happenstance of being born into a chaebol family. It’s all too effortless and easy for such people to make a fortune without taking on any responsibility.

Too effortless and easy

In Korea today, the majority of chaebol leaders are not the founders, but rather their grandchildren or even great-grandchildren. They all went through a roughly similar process before taking control of their family’s chaebol.

After some schooling abroad, including a posh private high school and illustrious university, they were given a position in their father’s company. Sometimes they completed an MBA or gained some experience at an international firm along the way. (To be sure, such experience is of little consequence to them.)

And then 30 years later, as if they were some kind of supernatural salmon, they jump upstream and return to the fold to receive training related to inheriting management control. And I’m not talking about a succession process such as those you see in overseas companies, where CEO candidates are selected from a pool of top executives and then trained in a long-term program. In the Korean chaebol, everything is predetermined. 

My investigations revealed that from the moment third- or fourth-generation chaebol heirs get a foot in the door at their parents’ conglomerate, it takes them less than seven years to become a ranking executive. Fast-tracked promotions for them are normalized. Conversely, it takes an average of 22 years for the standard college graduate to become an executive. A day for the chaebol inheritors is three days for the average employee.

Perhaps the most extreme example of lavish compensation for little work is Cho Hyun-bum, the chairman of Hankook & Company, the holding firm for Hankook Tire. Cho sat on the board of directors for two Hankook affiliates last year, receiving a total of 7.8 billion won (US$5.8 million). Not only is this an obscene amount, but Cho was detained for nine out of 12 months in 2023 on charges of violating fair trade laws, meaning he did not even fulfill his duties as a board member. 

The principle of no work, no pay apparently does not apply to chaebol bosses. 

Cushy compensation packages

Those who find themselves at the helms of Korea’s chaebol are obviously handsomely rewarded. In terms of income from labor, they fall within the top 0.1% of the country. Even when compared only to other executives, their compensation packages are obnoxiously generous. 

Let’s take the average salaries of the highest-paid executives from South Korea’s top 100 listed firms from 2014 to 2018. The difference between chaebol royalty and professional management was stellar. Professional executives hired based on their merits received an annual average of 1.7 billion won (US$1.26 million). Chaebol heads and their kin, however, received an annual average of 2.8 billion won (US$2.1 million). On average, these scions receive 65% more than the common executive. In short, people with a certain family name and lineage automatically receive more. I call this the “pedigree premium.”

To accurately gauge the size of these premiums, I accounted for factors like company revenues and profits, official job title, and the industry the company operates in. After controlling for these factors, the chaebol chairpersons still received a premium of 33% to 80% (95% confidence interval). Someone who belongs to the chaebol line will receive between 33% to 80% more money for fulfilling the same role as a non-pedigreed executive.

What’s interesting is that the pedigree premium varies according to each conglomerate. Analyzing data from South Korea’s top eight conglomerates, the CJ Group had the highest premium for the privileged bloodline. From 2014 to 2018, a controlling shareholder (chaebol family member) received an annual average of 5.9 billion won (US$4.4 million), resulting in a pedigree premium of 57%. A run-of-the-mill executive would have received 2.5 billion (US$1.9 million) for doing the same work. 

The Samsung Group, conversely, had a pedigree premium of zero. Samsung’s compensation packages for its professional executives are extremely generous, while the former chairman, Lee Kun-hee, was hospitalized from 2014 until his death in 2020.

Scholars have been debating whether a CEO’s salary is determined by leadership and management that leads to actual increases in profit and company value (and thus deserved) or by simple position of authority (and thus, essentially rent-seeking). But what about the pedigree premium? 

Let’s say that the chaebol leaders have exclusive business and management expertise that remains within the family. In that case, the pedigree premium could be viewed as justified compensation. Yet we all know that’s not the case. It is therefore necessary to conclude that the pedigree premium is based on inherited position and authority, and is unrelated to productivity or merit.

Astronomical dividends and wealth accumulation

However, salaries are only a small portion of the economic benefits chaebol bigwigs are privy to. The scale of the dividends they receive is symbolic of the serious economic inequality plaguing South Korean society. The bulk of these people’s wealth comes from their dividends. This wealth results in economic power that often metastasizes into political power.

From 2014 to 2018, the families of the eight Korean chaebol conglomerate chiefs received an annual average of 95.2 billion won (US$70.7 million) in dividends. That’s over twice the annual average salary they received in the same period, 40.3 billion won (US$29.9 million). 

Even when accounting for spending and taxes, if a single generation in the chaebol family line continually receives the dividends and salaries they received from 2014 to 2018, each generation accumulates an average of around 3.5 trillion won (US$2.6 billion) in their lifetime. And that doesn’t even include the value of the shares they hold.

The ultimate issue is that the process of wealth accumulation simply is not just. The chaebol chiefs and their families mostly inherit their shares from their parents — whether it be through direct inheritance or corporate succession. This inheritance necessitates the sacrifice of smaller shareholders and retail investors. This simple process of inheriting corporate shares and executive control — along with the pedigree premium — forms the crux of South Korea’s economic inequality.

Lack of accountability

Former Shinsegae Group CEO Chung Yong-jin was announced as the conglomerate’s next chairman this year after 18 years of being the vice chairman. Shinsegae announced that the decision was made based on the “rapidly changing industry landscape” and the need for a “frontal breakthrough” with “Chung at its core.” 

Yet during the past five years, Shinsegae’s stock has fallen 59%. During 2023, specifically, share prices fell 20%. Many observers pointed to miscalculations and incompetent management from Chung. 

Lee Myung-hee, Chung’s mother and Shinsegae’s current general chairperson, is known for her attitude of “rewarding competence and punishing incompetence” when it comes to executive appointments. That principle apparently does not apply to her son. When ordinary executives fail to perform, they pay the price. Chung Yong-jin, on the other hand, is promoted. 

Meanwhile, for the first time in the conglomerate’s history, Shinsegae is asking its employees to offer voluntary resignations in the face of falling profits. Chung was at the helm when the firm lost money, but it’s the rank-and-file employees who are facing the consequences. Chung’s appointment as chairman is a glaring example of the system of inherited power that plagues South Korea’s corporate world — a system that lets people with a certain last name off the hook, no matter how incompetent they are.

The chaebol bosses have strict business and management standards — except when it comes to their kin. Cases like Chung’s are seen all throughout the chaebol universe. The preordained corporate bigshots are rarely punished for poor performance or incompetence. It only happens when their errors are so monstrous they result in the conglomerate’s financial collapse, and they are finally expelled by force. Even competent and skilled chaebol leaders often pass down their legacies to incompetent successors.

The problem isn’t incompetence. It’s the lack of accountability or consequences among a privileged class that’s determined through bloodline. Yet the current administration continues to advocate policies that exclusively benefit those with that special status. 

When a company’s stock price is low compared to the firm’s net worth, it’s not the fault of executive incompetence among the controlling shareholders, nor is it their excessive greed — it’s the fault of high inheritance taxes. Or so says the current administration. Such thinking may be the dawn of a brave new world for Korea’s chaebol, but for the average citizen it’s a classic dystopia.   

By Choi Han-soo, professor of economics at Kyungpook National University 

Please direct questions or comments to [english@hani.co.kr]