Chaebol chairmen feeling new administration’s judicial pressure

Posted on : 2013-03-06 15:49 KST Modified on : 2019-10-19 20:29 KST
Conglomerates now preparing to respond to changing climate of tougher legal penalties for illegal acts
 the Seoul headquarters of SK Group
the Seoul headquarters of SK Group

By Kim Jin-cheol and Lee Jeong-hun, staff reporters

The Kolon Group is shutting down its bakery franchise.

On March 4, chairman Lee Woong-geul gave away his 19.97% stake in Sweet Meal to Flower and Little Prince, a scholarship foundation affiliated with the group. Sweet Meal is an eatery affiliate that runs the Beard Papa bakery franchise.

Operated out of small stores based in department stores, the bakeries escaped relatively unscathed from the recent furor over chaebol running bakeries. Recently, the Lotte Group handed one of its affiliates a theater side business that had previously been funneling work to chairman Shin Kyuk-ho’s daughter and other family members.

While Kolon and Lotte took preemptive steps to avoid charges of funneling work to affiliates and crowding out small businesses, it was government intervention that muscled the Shinsegae Group into regularizing its temporary workers. Emart, a superstore run by the group, hired ten thousand of its temporary employees on full time after the government investigated it and demanded that it either stop using illegal subcontracting workers or regularize them. Meanwhile, the Hyundai Group, whose name is virtually synonymous with illegal temporary employment, is now moving to purge the longstanding stigma by abolishing its four-decade tradition of 24-hour shifts.

More and more chaebol are also putting an end to their practice of funneling work to affiliates. The change has been particularly evident in advertising and systems integration. SK Innovation plans to hold competitive bidding to select a company for a new advertising push that begins that this May, opening up an opportunity for an outside firm to do work that was previously handled by the group‘s advertising company SK Marketing. Indeed, this is the first time the group has solicited outside bids since SK Marketing was formed in 2008. The Hyundai Group is also planning to hold bidding for advertising that was handled almost exclusively by its affiliate Innocean in the past.

While hordes of food companies were moving to take advantage of the change in presidential administrations to raise their prices, the CJ Group recently took the opposite approach. After President Park Geun-hye called for price stabilization, the group responded by lowering its factory price on sugar by 4% to 6%.

The quick about-face from chaebol that had previously stood firm against heavy fire from the public appears to be due to recognition that the new environment will not allow them to hold out any longer. Observers are predicting that the new Park administration is going to apply major pressure on them in its early going. Indeed, the pressure is already starting, with the National Tax Service imposing taxes on internal transactions exceeding 30% and planning extensive tax audits. The Fair Trade Commission is conducting large-scale inspections on internal transactions and funneling, with plans under way to publish quarterly reports on the former and return all illicit gains made through the latter.

But what really lit a fire under the chaebol’s feet was a prison sentence against a chaebol chief. The fate of SK Group chairman Chey Tae-won, who was sentenced to jail time and put in court custody early last month, sounded an alarm in the business community. A senior executive at one of the country’s top four groups explained, “In the past, [chaebol] chairmen always got off with the same ‘three years’ jail time suspended for five years’ sentence because of their contributions to the economy or the management vacuum, but it looks like things have changed a lot.”

Indeed, while Lee Kun-hee and Chung Mong-koo, the respective chairmen of Samsung Electronics and Hyundai Motor, each received presidential pardons in the past after being released with suspended sentences, three chaebol heads have ended up behind bars just in the last year.

What chaebol fear the most is an attack at the top. Another senior executive with a top-four group said, “Groups are more scared of their chairmen being arrested than they are of financial losses. They’ll take any financial loss so long as they can avoid an incarceration.”

Many analysts said that avoiding legal liability was the primary reason that Samsung Electronics vice chairman Lee Jae-yong unexpectedly declined to take on a directorship and Shinsegae vice chairman Chung Yong-jin opted to give up his own.

Some observers said that the recent actions by the business world show that economic democratization through the court system is a much more effective approach than any pressures from the new administration could be.

Kim Ki-won, a professor of economics at Korea National Open University, said a combination of pressures by the Park administration - reminiscent of the tactics of her father Park Chung-hee’s government - and the imprisonment of chaebol chairmen due to stricter sentencing guidelines seemed to be driving the change. At the same time, he added that the government pressures were not a permanent solution.

“We need to go beyond sentencing guideline changes, which judges have the discretion to change, and give real fangs to the Act on the Aggravated Punishment etc. of Specific Economic Crimes,” Kim said. “We have to create a system where chaebol chairmen who commit major crimes go directly to jail.”

 

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