Korea’s family-owned conglomerates, known as chaebol, have enjoyed their privileges for decades. Their dominance and entitlement have diminished in recent years and may be further on the wane, writes Michael Carney of the John Molson School of Business at Concordia University in Canada.
Growth drivers: Korea’s huge mostly family-owned conglomerates such as Samsung powered the economy's surge and continue to dominate (Credit: Koji Uema)
Lee Jae-yong was halfway through a five-year jail sentence for fraud, embezzlement and bribing Korea’s then-president when he was granted a special presidential pardon in August 2022. Lee, scion of the family that controls the multi-billion-dollar Samsung corporation and chief operating officer of Samsung Electronics, was jailed in 2018 for offences including embezzling company funds to buy a US$800,000 horse for the daughter of a friend of the then-president Park Geun-Hye. The government justified the decision by claiming that Korea's most significant company needed him back at the helm to boost Samsung's flagging performance. He was duly appointed Samsung executive chairman not long after his release from jail.
Known as the chaebol, Korea’s huge mostly family-owned conglomerates, which include Samsung, Hyundai and LG Group, powered the country’s surging economic growth between 1961 and 1997 and continue to dominate the domestic economy. Public sentiment toward the chaebol is mixed: While there is pride in their economic success, there is also widespread animosity toward them. While the middle classes seek to place their highly educated children in the chaebol, they view the companies as corrupt, thwarting social justice while many family owners behave as if they are above the law.
This ambiguity in perspective extends to the government. In the past two decades, successive governments have sought to limit chaebol dominance. Targeting the wealthiest families, Korea levies some of the world's heaviest estate taxes, as high as 65 percent, when inherited assets belong to a family with a controlling firm share. The Korea Corporate Governance Improvement (KCGI) Fund and the National Pension Service are building up equity stakes in chaebol firms. They play an active role in defending the interests of minority shareholders and opposing self-serving decisions by family majority owners. Yet, governments have broadly protected and enabled the more successful business groups. Commuting prison sentences is commonplace for the family members of Korea's major business groups.
Concentrated ownership of conglomerates creates tension in mid-sized industrial economies such as Korea. There are advantages to having powerful large-scale businesses that can compete successfully in international markets. Domestically, however, the dominance of the chaebol appear to have detrimental consequences. Korea has only one representative (Samsung Electronics) in the World Investment Report's Top 100 non-financial multinational enterprises (China has 10 and Japan nine).
The government's simultaneous support and constraint of chaebol may be rightly balanced. For more than 30 years, Korea pursued a heavily subsidized export-oriented development strategy. The mid-1990s represented the high point of the chaebol's economic success. But the 1997 Asian financial crisis undermined the position of the most highly leveraged chaebol. Ten of the top 30 in 1997 were bankrupt and dissolved by 2003, including fourth-ranked Daewoo. Subsequently, Chinese competition in manufacturing industries has reined in the surviving chaebol. Many chaebol firms now face a precarious future.
Consider Hanjin’s trajectory. The owner of Korean Air Lines (KAL) and Hanjin Heavy Industries, a major shipbuilder, Hanjin attracted global infamy in 2014 with the “nut rage” incident. Heather Cho, a KAL vice-president and daughter of Hanjin Chairman Cho Yang-ho, scolded and repeatedly struck a flight attendant who served her macadamia nuts in a canned package instead of warmed on a plate when departing JFK airport in New York City. Cho then ordered the chief flight attendant off the plane, requiring it to taxi back to the airport's gate. She was convicted of coercion and abuse of power and was made to serve five months in prison. Four years later, her younger sister would come under fire for a similar incident when she allegedly splashed hot water and shoved a subordinate.
In 2018, activist investor KCGI increased its holdings in KAL and engineered the Cho family leadership handover to a shareholder-appointed chief executive. In April 2019, KAL's chairman and chief executive Cho Yang-ho died suddenly at age 70, leaving his son Cho Won-tae with a ruinous estate tax estimated at US$149 million, shrinking the bereaved family's ownership stake in the group. Estate taxes and inheritance laws threaten the chaebol's dynastic intentions by limiting father-son succession.
Hanjin made risky investment bets with disastrous consequences. Hanjin Heavy Industries attempted to corner the booming market for giant container ships, building a US$2.3 billion facility at Subic Bay in the Philippines in 2006. In October 2018, Hanjin delivered the world's largest container ship, the Antoine de Saint-Exupéry, to French shipping company CMA-CGM. In January 2019, Hanjin Philippines abruptly declared bankruptcy and closed the Subic Bay facility, throwing 28,000 people out of work. Despite low wages in the Philippines, Hanjin could not stay competitive with lower-wage rivals from China.
Not all chaebol are as fragile as Hanjin. Samsung remains vital, while the midsized Hanwha Group, which is in a diversified range of businesses including explosives, its original niche, energy, materials, aerospace, finance, retail and lifestyle services, has flourished recently. As for new groups such as Korea’s Google-style tech and media companies Naver and Kakao, their founders have publicly rejected any intentions and expressed commitment to adopting professional management.
The combination of low-cost international competition in legacy industries, activist government investors, aggressive inheritance and estate taxes, and inappropriate and illegal or criminal behavior of family members, along with the tenuous succession of privileged third-generation family members may signify a further dwindling of the power of Korea's family chaebol.
This article is published under Creative Commons with 360info.
Schwak, Juliette. (November 22, 2018) “When Public and Private Merge: South Korea and the Chaebol”, AsiaGlobal Online, Asia Global Institute, The University of Hong Kong.
Shastry, Vasuki. (March 4, 2021) “An Asian Century Is A Long Way Off”, AsiaGlobal Online, Asia Global Institute, The University of Hong Kong.
Tejada, Carlos. (February 17, 2017) “Money, Power, Family: Inside South Korea’s Chaebol”, The New York Times, New York, NY, USA.
John Molson School of Business, Concordia University