Plans to succeed businesses to the third generation have proven difficult for some founding families in South Korea. Such is the case for two of the country’s largest conglomerates – Samsung and Hyundai.
The term ‘chaebol’ refers to large business groups in Korea. It is a collective of legitimate firms where all affiliations maintain strong connections under a controlling shareholder of the group, called a ‘chonsu’ or chairman. Samsung and Hyundai are examples of such enterprises.
Securing the main shareholder position in the core company of a group has been the major issue in business succession plans because the position-holder controls all affiliates of a group through complex ownership structures.
Samsung planned to succeed the controlling position to Lee Jae-yong, the only son of Lee Kun-hee, by strategically appointing him to a senior position in Samsung Electronics in 2001 at the age of 33. The plan comprised of three stages:
- securing seed money to increase equity shares and the controlling position,
- strengthening the foundation to control all affiliates through mergers, and
- converting to a holding company, which includes establishing a finance holding company, to ensure that the successor controls all affiliates.
The plan, however, was unexpectedly expedited following his father’s hospitalisation in 2014. It has since been challenged due to Lee’s involvement in a political bribery scandal and obstruction by international investors. Non-government organisations and academics have also criticised him for receiving a tax-free inheritance in the process of the first step in 2014.
The market value of Lee’s shares, which amount to 17 per cent of issued shares, is around USD 7 billion, compared to his initial investments of USD 6 million 20 years ago – a return of approximately 15,900 per cent. As a result, Lee became the third richest person in Korea.
Elliott Management Corporation, a US-based activist investment company, opposed Samsung’s plans to merge two of its affiliates in 2015-2016, arguing that this was deliberately designed to favour the Samsung family at the expense of shareholders.
Despite the opposition, the merging plan was successfully completed. However, former senior government officials were jailed for their illegal involvement in the National Pension Service (NPS) – one of the largest single shareholders of the companies – during the process. Following this incident, the Korean government adopted the Korea Stewardship Code which affects the Fund’s intervention of chaebol’s governance practices. Lee was also imprisoned for a year on suspicions of bribing former President Park Keun-hye – who is herself currently serving 23 years – to gain her approval for Samsung’s succession plan. As a result, their business succession plan has come to a halt without progressing to its final stages.
Hyundai Motor Group is composed largely of Hyundai Motor, Kia Motor, and Hyundai Mobis. The corporation announced its plans in April 2018 to improve their governance structure where Mobis will play a pivotal role in the process of eliminating circular cross-ownership.
Chung Eui-son, the son of chairman Chung Mong-ku, is one of the largest shareholders in Mobis. Though Chung Mong-ku has to pay around USD 1 billion in taxes, Hyundai’s plan is to avoid a holding company system. This is to keep the synergy from credit provisions to consumers generated by Hyundai Capital Co. and for the flexibility of expected mergers and acquisitions through Hyundai and Kia Motor Vehicles.
Hyundai’s succession plan includes shareholder-friendly measures, such as the increase in share value by forfeiting its own shares – approximately USD 1 billion – and 30-50 per cent of dividends from surplus cash flows. They also plan on strengthening shareholder rights by appointing an external director with the view to establishing a committee that will improve transparency in management.
This succession plan, however, is also opposed by Elliott Management. Though it holds true the spirit of governance reform by streamlining power and removing cross-ownership, the management firm criticised the absence of a long-term plan that focuses on shareholder wealth. Consequently, Hyundai decided to postpone the succession plan until 22 March 2019 when the board selected Chung Eui-son as the CEO of Hyundai Motor and Hyundai Mobis respectively. Though Chung Mong-ku still remained chairman of Hyundai, the title of CEO (and internal board appointments at Kia and Hyundai Steel) will enable Chung Eui-son to control the whole group.
Both Samsung and Hyundai’s succession plans eliminate some circular cross-ownership among affiliates. In addition, both have publicised specific measures to increase shareholder wealth. This is a substantial improvement on past traditions where illegal business succession to the next generation was the norm.
The succession plans adopted by two of the greatest chaebol groups have rekindled the debate on governance issues surrounding business succession. Indeed, the Korean government adopted Korean Stewardship Code for these business successions of the two largest chaebols. This adopted Stewardship is similar to the one released in the UK in 2010 aiming to protect (minor) capital providers and sustainability of organisations, however the current liberalistic Korean government expected the NPS, as the largest shareholder of most chaebols, to exercise their shareholder rights more actively to improve corporate governance practices of chaebols. In contrast, some commentators including opposition parties expressed their concerns that the adopted Stewardship Code in the state-run NPS could be instrumented by ‘government’ to intervene chaebols’ strategic decisions which may diminish their investments and entrepreneurships in the domestic market. Scholars usually point out benefits of global competition such as improving efficiencies and information spill-overs. The noticeable activities of global hedge funds along these sustained business succession plan, however, provoked some nationalistic sentiments. At the AGM of 22 March 2019, for example, Elliott requested the Hyundai (Mobis) dividend of 21,967 (26,399) won per share compared to the proposed 3,000 (4,000) won by the companies. This request caused other minority shareholders to suspect the real intention of Elliott could be harmful for the companies’ investment plan for long-term competitiveness.
Some observers propose that strengthening of the anti-takeover rules should be made in order to ensure a level playing field for domestic firms and foreign hedge funds.
Dr Byung-Seong Min is a senior lecturer in the Department of Business Strategy and Innovation and member of the Griffith Asia Institute.
