Lee Jae-Young 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, heir to the multi-billion dollar Samsung corporation and a former chief executive, was jailed in 2018 for offences including embezzling company funds to buy a $USD800,000 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 not long after his release from jail.
Known as the chaebol, these family-owned conglomerates, which include Samsung, Hyundai and LG Group, powered Korea's surging economy between 1961 and 1997 and continue to dominate Korea's domestic economy.
However, public sentiment toward the chaebol (a group of massive, mostly family-run business conglomerates) is ambiguous: 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 them as corrupt, thwarting social justice, while many family owners behave as if they are above the law. This ambiguity 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 broadly protect and enable 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, the chaebol appear to have a dangerous dominance. Yet 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 looks to have the balance right.
For more than 30 years, Korea pursued a heavily subsidised 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 chaebols. Many chaebol firms now face a precarious future.
Consider Hanjin’s trajectory. The owner of Korean Air Lines 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 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 then served five months in prison.
Hanjin also made risky investment bets with disastrous consequences. Hanjin Heavy Industries attempted to corner the booming market for giant container ships, building a USD$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 Exupery, 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.
A few months later, activist investor KCGI increased its holdings in Korean Airlines and engineered the Cho family leadership handover to a shareholder-appointed chief executive. In April 2019, KAL's Executive Chair Kal Cho Yang-ho died suddenly aged 70, leaving his son Cho Won Tae with a ruinous estate tax estimated at USD$149 million, shrinking the bereaved family's ownership stake in the group. Estate taxes threaten the chaebol's dynastic intentions by limiting father-son succession.
Not all chaebol are as fragile as Hanjin of course.
Samsung remains vital, and the midsized Hanwha Group has flourished recently. The founders of Korea’s Google-style tech and media companies, such as Naver and Kakao have publicly rejected their dynastic intentions and expressed commitment to adopting professional management.
However, the combination of low-cost international competition in legacy industries, activist government investors, aggressive inheritance and estate taxes, the often decadent behaviour of chaebol family members, along with the tenuous succession of privileged third-generation family members may signify the coming twilight of Korea's chaebol.
Michael Carney is a Professor at John Molson School of Business, Concordia University, Montréal, Québec Canada and Concordia University Research Chair in Strategy and Entrepreneurship. His research focuses on entrepreneurship and the comparative analysis of business, financial and governance systems and their influence upon the development of firm capabilities and national competitiveness.
Dr. Carney declared he has no conflict of interest and did not receive any specific funds.
