South Korean Chaebols and Value-Based Management
- 518 Downloads
South Korean industrial conglomerates (chaebols) are discussed in the context of value-based management (VBM). Recent economics and finance literature on the diversion of corporate resources from the firm to the controlling shareholders (tunneling), for which chaebols are notoriously known, is discussed. Chaebols have engaged in empire building and expropriation of minority shareholders, distorting the process of efficient resource allocation in South Korea, and became the root cause of the 1997 financial crisis. We argue that the 1997 crisis should be viewed as a consequence of chaebols’ systematic deviation from the guiding principles of VBM. We use tunneling within chaebols as an example of the need to directly address prohibition of the expropriation of minority shareholders as a primary postulate of VBM. We argue that VBM should require that the value generated by the firm not be expropriated from minorities, or any stakeholders, by dominant shareholders. We also examine moral and ethical considerations and present explanations as to why the unethical practice of tunneling has been tolerated by the South Korean public. We show that public opinion on tunneling is changing and that the treatment of minority shareholders by chaebols’ controlling families is becoming increasingly unacceptable to South Koreans.
Keywordschaebols governance minority shareholder expropriation tunneling value-based management
Unable to display preview. Download preview PDF.
The authors would like to thank Joyce Silberstang and Bruce Swensen for their help with the paper.
- Baumol, W.: 1959, Business Behavior, Value and Growth (MacMillan, NY).Google Scholar
- Bebchuk, L., R. Kraakman and G. Triantis: 2000, ‘Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Creation and Agency Costs of Separating Control from Cash Flow Rights’, in R. Morck (ed.), Concentrated Corporate Ownership (University of Chicago Press, Chicago, IL)Google Scholar
- Berle, A. and G. Means: 1932, The Modern Corporation and Private Property (MacMillan, NY).Google Scholar
- Bison, T. A.: 1954, Zaibatsu Dissolution in Japan (Greenwood Press, Westport, CT).Google Scholar
- Black, B. and W. Kim: 2008, ‘The Effect of Board Structure on Firm Value: A multiple Identification Strategy Approach Using Korean Data’. SSRN Working Paper, http://ssrn.com/abstract=968287.
- Chung, K. H. and H. C. Lee: 1989, Korean Managerial Dynamics, (Praeger Publishers, NY).Google Scholar
- Chung, K. H., H. C. Lee and K. H. Jung: 1997, Korean Management: Global Strategy and Cultural Transformation, (Walter de Gruyter, Berlin).Google Scholar
- Johnson, S., R. La Porta, F. Lopez-de-Silanes and A.␣Shleifer: 2000, ‘Tunneling’, American Economic Review Papers and Proceedings 90, 22–27Google Scholar
- Khanna, T. and K. Palepu: 2000a, ‘Emerging Market Business Groups, Foreign Investors, and Corporate Governance’, in R. Morck (ed.), Concentrated Corporate Ownership (University of Chicago Press, Chicago, IL)Google Scholar
- Kim, K.-W.: 1999, Chaebol Gaehyeogeul Dulleossan Jaengjeom (Issues in Dispute Concerning Chaebol Reform). Conference Presentation at the Korea Social and Economic Studies Association and Korea Social Science Institute, 20 November, SeoulGoogle Scholar
- Kim, J.: 2000, ‘Recent Amendments to the Korean Commercial Code and Their Effects on International Competition’, University of Pennsylvania Journal of International Economic Law 21, 273–329.Google Scholar
- Kim, J. and J. Kim: 2001, ‘Shareholder Activism in Korea: A Review of How PSPD Has Used Legal Measures to Strengthen Korean Corporate Governance’, Journal of Korean Law 1, 51-76.Google Scholar
- Kim, E. H. and W. Kim: 2007, Corporate Governance in Korea: A Decade after the Asian Financial Crisis. The University of Texas School of Law, Law and Economics Research Paper No. 123Google Scholar
- Kim, E. H., M. K. Kim and J. Yi: 1998, Economic Value Added (EVA) of the Listed Companies. The Korea Stock Exchange Report 98-01Google Scholar
- Lim, Y.: 1999, Technology and Productivity: The Korean Way of Learning and Catching up, (Cambridge: The MIT Press).Google Scholar
- Morck, R., D. Stangeland and B. Yeung: 2000, ‘Inherited Wealth, Corporate Control and Economic Growth: The Canadian Disease’, in R. Morck (eds.), Concentrated corporate ownership (University of Chicago Press, Chicago, IL).Google Scholar
- Park, Y. C. and J. W. Lee: 2002, ‘Recovery and Sustainability in East Asia’, in M. Dooley and J. Frankel (eds.), Managing Currency Crises in Emerging Markets. Chicago: University of Chicago Press.Google Scholar
- Rho, H. K.: 2004, From Civil Society Organization to Shareholder Activist: The Case of the Korean PSPD, Brunel University Research in Enterprise, Innovation, Sustainability and Ethics Working Paper No. 15.Google Scholar
- Shik, K. B.: 2004, ‘Korean Corporate Culture and Malaysia’s Look East Policy Expectations’, Malaysian Management Review 39(1)Google Scholar