SEOUL -- Despite some moves toward reform, opaque management practices are still rampant among major South Korean conglomerates, with many owners continuing to wield enormous influence from behind the scenes.
Owners of South Korean conglomerates, or chaebols, are not held responsible for management decisions under the country's commercial law, making it difficult for shareholders to punish them for mistakes.
Still, conglomerates are facing growing pressure to reform their management structures, especially from foreign institutional investors, as many have seen their stock prices sag recently.
A recent report by the Korea Fair Trade Commission, which conducted a survey in 2015, highlighted the lack of management transparency at many conglomerates. The report showed that 13, or about 30%, of 40 major conglomerates have owners who do not serve as board members for any group company.
Who's in charge?
Hyundai Heavy Industries is one of the minority of chaebols whose ownership and management are separate. At many others, the owner acts as chairman of the board or takes another management role without assuming the formal responsibility a board seat.
Samsung Electronics is a prominent example of this more common setup. Lee Kun-hee is Samsung's second-generation chairman; his eldest son, Lee Jae-yong, is vice chairman. The younger Lee acts on behalf of his ailing father. Neither is a board member.
But Samsung cannot make decisions on important matters such as large-scale investments, changes in senior management or reorganization of group companies without the younger Lee's approval. The vice chairman also plays host to foreign heads of state and top leaders of big foreign companies.
A merger between Samsung C&T and Cheil Industries, both Samsung group companies, was approved at an extraordinary meeting of Samsung C&T shareholders last July, following a proxy battle with U.S. fund Elliott Management.
Elliott, which was a shareholder in Samsung C&T, opposed the merger, claiming the company's board accepted an unfavorable share swap ratio, putting the interests of the founding family ahead of those of the company.
Some Samsung C&T shareholders supported Elliott at the meeting. Even one who voted in favor of the merger said: "I support the company's proposal out of patriotism, but Elliott's argument is reasonable."
In 1998, the South Korean government instructed conglomerates to clarify their management responsibilities by having owners serve as board members. This order followed the outbreak of the Asian financial crisis.
At the time, Lee Kun-hee, Samsung's chairman, became the company's representative director. But he resigned in 2008 after being indicted on criminal charges, including breach of trust and tax evasion. Lee returned to Samsung as chairman in 2010, having been pardoned, but he did not rejoin the board.
Samsung is to hold a regular shareholder meeting on March 11. The agenda will include amending the company's articles of incorporation to enhance its corporate governance. Under the current rules, the representative director is supposed to serve as chairman of the board. A proposed amendment will allow an outside director or the representative director to assume that role. That is a very small change, but it is expected to let in some fresh air into the boardroom if it passes.
Samsung is South Korea's largest and, many would argue, its most important business group. But it is a laggard in corporate governance. Despite effectively being in charge as Samsung's vice chairman, Lee Jae-yong appears to be shying away from bold reforms while his father remains alive. What will happen after the elder Lee passes from the scene is anyone's guess.