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Korean Air chairman's death creates leadership vacuum at Hanjin

Activist fund seeks to pry control from founding family's hands

Cho Won-tae, president of Korean Air Lines, is next in line to take over Hanjin Group, but activist investors are trying to stop the tradition of hereditary leadership.   © Reuters

SEOUL -- The sudden death of Chairman Cho Yang-ho Sunday has left South Korea's Hanjin Group without a leader, with his eldest son's succession far from certain as an activist shareholder presses the scandal-ridden conglomerate to end family management.

The group owns Korean Air Lines and other transport companies through holding company Hanjin KAL. It is infamous, however, for 2014's "nut rage" incident, in which Cho's eldest daughter forced a plane back to the gate after becoming upset at how she was served macadamia nuts. The chairman himself was accused of embezzlement last year.

Activist investor and second-largest shareholder Korea Corporate Governance Improvement (KCGI) moved to increase its stake in the conglomerate after Cho's death was announced Monday. The fund, run by former securities analyst Kang Sung-boo, has built up its position in the company since the fall and requested governance reforms at Korean Air, viewing the string of family scandals as providing an opening.

Korean Air shareholders ousted Cho from the board at their annual meeting March 27, an usual move in which KCGI played an indirect role. The activist fund expanded its holdings in Hanjin KAL after that decision as well. Altogether, the fund had raised its stake to 13.47% as of Monday from 10.71% in late December.

Cho's death comes too early for Hanjin Group given that the succession of his eldest son, Cho Won-tae, the president of Korean Air, has not been finalized.

As other South Korean conglomerates, or chaebol, passed the reins from the second generation of family leaders to the third, Cho remained at the helm of Hanjin KAL until nearly the end of his life. That reality is also reflected in the family's shareholdings, with Cho's 17.84% stake dwarfing his son's 2.34% share.

 

Korean Air Chairman Cho Yang-ho, seen here at a court hearing in 2018, died suddenly on April 8.   © Reuters

Hanjin Group said Monday that it had adopted an emergency management arrangement that will leave the chairmanship vacant for now and entrust decisions to a collective leadership made up of several top executives from group companies. It will likely move to install Cho Won-tae as leader.

The 43-year-old's leadership skills are as yet unproven, however. "The elder Cho and professional executives have been in charge of management until now, so his achievements as president of Korean Air are unclear," said a South Korean securities analyst.

Korean Air has struggled over the last five years, posting only one annual net profit, in 2017. Financial support for Hanjin Shipping, which entered bankruptcy protection under Cho's younger brother, and real estate and other poor investments have weighed on earnings.

Although the conglomerate is not thought to be facing the financial difficulties of Kumho Asiana Group, whose chairman recently resigned after an auditing controversy, investors are demanding a lighter debt burden. Korean Air's debt-to-equity ratio stood at over 1,000% in 2017, and although that had shrunk to 744% last year, the figure is still higher than regional peers like Singapore Airlines.

The group has failed to chart a convincing path to growth. Its midterm management plan from February targets annual sales of 22 trillion won ($19.3 billion) in 2023, compared with 16.5 trillion won in 2018, and an operating margin of 10%. The report did not provide a concrete strategy, however, while dodging shareholder pressure for transparency and other reforms.

The future of Cho's stake in Hanjin KAL is also unclear. The Cho family -- including Won-tae and daughters Hyun-ah and Hyun-min -- owns 28.95% of the holding company. Cho Won-tae may have to sell off a portion of those shares to pay South Korea's estate tax of up to 50%, however, decreasing the group's number of stable shareholders.

 

Korean Air Lines' headquarters in Seoul. Parent company Hanjin KAL is owned by the Cho family, who have been at the center of several controversies in recent years.   © Jiji

That would be a boon for KCGI as it scoops up more Hanjin KAL shares. The activist fund will be able to significantly close the gap with the Cho family should it team up with the National Pension Service, which rounds out the top three shareholders with a stake of over 6%.

Cho Won-tae will be up for reelection to the group's board next year, but KCGI will likely oppose his bid -- a widely held view that sent the stocks of Hanjin KAL and Korean Air up Monday as investors pin their hopes on governance reform.

Corporate management is often a family affair in South Korea -- only a few companies such as steelmaker Posco reject the hereditary system -- but the tradition seems to be reaching its limit.

The latest handover from second generation to third is widely seen as the practice's last breath. A large reason is that investors look down on family management because it lacks transparency and is often abused by relatives. Inheriting the necessary shares is also expensive due to the hefty estate tax.

Some founders are already passing the company reins on to professionals, such as the head of internet company Naver. The founder of game publisher Nexon has decided to sell a controlling stake in holding company NXC. Biopharmaceutical company Celltrion said professional managers will replace the founder when he retires next year.

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