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Lotte boss's prison term tests South Korea's faith in 'chaebol'

Samsung heir is free again, but at what cost to the country's reputation?

Lotte Chairman Shin Dong-bin, center, who was charged with bribery, arrives at the Seoul Central District Court in Seoul, South Korea, on Feb. 13.   © Reuters

SEOUL A prison sentence handed down to Lotte group Chairman Shin Dong-bin has put South Korea's conglomerates on edge, again, days after the release of Samsung heir Lee Jae-yong had many executives breathing sighs of relief.

Shin, who also goes by the Japanese name Akio Shigemitsu, was sentenced on Feb. 13 to 30 months for paying off a foundation controlled by a confidante of former President Park Geun-hye to secure political favors. At the time, Lotte was seeking a government license to run duty-free shops.

The chairman is the second son of Shin Kyuk-ho, or Takeo Shigemitsu, who founded Lotte in Japan.

Lotte is a chaebol, one of the sprawling family-run conglomerates that dominate South Korea's economy. It is a formidable player in the retail, entertainment and petrochemical sectors. These conglomerates are under ever more pressure to change as politicians and the public became more critical of their all-encompassing influence.

The court's decision against Shin came as a surprise after Lee's release on Feb. 5. The Samsung Electronics vice chairman had his five-year sentence for bribery cut in half and suspended.

Both Samsung and Lotte were accused of bribing the foundation operated by Choi Soon-sil, the woman at the center of the influence-peddling scandal that led to President Park's impeachment. But observers said the case against Lotte was more clear-cut.

In Lee's trial, prosecutors alleged that Samsung provided cash to win the government's support for a merger between group companies -- a merger that enabled a smooth leadership transition to Lee, the son of Samsung Chairman Lee Kun-hee. The court dismissed the allegation.

Lotte, in contrast, was the only company that provided funds to Choi's foundation more than once. This made it easier for prosecutors to argue that the conglomerate committed bribery with the clear objective of obtaining the duty-free license.

Shin's imprisonment has cast a shadow over Lotte's core operations. Moody's Investors Service on Feb. 14 said the ruling is credit negative for key listed subsidiary Lotte Shopping. Although the short-term impact may be limited, the sentence "will increase uncertainties over Lotte Shopping's long-term strategic planning and decision-making at the highest management level, including the sale of its hypermarket operations in China," said Wan Hee-yoo, vice president and senior credit officer at Moody's.

Lee Jae-yong, vice chairman of Samsung Electronics, at a parliamentary hearing in Seoul in December 2016.   © Getty Images

Also on Feb. 14, Shin met with Lotte group Vice Chairman Hwang Kag-gyu in jail and reportedly told him that under the circumstances, stability in management is crucial. The chairman urged Hwang to maintain close communications with business partners to reassure them.

NO MORE TRUST In the broader business community, the court's decision has caused much consternation. "What on earth should businesses do?" asked one senior corporate executive.

Government officials have a history of pressing businesses -- especially cash-rich family conglomerates -- to provide financial support for all kinds of policy objectives, from aiding startups to promoting sports and culture.

"We don't think about rewards," said a former president of a big South Korean company. "The only reason we provide money [for the government] is that we fear offending [policymakers] by refusing such requests."

Many executives at large companies had welcomed Lee's release. "This will make it easier for us to maneuver," one said.

But the Lee decision also unleashed a wave of public anger. In just three days, more than 200,000 citizens signed a petition on the president's official website calling for an assessment of the judge who freed Lee.

Both the government and the judiciary are sensitive to public opinion, and a senior official at a South Korean economic newspaper suggested the public backlash against the Lee ruling may have influenced the Shin case.

The takeaway, from the conglomerates' perspective, may be that playing ball with the government has become too risky.

But with all this going on, there is another pressing question: Should convicted corporate leaders be allowed to take back the reins of their business empires?

Soon after Lee's Feb. 5 release, the Chosun Ilbo newspaper reported that Samsung was preparing for him to resume leadership.

Current President Moon Jae-in takes a tough line on crimes committed by heads of the country's chaebol. But many South Koreans believe that even if Lee's conviction is upheld by the Supreme Court, he will eventually be pardoned.

Their expectations are based on many precedents. For example, Lee's own father, Samsung Chairman Lee Kun-hee, was pardoned so he could help with South Korea's bid to host this year's Winter Olympics.

Chey Tae-won, the chairman of SK group, another powerful chaebol, was also pardoned. Both were said to have been rewarded for their contributions to South Korea's national image and economy.

TOO BIG TO JAIL These pardons are commonplace in South Korea due to the country's unique political environment. Because of an intense rivalry between conservatives and liberals, "business leaders who cooperated with the previous administration often face criminal charges when a new administration takes over," said the head of a private-sector think tank.

But conglomerates dare not defy whoever controls the government at the time, since it could set them back when applying for business licenses and undertaking other activities. The public tends to accept the return of a disgraced corporate executive as part of this pattern.

Overseas critics are less forgiving. Many think corrupt chaebol leaders are getting off with little more than a slap on the wrist.

"There are almost no examples among developed countries where a convicted chief of a well-known, publicly traded company is reinstated to his post," said Isao Sakai, who heads the Tokyo-based consultancy ProNed.

"If Lee returns, foreign investors will likely have doubts about Samsung's stance on compliance," Sakai added.

There needs to be a system in place that prevents convicted corporate leaders from retaking control of their companies, said Seoul National University professor Park Sang-in. An expert on chaebol reform, Park proposes delisting any company that reinstates a convicted leader.

There may be further debate on these practices if the conviction of Lotte's Shin Dong-bin stands. But some in the South Korean business community believe the problem, rooted in the tangled ties between business and politics, is too big for companies to solve on their own.

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