beyondbrics

Kim Jong-il, North Korea’s dictator, tends to grab the headlines as the root-cause of the “Korea discount”. But unfortunately there’s another factor at play: corporate responsibility.

If Jeffrey Skilling, the former Enron chief executive, was South Korean, you could imagine him back at his desk, taking key decisions. And can shareholders in Korea stop that kind of thing happening? Don’t be silly.

Shareholders are not consulted on “family” matters like the return of a criminally convicted boss.

South Korea’s public knows this is an ugly problem and is welcoming moves by one big stock market investor, the National Pension Service, to form a neutral panel that can start to hold companies to account.

It will be interesting to see how the NPS gets on because the signs are that the government is still – deep down – soft on serious corporate corruption.

Lee Myung-bak, the president, gave a Christmas pardon to Lee Kun-hee, the chairman of Samsung Electronics, who had been found guilty of serious financial crimes.

South Korea has also given a plum job to Chey Tae-won, chairman of the SK Group. Chey spent time in jail for manipulating accounts; it is hard to imagine him flourishing again on the public stage in Europe or the US. But in Korea he’s been appointed as the convener for a high-profile business summit linked to the Seoul G20 meeting due to take place in November.

In Korea, corrupt bosses are allowed to preserve “face”, particularly among foreigners, who are considered ignorant about the murky heart of the family conglomerates, or chaebol. And it’s true that foreign investors – and indeed most Koreans – know precious little about how the chaebol really work, particularly given the lack of information in their annual reports.

The truth is that for now they probably don’t care much either, because the chaebol look highly profitable again and seem to respond well to strong family leadership, regardless of whether that leadership comes from a convicted criminal.

But the Korean market is prone to volatility, as the FT reports today, and when times get tough attitudes are likely to change. Foreign investors know that such clan-run businesses won’t give them the full story about how they’re faring. So they often feel it’s safer to park their capital somewhere else.

That’s probably one reason why foreign investment has not quite kept pace with the market in South Korea.

So, what is the president doing on the corporate governance front? He is very proud of his committee on “national branding”, which is meant to make people think better of Korea and not associate it with the engrained corruption that catalysed the meltdown of 1997.

In truth, people will only start to have real faith in Korean corporate responsibility when convicted bosses do their full jail terms and then stay out of corporate life. Shareholders could even be allowed to decide on the most suitable successor – and pick one from another family.

Related reading:
South Korea to pardon businessmen, FT
Hyundai and the ghost of crony capitalism, beyondbrics