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| Kim Sang-jo | Jang Ha-sung |
By Yoon Ja-young
President Moon Jae-in's nomination of two professors nicknamed "chaebol snipers" to key posts is obviously unnerving the country's conglomerates.
The two have been toning down their criticism of chaebol recently, although the market expects reform is inevitable. These expectations are pulling up the companies' share prices as reform will lead to a better corporate governance structure and get rid of elements undermining their stocks.
Professor Kim Sang-jo from Hansung University and professor Jang Ha-sung from Korea University have been two of the main pillars in the country's activism against the chaebol-dominated economy. The former was nominated to head the Fair Trade Commission (FTC) and the latter was named as the presidential chief of staff for policy.
Both worked with the People's Solidarity for Participatory Democracy, the country's leading civic group, engaging themselves in activities to reform chaebol. They especially took issue with the groups' complicated governance structure, which enabled the owner family to control the entire conglomerate with only a small stake, at the expense of small shareholders.
They also criticized chaebol's unfair deals among affiliates to fatten the wallets of the owner family, as well as handing over managerial control within the family using legal loopholes.
President Moon's chaebol reform plan is expected to gain momentum with the nominations of the duo. Shifting from a conglomerate-centered economy, the new administration is seeking to provide fair opportunities for small- and medium-sized businesses.
However, the two professors have reduced their criticism of late, asking the media not to call them by their nicknames."
"If we impose compulsory measures on chaebol, it will only worsen problems if they aren't accompanied by the growth of small- and medium-sized businesses," Jang said. He also stressed conglomerates' role in job creation.
"I don't think clobbering is the right expression for chaebol reform," he added.
In joining the Ahn cheol-soo camp in the 2012 presidential election, he said he wished to be called "a companion of chaebol, not a sniper."
Even so, the market expects conglomerates will have to reform their corporate governance structure.
"Back in the 1990s, most conglomerates diversified their business portfolio, controlling the whole group with a small stake through circular shareholding and mutual loan guarantees. It led to the collapse of some groups after the Asian Financial Crisis," said Lee Sang-heon, an analyst at Hi Investment and Securities.
Prof. Jang led the initiative of the Korea Corporate Governance Fund, dubbed "Jang Ha-sung fund" back in 2006, in the belief that better governance structures would raise the value of Korean companies.
Lee said that the new administration will use the Stewardship Code and a revision of the Commercial Law to ensure chaebol reform.
"The conglomerates that haven't switched to holding a company system will face difficulties. They will have to accelerate the corporate governance structure reform," said Jeong Seong-yeob, a researcher at the Daishin Economic Research Institute.
Hyundai Motor Group, for instance, has a circular shareholding system, under which Hyundai Mobis holds a 20.8 percent stake in Hyundai Motor; Hyundai Motor has 33.8 percent in Kia Motors; and Kia Motors has 16.9 percent in Hyundai Mobis.
It enables the group chairman Chung Mong-koo to control the whole group, though he has only a 6.96 percent stake in Hyundai Mobis and a 5.17 percent in Hyundai Motors. The group will have to shift to a holding company system to get rid of this. The three affiliates have seen their share prices rise by double digits since last month, on the expectation that the introduction of a holding company system will improve their corporate value.
Hyundai Heavy Industries Group will also shift to a holding company system. Analysts expect affiliates of the group to see their market capitalization expand by over 30 percent after the reform. Lotte Group also announced last month that it will adopt a holding company system in October, though some of its affiliates fell on the bourse after the announcement.
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