'NPS should control chaebol'

Colin Mayer, professor at the Said Business School, Oxford University , delivers a lecture at Seoul National University, Thursday. / Korea Times photo by Yoon Sung-won

By Kim Da-ye

Reforming chaebol has been a key-agenda issue for any new administration. The Park Geun-hye government is also trying to grapple with this.

A renowned British scholar offers a solution that defies the western model for short-term shareholders’ interests and embraces a long-term institutional intervention.

More simply, Colin Mayer, professor at Said Business School, Oxford University, recently told The Korea Times that the National Pension Service (NPS) should be encouraged to use voting rights as large shareholders in many chaebol firms in order to keep them on their toe.

“Exposing companies to short-term shareholder interests as in the U.K. and the U.S. is not the right way to address the chaebol problems,” said Mayer who was also the dean of the U.K.’s leading business school between 2006 and 2011.

“Instead, injecting more long-term outside ownership would be beneficial.”

Regarding this long-term outside ownership, Mayer agrees with the idea that the National Pension Service (NPS) should exercise voting rights as a large shareholder of conglomerates’ affiliates. “This is an interesting and potentially valuable way forward. Pension funds have long-term liabilities. They, therefore, have an interest in long-term investments,” Mayer said.

Mayer indicates that Korea’s 400-trillion-won pension fund should be given even more voting rights than short-term shareholders are. “Shareholders who are willing to commit to hold shares for long periods of time should be compensated for the liquidity rights that they forgo by being given more voting rights per share than short-term shareholders. That way, the interests of the company in long-term investments are aligned with those of its shareholders.”

Chaebol aren’t that bad

When asked which Korean company has an ideal corporate governance, Mayer said, “One of the most impressive companies in the world is Samsung.” He cited the commitment of Samsung’s long-term investors to supporting the growth and development of the business as a key factor in the company’s “remarkable performance in a wide array of markets and industries.”

Samsung Group has more than 70 affiliates, and controls them in a circulatory ownership structure. Samsung Life Insurance owns a 7.2-percent stake in Samsung Electronics, which then holds 35 percent of Samsung Card shares. The credit card company owns a quarter of theme park affiliate Samsung Everland, which has a 19-percent stake in Samsung Life Insurance. A major stake in one of these firms allows founding families to control the whole group.

The often-criticized structure isn’t an isolated case, Mayer said. It is common for families to exert control over and above their shareholdings through using a combination of circular shareholdings, pyramid structures and dual-class shares that confer to them more votes than to other shareholders. These lower the cost of exercising control, while making it easier for families to retain control even when they issue shares in the stock market to fund their expansion.

“The question is how Samsung should reform and sustain its performance in the future. The answer is that it needs to be able to retain the focus on long-term growth and investment, which has been the hallmark of its success in the past,” Mayer said.

“At the same time, however, it should seek to reduce the dominance of family members, strengthen the independence of its board and establish a broader participation of investors in the financing and ownership of the firm.”

Despite his background as a management professor for 18 years and dean for five years, Mayer is considered a rebel in business education. He recently authored a book on why companies have lost the trust of consumers and how they can restore this trust. The book, “Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It,” points out shareholder capitalism as the culprit of the lost trust.

Mayer said that shareholders’ influence on companies through takeover markets, performance-related pay and direct engagement in corporate activities originally aimed to overcome the “agency” problems of management. They intended to prevent management from pursuing wasteful investments and paying themselves excessively high salaries.

But shareholders’ power has gone extreme with an increasing acceptance of the view that the sole function of directors is to maximize the value of shares, the scholar said.

“Today it is widely accepted in, for example, business school education that the role of managers is to serve the interests of their shareholders,” Mayer said.

In the meantime, shareholders became significantly less committed to the companies they partially owned. Seventy years ago, the average period of holding of shares on the stock market was eight years. Thirty years ago, it was four, and now it is a matter of a few months, sometimes days or seconds, Mayer said.

The focus of corporations has naturally become short-term. “Not only do they pursue shareholder interests at the expense of other parties, like customers, employees and the environment, but they also pursue ever shorter-term interests,” Mayer said.

Mayer sees this change as the key factor to the decline of the U.K. and U.S. firms, in contrast to the rise of their Korean counterparts under family stewardship. The professor said that the U.K. has been a model of corporate governance, but on the other side, has also suffered from the weak performance of the economy and the steady decline in the manufacturing industry.

The headquarters of the National Pension Service in Jamsil, southeastern Seoul / Korea Times file

What’s wrong with chaebol?

Although Mayer seems to prefer family businesses focused on long-term goals to short-sighted shareholders, he acknowledges problems created by chaebol. The scholar points to three: the exploitation of monopoly positions in consumer markets and concerns about excessively high prices; the exploitation of minority investors; and the financial and political influence that they can exert.

Regarding the first problem of the conglomerates’ monopoly, Mayer said that stronger competition policies and anti-trust regulations can address the issue. He added that Israel, whose industries are also dominated by family-held companies, have made similar efforts.

In fact, the Korean government began strengthening the anti-competition policy with the recent moves to stop conglomerates from expanding to the industries traditionally belonging to small and medium businesses. The government has worked on identifying industries in which chaebol should have limited activities. The bakery and dining industries are examples.

Regarding the second problem of minority shareholders being marginalized, Mayer said that measures to protect them should be in place, an example of which is treating all shareholders equally when it comes to issuing new shares or purchasing shares in an acquisition.

Finally, the scholar said the third problem of chaebol’s political and financial influence can be addressed by requiring these companies to keep their distance from government and financial institutions. “The requirement to put contracts out to tender and to have transparent public procurement programs is a way to address the political influence problem,” the scholar said.

“Likewise, in many countries there are rules prohibiting companies from owning banks and conversely limitations on bank ownership of company shares,” he added. During the election campaign, President Park Geun-hye pledged to reduce the limit of a non-financial firm’s stake in a bank from 9 to 4 percent.

How to fix the system

Mayer acknowledges that although these remedies to the three major problems caused by chaebol can help prevent failures in the short term, they cannot improve the whole Korea Inc. in the long run. He said that more regulations would only lead corporations to exploit regulatory loophole or lobby the government.

The scholar’s conclusion is that a firm’s corporate governance should change to the way that its purpose doesn’t get swayed by shareholders. An increasing role of the NPS at the board would be the answer for reforming that for chaebol.

In his book, Mayer points out that a trust firm is an ideal corporate governance model. A trust firm has a board of trustees who are “the guardians of the corporation’s stated values and principles.”

In the ideal trust firm he describes, shareholders will have to register their ownership for particular periods of time. During that period, the shares cannot be transferred or traded while shareholders are allocated voting rights that are proportional to the number of years outstanding on registration.

For example, a shareholder purchases 1,000 shares for 10 years, receiving 1,000 votes. After two years, the shareholder’s votes will be reduced to 800. By the time the period expires, the shareholder will have no voting rights, but the shares will be tradable.

“Chaebol should clearly articulate the way in which they will benefit society more generally, in terms of promoting employment, the education and training of the labor force, the interests of customers in terms of the quality, reliability and price of the goods and services that they sell and communities more generally in terms of environment protection and their contribution to social capital,” Mayer said.

“They should demonstrate how these principles are firmly embedded in their organizations and how the boards of directors take responsibility for ensuring that the corporation abides by those principles.”

Colin Mayer’s lecture on “Firm Commitment” can be found at the website of Voices From Oxford (www.voicesfromoxford.org). He is an economics and business editor at Voices From Oxford.