Left Flank

I never thought I'd give chaebol, or Korean conglomerates, a kind word. Yet, Dani Rodrik links to and highlights an argument for fair play.

'One might have expected a louder hue and cry against hedge funds that were speculating in financial markets and obtaining credit at easy terms from lenders when the current crisis unraveled. Instead we have witnessed unprecedented liquidity being pumped into the markets at non-distress rates, essentially blurring the difference between illiquidity and insolvency. We have seen the world's central banks provide enormous amounts of credit to avoid larger scale collapse. What is not so clear is the real economic benefit that the speculating hedge funds were generating. At least in the case of Korea, there were real economic benefits to be generated, employment to be created, and international markets to be penetrated. This is not to absolve some chaebols of their misdeeds -- pledging poor collateral, cross ownership among chaebol affiliates, use of cheap government credit and the like -- yet there does seem to be a double standard in the way the international community is dealing with the current crisis caused by excessive and under-regulated leveraging and the way in which Korea was pilloried in the aftermath of the 1997 crisis.'

As I'm in the process of reading Stiglitz's insider account of the '97 IMF debacle, this conclusion has a good deal going for it.

Which one of this paragraphs is closer to the mark, the first, or the second?

Alongside Mr Lee's resignation, and those of other managers, Samsung announced a series of reforms. It will donate a large sum to “a good cause”, undo some labyrinthine cross-shareholdings, and (to assuage concerns about its dominance) will not enter the retail-banking market when it is opened up later this year. Samsung's strategic planning office, which concocted a variety of dodgy schemes, will be closed. The younger Mr Lee, who was not charged, resigned as a senior executive at Samsung Electronics and will move to a different role in the group, based abroad.

By South Korean standards these are drastic moves, and may represent an acknowledgment that corporate-governance reforms are needed. But sceptics wonder whether the changes are merely cosmetic. The Lee family will still be Samsung's largest shareholder, and many of its loyal lieutenants remain in senior positions. Although Mr Lee technically faces a life sentence, few believe he will spend time in jail. He will not be replaced as chairman, and it is assumed that his son will return home after a couple of years to take up the post, once public anger has dissipated. That could prove to be the real test of how much things have changed.

Businessweek:

Some activists argue the reforms fall short of guaranteeing the prevention of the family's return. «The problem is the son can always be elevated to the chairman and assume near-absolute control unless a system is built to guard against such practices,» says Korean National Open University economist Kim Ki Won, who has studied the chaebol for two decades. «My hunch is that there's only a 30% chance of Samsung achieving a good governance system in view of the lack of reference to the son's illegally earned benefits.»

Others, though, are more hopeful. «I respect today's move by Chairman Lee, who unlike other chaebol chiefs, personally took responsibility for wrongdoings,» says Jang Ha Sung, dean of Business Administration College at Korea University and a longtime promoter of shareholder rights. «What's still needed is to build a sustainable system enforcing transparency and accountability.»

...and Bloomberg echo the «standing at the crossroads» vs. «business as usual» predictions.

While Lee's indictment last week on charges of breach of duty and evading about $113 million in taxes blunted his ethics push, the announcement yesterday that he and other top Samsung executives will step down puts more at stake. The chaebol model itself -- criticized by outsiders as a closed network even as it poured investment into the economy -- may be unraveling, according to some analysts.

The announcement signals ``an end to the era of the Masters of the Universe,'' says Tom Coyner, who helps advise foreign investors in Korea as president of Soft Landing Consulting Ltd. in Seoul. ``The resignation by Chairman Lee Kun Hee is unprecedented.''

Actually, I see some conveniently aristocratic logic at work here. As ROK's economy slips into lower growth and slips a global notch to 13th, it's difficult to claim Lee has all the magic he once did. The Lone Star decision seems like more of the same, too. It's almost like throwing scraps to the dogs. I'll put a marker on a predictable future.

FT's Song Jung-a is skeptical about ROK President's Lee Myung-bak's magical powers to influence the South Korean economy.

Although some analysts doubt whether the new president can make good on his bold promises, especially as the slowing US economy threatens to curtail demand for South Korean cars and mobile phones, Mr Lee remains confident that growth will accelerate from 5 per cent last year to 6 per cent this year.

By increasing inputs of labour and capital, Mr Lee added that he could boost Korea's potential rate of growth to 7 per cent within a decade.

Mr Lee dismissed claims that he would favour the country's chaebol as he tries to revive the economy. «The government believes that big companies have to continue to develop themselves while small and mid-sized companies should be made healthier so they have their own competitiveness,» he said.

But Mr Lee has introduced measures that will make life easier for corporate giants such as Samsung, LG and Hyundai.

In addition to his plans to scrap the restriction on conglomerates owning banks, ending a regulation intended to ensure the stability of the financial sector, Mr Lee's government last week said it wanted to adopt «poison pill» and multiple voting rights measures to protect South Korean companies from hostile takeovers.

The justice ministry cited a «foreign funds' hostile M&A threat» against SK Corp and KT&G – which were targeted by Dubai-based Sovereign Asset Management and US billionaire Carl Icahn respectively – as evidence of the need for such legislation.

Keep foreigners out, keep chaebol supreme...what has changed?

R. Elgin and JD Link exchange some excellent points on David Eldon's remarks at a press conference yesterday on reforming ROK's FDI exposure and regulatory practices.

"When I was asked to work as Lee's adviser, I was a little bit puzzled over why Korea, an OECD country, has not reached the same level of other similar economies. Advanced countries with successful financial centers have a single and independent regulator in common. Korea has tremendous potential. Korean organizations should be more globalized and attractive."

JD Link has this comment to that R. Elgin post:

He's on the right track. You'll have noticed that the biz and economic news for the past couple of weeks has been full of grand ideas. Today's Joongang has many interesting stories. One shows 2MB promising to allow greater cross-shareholding by the chaebol, a couple days ago letting them own banks. Neither are good ideas.

But rather than oppose the individual policy decisions that have strong support among Korea's business leaders, Eldon knows that simply legislating greater transparency will, in time, reveal the weakness of these reforms, should they come to pass. If investors, whether foreign or Korean, could actually see and understand who owns what (and controls what) in Korea, and how the companies use the money, then the investors themselves will force the needed changes. This is a much more powerful and lasting force for change than government tinkering with regulations while the real workings of Korean business stay hidden from view.

Eldon is trying to halt a train accelerating to its wreck, and no amount of press conferences will disguise that. I hope he's earning good money for good services, at least.