Daewoo

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  • Topic: Chaebol, Daewoo, Yonsei University
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Asian Corporate Governance Case Studies Series [Korea]

Anatomy of an Asian Conglomerate: The Rise and Fall of Daewoo and the Formation of Modern Corporate Governance

Joongi Kim Graduate School of International Studies Yonsei University, Seoul, Korea

Hills Governance Center at Yonsei University

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Asian Corporate Governance Case Studies Series [Korea]

CONTENTS

I. INTRODUCTION II. ASIAN CONGLOMERATES & KOREAN
CONGLOMERATES 1. Business and Government Relations 2. Ownership Structure 3. Related-Party Transactions and Self-Dealing 4. Accounting Fraud and Loan Fraud 5. Financial Structure

III. CONCENTRATED DECISION-MAKING AND THE
FAILURE OF OVERSIGHT 1. Concentrated Decision-Making 2. Inadequate Oversight by Representative Directors, Boards of Directors and Statutory Auditors 3. Shareholders and Stakeholders IV. CONCLUSIONS REFERENCES

Hills Governance Center at Yonsei University

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Asian Corporate Governance Case Studies Series [Korea]

LIST OF TABLES Daewoo Group Intraconglomerate Ownership Improper Internal trading and Subsequent FTC Subcharge by Group Accounting Fraud Debt/Equity Ratio of Top Four Chaebols Daewoo Group’s Domestic Borrowings Director and Officers Liability Insurance Policies in Korea

LIST OF CHARTS Daewoo Group’s Ownership Structure in 1997

Hills Governance Center at Yonsei University

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Asian Corporate Governance Case Studies Series [Korea]

I. INTRODUCTION 1
Many Asian companies collapsed during the financial crisis in 1997 and 1998, but none compared to the demise of the Daewoo Group, imploding under the weight of 22.9 trillion won in accounting fraud. The Daewoo saga provides an understanding of the state of corporate governance in a major Asian conglomerate. As later discovered, weak corporate governance of conglomerates and their vast network of companies had a devastating effect when the 1997 financial crisis hit. Corporate governance reforms since then have mainly focused on the large listed companies that belong to such conglomerates and have proved vital to the restructuring efforts of Asian economies. Daewoo shared many common features with other Asian conglomerates in terms of its corporate governance. Generous government concessions, substandard regulatory oversight, weak bank supervision, ineffective boards of directors, and complicated ownership structures represented some of the more prominent common elements. Daewoo’s total domination by its controlling shareholder and chairman, who served as its patriarch, remained a central problem. A key focus of this case study will be to trace the development of this type of structurally weak corporate governance system, and try to place it in the context of other Asian companies. This case study will first review the background of Daewoo’s corporate governance, particularly from the perspective of Asian conglomerates. The paper will next analyze how key players of the Daewoo conglomerate, 1

The author would like to thank Jisoo Lee, Heejung Kim, Suyoune Lee, Jeonghoon Seo and Mihwa Park for their assistance in preparing this case study. 53

Hills Governance Center at Yonsei University

Asian Corporate Governance Case Studies Series [Korea]

including the board of directors, creditors, accounting firms, officers, shareholders and employees, failed to act as active monitors. This study will then explore the structural and functional corporate governance problems that plagued Daewoo. In the end, this paper will provide a comprehensive review of the institutional corporate governance failures in a large Korean conglomerate in the hope that it can provide valuable policy lessons for other emerging markets in Asia.

II. ASIAN CONGLOMERATES & KOREAN CONGLOMERATES
This chapter will review the basic characteristics of large conglomerates in Asia. Within this framework, it will then provide a history of Daewoo leading up to the...
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