Money Matters

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In 1999, the Daewoo Group, one of the biggest transnational conglomerates, collapsed, committing a staggering $15.3 billion in accounting fraud in the process, the largest in world history. In 2006, its chairman was sentenced to eight years in prison and a disgorgement penalty of $22.7 billion. Daewoo’s problems, however, did not remain a case isolated to Korea and their mighty, family-controlled conglomerates called “chaebol.” Daewoo’s demise foreshadowed corporate scandals that more recently ravaged confidence in financial markets around the world. Leading financial institutions, investment banks, securities analysts, accounting firms and credit agencies from around the world failed to address its problems. Despite its warnings, policy discussion focusing on the importance of reputational intermediaries and gatekeepers in particular has only recently emerged.

This forensic study analyzes the history of Daewoo, a major chaebol, focusing on the implications of its vast corporate governance meltdown. It surveys Daewoo’s internal corporate governance, particularly its controlling shareholder, boards of directors, officers, employees and banks. Furthermore, the external corporate governance landscape and the failure of reputational intermediaries, gatekeepers and public institutions are explored. By analyzing an Asian conglomerate from a leading emerging market, this study also contributes to the comparative corporate governance literature regarding the importance of formal law and enforcement and the trends toward convergence. This study highlights the emergence of functional substitutes to traditional remedies under formal corporate law for the implementation of legal enforcement and creation of corporate governance discipline. It also traces how Korean companies have converged toward a more shareholder-oriented corporate governance model from a state-oriented model. Finally, the ineffective corporate governance system in place at the time of the Asian financial crisis provides a backdrop for the reforms that followed. A Forensic Study of Daewoo’s Corporate Governance: Does Responsibility for its Meltdown Lie Solely with the Chaebol and Korea? ****** ***[1]


II.The Chaebol and the Financial Crisis7

A.The Making of the Great Universe7
B.Tragic Hero: Chairman Woo Choong Kim13
C.Chaebol Business Practice and Culture16
D.Fatal Decisions during the Asian Financial Contagion22 E.Accounting Fraud and the British Finance Corporation28

III.Ineffectual Internal Corporate Governance35

A.Controlling Shareholder’s Imperial Control35
B.Ceremonial Representative Directors, Directors and Statutory Auditors44 C.Investor Passivity50
D.Compliant Commercial Banks and Silent Debt-Holders55
E.Labor Limitations63

IV.Where Were the Gatekeepers and Public Guardians?66

A.Accounting Oversight: Chong-Un and San Tong68
B.Investment Banks, Securities Analysts and Credit Rating Agencies74 C.Financial Supervisory Service, Fair Trade Commission and KDIC82 D.Prosecutors, Courts and other Public Guardians93



At the end of 1999, one of the largest conglomerates in the world, the Daewoo Group, collapsed in spectacular fashion. During its peak, Daewoo was a sprawling enterprise with over 320,000 employees in 500 domestic and foreign companies that operated in over 110 countries.[2] Its management received widespread praise and academic recognition for its success.[3] Yet, when the financial crisis hit, it managed to commit 22.9 trillion won ($15.3 billion) in deception that was termed the “biggest accounting fraud in history, surpassing WorldCom and Enron.”[4] Years later, inner-workings of the conglomerate are finally coming to light. After hiding as a fugitive overseas for over six years, Daewoo’s chairman, Woo Choong Kim, returned to Korea in June 2005 to face criminal...
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