Money Matters
Abstract
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
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