Overview of Chaebol Firms Corporate Governance

Topics: South Korea, Corporate governance, Chaebol Pages: 8 (2811 words) Published: May 21, 2013
The downfall of many South Korean (will be referred to as Korean in the scope of this paper) business groups, namely the chaebols in 1997 was so devastating to the Korean economy that its government was forced to accept a US$58 billion bailout from the International Monetary Fund (IMF). However, the IMF fund was not provided unconditionally; Korean government had to improve its economic competitiveness in many areas to satisfy the demands required by the IMF, of which corporate governance was of utmost importance. Many studies has scrutinized poor management practice of corporate governance, specifically in the chaebol firms as one of the main drives behind the collapse of Korean economy (Chang, 2006, Lee, 2002, Nam, 2001, Kim, 2004), some even set it as case study of how corporate governance could relate to firm values and company performance (Black, Jang and Kim, 2005, Baek, Kang and Park, 2002); and more specifically, the impact of having outside directors on board (as an aspect of corporate governance) on firm performance (Choi, Park and Yoo, 2007). Given the recentness of the studies, corporate governance is an ongoing issue in Korean firms that needs to be fully understood in order to explore the performance of firms in micro level, and the economic competitiveness of a whole economy on a macro level. Therefore, this paper is intended to discuss the conceptualization of modern corporate governance, apply it to bring outstrengths and weaknesses of corporate governance of Korean firms (mainly focused on chaebol companies) before the 1997 crisis, and analyse the outcomes resulting from many changes implemented by the government concerning corporate governance practices in Korean firms since then, utilising external academic research available online. This section is dedicated to explore the concepts of corporate governance in literatures. Corporate governance is a newly concept in modern business environment, linking many different managerial theories such as agency theory, transaction cost (Williamson, 1987) into applicable practices in organisation. Corporate governance is broadly defined in literatures. According to Shleifer and Vishny (1997) (quoted by Kim, 2004), corporate governance defines the ways in which the supplier of finance to corporations is assured of getting a return on their investment in a firm (which include managers, capital suppliers, employees and other stakeholders of the company). Other way to look at corporate governance is the distribution of rights and responsibility of different participants in an organisation (Aguilera, 2004) ,or the processes by which organisations are directed,controlled and held to account (ANAO, 1999), or the relationship between various agents in an organisation (Powers, 2010), all of the approaches are relevant in light of examining the key strength and weaknesses in corporate governance in Korean companies. Introduction of the growth of the chaebols is necessary to provide general background to the paper. As the Republic of Korea was established in 1948, many state-controlled enterprises were founded as instruments of the government to lead the development of the country industrialisation (Carney, 2008). These firms were allowed superior economic rents from the Korean government such as preferential loan with low rates, tax breaks, and market protection from outside competitors; which were space and opportunities to achieve superficial growth. These economic forces are reckoned as the chaebol companies, often controlled by families who had strong ties with the government. Since their establishment, the chaebols had been dominated the Korean economy, with 40% output in the mining and manufacturing sector accounted by them in 1996 (Chang, 2006). Several of the chaebol firms are major players with well-known brands in the global market such as Samsung, LG, Huyndai, in their specific areas. Armsden (1989), quoted by Carney (2008) argues that these companies have formed...
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