FTC Alerts Chaebol
Again Over Corporate Governance System
The government is considering
adopting a three-year road map for market reform that focuses on
improving the ownership and corporate governance structure of chaebol.
However, chaebol _ sprawling family-owned conglomerates _
strongly oppose the planned road map, which they said came off the
desk of policymakers not well versed in the real business world.
The FTC plans to use the inter-subsidiary investment ceiling
regulation imposed on chaebol, which were originally mapped out as a
tool to curb conglomerates from blindly expanding their businesses,
as leverage to induce major conglomerates to change their corporate
The road map contains an apparent message that the government
will provide a legal loophole for conglomerates, if such regulations
really act as a burden to their business activities, with the aim of
Under the current Fair Trade Law, affiliates of conglomerates are
barred from holding stakes or making equity investments in sister
and non-affiliated companies in excess of 25 percent of their net
However, chaebol affiliates with debt-to-equity ratios equal to
or less than 100 percent are exempt from the inter-subsidiary
investment ceiling regulation.
According to the draft road map, the FTC would not apply those
rules to conglomerates that have effective systems to prevent
arbitrary decisions by owners.
As a tool to avoid investment ceiling regulation, the FTC
forwarded the adoption of a holding company system.
This means the FTC considers corporate governance structure of
companies more important than the financial structure. It believes
the adoption of the holding company system would naturally block
inter-subsidiary investments between firms affiliated with chabeol,
thus simplifying the ownership structure of the conglomerate.
The FTC expects three to four chaebol with total assets of more
than 5 trillion won to adopt the holding company system. LG Group,
for instance, has already adopted the holding company system,
marking a first for South Korea.
The FTC also forwarded the cumulative voting system, which
strengthens the clout of small shareholders, and granting more
authority to outside directors to act as a check on chaebol leaders.
The commission also proposed chaebol owners and their family
members trim their actual voting rights in affiliated firms to an
extent that matches the amount of shares they own in the companies.
The move is a direct attack on major shareholders exercising
voting rights beyond the legal limit.
The agency said in July that the heads of South Korea¬°¬Øs 11
largest chaebol have voting rights more than 10 times the size of
their individual share holdings. It wants chaebol to reduce their
voting rights to a maximum of twice the actual share holdings.
In addition, chaebol with small numbers of affiliates can be
exempted from cross-investment ceiling regulations.
Meanwhile, the FTC plans to regularize its probe of illegal
inter-subsidiary trading among chaebol affiliates.
The FTC is reviewing the forming of a committee of outside
directors to supervise intra-affiliate financial transactions.
However, conglomerates oppose such moves by the FTC, claiming
such restrictive measures would only strengthen the voices of small
shareholders. Still, the FTC plans to ask conglomerates with total
assets of over 2 trillion won to adopt the cumulative voting system.
Chaebol quickly contended the plan might infringe upon the right
of companies to manage themselves.