South Korea's New President Prepares to Square Off With Corporate Dynasties

By Timothy W. Martin and Eun-Young Jeong Features Dow Jones Newswires

South Korea's new president, like his predecessors, promised to loosen the hold that powerful, family-run business empires such as Samsung have over the economy, and he has a rare opening to accelerate change.

Continue Reading Below

President Moon Jae-in has vowed to reform South Korea's chaebols "gradually, but fully." How extensive those changes are by the end of his five-year term will be determined in large part by his ability to overcome political challenges and the economic entrenchment of the conglomerates.

Mr. Moon, sworn in Wednesday as the country's first left-leaning president in nine years, rode a wave of populist frustration over a bribery scandal that rocked the country's business and political elite, from his predecessor to top Samsung officials.

Revamping these dynastic enterprises has been a popular campaign promise in the past. Though the chaebols once lifted the nation out of poverty, they are now seen by many South Koreans as hindering growth and competitiveness of smaller businesses.

Past presidents haven't produced substantial changes to the ownership structures or transparency of conglomerates such as Samsung, LG and Hyundai Motor due to opposition from pro-business conservative lawmakers and lobbying groups.

Things could be different under Mr. Moon. His tough talk about revamping the chaebol system faces a better shot of succeeding now due to public outcry over how economically powerful a handful of conglomerates have become.

Continue Reading Below

Mr. Moon also is under pressure to respond to public discontent over the corruption scandal that resulted in the jailing of former president Park Geun-hye and Samsung's de facto leader, Lee Jae-yong. Both have denied wrongdoing and their trials are continuing.

"Even though at one point the chaebols were too important to touch, now the dynamic has changed," said Troy Stangarone, a senior director at the Korea Economic Institute in Washington.

The Federation of Korean Industries, a lobbying firm representing some chaebols, said it looks forward to the new government's efforts "to pave a path for economic growth through integration and reform."

Some South Korean lawmakers and corporate-governance experts say shaking up chaebols would reduce their clout and help to diversify the economy by making it easier for new firms to compete -- and potentially create more jobs and spur innovation.

In moving to diminish their dominance, Mr. Moon will face resistance from pro-business conservative lawmakers. While several bills are circulating with lawmakers to further regulate the chaebols, legislating would require support from the pro-business conservative bloc. During the election campaign, Mr. Moon's main conservative rival, Hong Joon-pyo, pledged to relax regulations for conglomerates.

Mr. Moon's party holds 120 out of 300 seats in the National Assembly. The combined voting power of the three progressive parties falls short of the 60% needed to pass non-budget bills in plenary session.

Mr. Moon can effect some changes without legislative approval, such as limiting conglomerates' ability to contract work to other affiliates, said Park Sang-in, an economics professor at Seoul National University. Pushing these measures would demonstrate that Mr. Moon prioritizes chaebol reform, he said.

A representative from Mr. Moon's office wasn't available for comment.

Some chaebols are already making changes in response to investor agitation and potential legislative crackdowns. For politicians, attacking the conglomerates has become easier as the corruption scandal has unfolded and economic growth has slowed.

The largest South Korean conglomerates have traditionally maintained close ties with the government. Critics accuse them of using their sway to dominate industries and discourage new entrants. The five largest chaebols represented about 10.6% of the country's gross domestic product, as calculated based on the groups' added value. Sales revenue generated by the top five chaebols was equivalent to 58% of GDP in 2015, according to Chiang Min-hua, a research fellow at the National University of Singapore's East Asian Institute.

Mr. Moon has said he wants conglomerates to move to clearer holding-company structures and reduce use of so-called treasury shares that have been critical voting blocs to help push through generational transfers of power.

He wants to give minority shareholders a larger say in company decisions. And he has pledged to give South Korea's National Pension Service more independence in proxy voting -- a shift that should usher in greater transparency as to which company moves earn the support of the world's fourth-largest retirement fund.

The core tension, corporate-governance advocates and foreign investors say, is that South Korea's marquee companies too often prioritize family succession planning over what's best for shareholders.

Complicated family ownership and a lack of transparency have weighed on South Korean shares, meaning they are priced lower than what they could fetch in more open markets, these people say.

Still, the Kospi Composite Index has been performing strongly this year, gaining more than 13% since Jan. 1.

Efforts to overhaul the chaebols aren't new. Ms. Park, the former president, adopted measures that would hinder further chaebol cross-shareholdings.

"Chaebol reform has been a political slogan in South Korea for years, but it has seen little progress up until now," said Chung Sun-seop, head of corporate-research firm Chaebul.com.

Many conglomerates have taken steps in recent years to modernize. LG, Hyundai Heavy Industries Co. and SK Group have adopted or are moving to holding-company structures -- long viewed by lawmakers and corporate-governance advocates as more transparent.

Samsung Electronics Co. said it wouldn't adopt a holding-company format, but said last month that it would cancel some $35 billion in legacy treasury shares. The removal of treasury shares -- typically repurchased stocks the company holds in reserve -- means Samsung is walking away from conventional chaebol succession planning.

Write to Timothy W. Martin at timothy.martin@wsj.com and Eun-Young Jeong at Eun-Young.Jeong@wsj.com

(END) Dow Jones Newswires

May 11, 2017 11:30 ET (15:30 GMT)