It’s hard not to be a watchdog for Korean facing issues that grow in concern and could potential have a global impact on the organizations and clients I support.
In an interview for an upcoming segment for the Korean media show “Koreascape” on globalization, I was also asked for my opinion on the recent drama within Lotte, Korea 5th largest chaebol over control of the Group. The host Kurt Achin, a seasoned journalist, shared concern over the bold move by one of the Founder’s son to take control of the Group, which has drawn considerable media and popular notice to the ongoing issue of succession among the chaebol. This media attention has not only been limited to Korea, but showed up on Page 1 of the WSJ as well as AP and the other leading wire and new service. [BTW Lotte is Korea’s largest retail, distribution, tourism and construction Group with a growing international presence and annual sales estimated at more than $100 billion. Also, Chaebol is a common South Korean term for their conglomerates, often multinational, global enterprises led by a Chairman and in most instances family controlled.]
This brings us to a media summary on the topic of Korean Family Succession, as well as a FAQ sharing my thoughts.
To prefix my comments, in her book, How to tell your story so the world listens, Bobette Buster author and USC Adjunct Professor notes:
“It has been said that Industrial Age ended after the end of World War Two. Then, it was superseded by the Age of Information via the computer, the 1960s boom in Madison Avenue advertising…and television. Then with the Internet boom of the 1990s, there followed in 2003 with viral explosion of the social media. With this a new deceiving conceit arose: anything worth knowing is available at our fingertips. This immediacy has curiously, made people less curious about discovering the world, at least to any depth.” The author then points out; we often “… know the facts, but not the context in which they happen.”
Let’s start with what we know and specifically fueling so much concern, and then I will share some context in a FAQ.
An editorial on the Lotte controversy in Yonhap, the Korean newswire service, writer sums up popular sentiment:
“Koreans are sick and tired of these internecine fights when the managerial control of a chaebol moves between generations.” More so, “who will succeed a family decision, rather than a formal shareholders’ meeting.”
Fuel to the fire… In July, amid considerable media attention, Samsung C&T and Cheil Industries agreed to an $8 billion merger that essentially consolidated the Samsung Group’s Lee family sway over Samsung Electronics, the Group’s flagship. This move sparked the ire of activist shareholder Paul Singer, CEO of U.S. hedge fund Elliott Associates. The American firm publically felt the deal would undervalued their substantial stock holdings in Samsung C&T while overvaluing Cheil to the benefit of the Lee family successor. Samsung rallied their supporters to win over Elliott in a heated vote.
Noting, I have prepared a three point FAQ look at context behind Korean succession, past and present.
1. What’s driving Korean family succession?
Looking back, Korea’s chaebol model is strongly rooted in their past. Neo-Confucianism, the dominant secular ideology of the nation going back to 1392, required all government officials and bureaucrats to pass rigid civil service examination for local, provincial or court positions. The Korean monarchy was the exception, male primogeniture used to determine the next ruler. Likewise, within Korean families, the eldest son and his descendants take precedence over siblings and their descendants. Elder sons took precedence not only over younger sons, but all sons took precedence over daughters—even elder daughters.
With the modern era and end of Japanese Colonial Rule, Korean business groups emerged. Family run, they gained considerable momentum during the 1960s, 1970s, and 1980s under the state-run policies mandated by the government.
At times this was a love/ hate relationship between the Groups and Government—with transfer of family wealth becoming an issue as the first generation of Founders handed over control to their children.
It is here we also see the first controversies surface. Following Korean traditional Confucian norms that dictated the eldest son be granted control over the family holdings as the next patriarch in some cases as with Samsung and Hyundai, a sibling or relative other than the eldest was selected by the Founder. In some instances, the elder sibling(s) fell out of favor of Founder, while in other cases a younger son assumed the role following the death of an elder son or if there was no son, a relative would take control.
2. How is the recent merger at Samsung associated with succession?
A second set of issues with wealth transfer centers on inheritance taxation—a tax levied up to 50% of the patriarch’s assets. To avoid the hefty tax, defacto holding companies allowed the second generation to gain control over the Groups with a marginal investment and little direct inheritance of the patriarch’s holdings.
As we move into a 3rd Gen of family control Groups like Samsung and Hyundai Motor have been engaged in similar lengthy and well orchestrated fiscal moves to transfer wealth and control. Much of this is through merging smaller companies, which the future successor has a substantial interest, with a larger Group’s firm, gaining control with no investment of monies. i.e. Samsung C&T and Cheil Industries.
A second method is work funneling.
In this process, Korean chaebol families have considerable ownership stakes in many of the privately held sister companies.
Next, the other subsidiaries give these smaller companies a huge amount of business to increase their revenue. Finally, these smaller companies grow considerably over time and can move to an IPO or sell some of their holdings to outside investors. i.e. Hyundai Glovis and Innocean Worldwide.
The families can then use the revenue stream to buy stock in other key publically traded subsidiaries and their chaebol’s defacto holding company.
In both cases, ownership stake along with circular, cross and pyramid (radiant) shareholdings give them direct and indirect control over the entire Group.
3. Noting public sentiment regarding succession, how likely is it for the South Korean President Park Geun-hye to toughen corporate laws?
As I note above, there has been a longtime Love/ Hate relationship between the chaebol and the Government. Despite the chaebols’ dominance and influence, they are increasingly coming under pressure from new laws and regulations designed to increase financial transparency and accountability of family members.
For instance, the government recently enacted a “deemed inheritance tax,” so that family members can’t get around South Korea’s inheritance tax laws, and has revised commercial laws to tighten requirements for reporting internal transactions.
This said, at time when addressing Korea’s sluggish economy is a priority for the current administration, few feel President Park Geun-hye will lash out at against the Groups. I see pressure being exerted on Lotte to resolve their family differences. I also see succession plans by Samsung and Hyundai continuing, with the reins of control and ownership transferred as planned—with hope to draw as little attention as possible.
To conclude, as a colleague expressed recently that for succession plans still in the works, their transition will come late in the cycle. As others bring attention to the issue, transitions that must and will occur from the current and aging leadership to the next generation will gets more a legal focus and public scrutiny.
I’d add this means focus and resources the Group’s leadership should have on running their business will be re-directed to dealing with succession. Decisions impacting their global operation could be delayed as well as the approval process, which require a high level sign off.
Deconstructing key aspects of western workplace in contrast to norms in South Korea continues to draw my attention. This week I add U.K. workplace insights since it, too, has a strong entrepreneurial and creative class–taking risks and learning from mistakes as seen there as part of the process going hand and hand.
In some ways I am personally draw to the British and specifically a Wales’ spin on business. This was well captured in a David Hieatt, Co-founder of The Do Lectures & Hiut Denim, 2011 workshop titled “Love Luck and Ideas got a town making jeans again.” So take some time listen, it’s well worth the time. More so, for my Korean friends in Korea and those Koreans working in overseas operations the video shares values that are actually tied to business like Love, Luck and Sentiment.
BTW I love David’s quote that jeans are “the creative uniform for the creative man”. Captures something I was missing, but so true,
This said, we all recognizing there is a gap in norms, values, and attitudes between the West (and in this case Wales in the U.K.) and South Korea, so what are construction steps can be taken to bridge the gap and lead to solutions.
Frankly that where my expertise comes in. I provide a strategy, coaching, and training to overcome cultural impasses that if not addressed do lead to frustration, stalled momentum and high turnover of the best staff and leadership.
To recap my thoughts in previous posts, a strong Creative Class is seen as key to sustaining a forward-leaning, innovative economy. Going hand in hand with this is workplaces that embrace diversity and openness, are not opposed to self-expression, promote individual recognition for hard work as well as resulting compensation (more than a base pay) for doing what they are good at… and they work in a community offering an engaging and even edgy lifestyle.
So where do I see disconnects between South Korea and America?
For starters in America the old Fordism and Company Man model at least for the creative class has shifted. Workers were once strongly tied to the company, this relationship nicely summed up by Richard Florida, “You were a company man, identifying with the company and often moving largely in the circles created or dictated by it.” Today, creatives value their unique social identity–one able to move intact from firm to firm and well as assuming the risks and absorbing the benefits companies once backed.
In contrast, rooted in Korean norms and collectivism, Korean workers strongly identify with their company—perhaps more so within the major Groups like Samsung, Hyundai, LG, and SK, as well as those working for a high profile global brands in Korea like Nike.
These organizations tend to be highly traditional vertical (and often horizontal) corporations— top-down management hierarchically flowing workload down to teams (most often operating in silos) with the Taylorized expectancy they follow routines and norms long established. In contrast, a creative work culture dies when so regimented as Florida points out, “ like rote work in the old factory or office.” A long hour chained to cubical cranking out Point points is very different than a culture where ideas are conceptualized inside one’s head in a café over a latte or during a trail run.
All said, one could argue Korea may not be wired for fostering a sustainable creative culture.
What I do find as encouraging is many in Korea on a personal level attracted to and appreciate counter-culture. There is an ever growing segment is their society adopting a lifestyle more conducent to creativity. Much of this influence has been Koreans exposed to the global art scene, the influence of expat non-Koreans, plus Koreans embracing their own traditional artisan heritage. In some ways, this movement has taken on a rather edgy Bohemian feel… one I find very cool.
Seoul LP Bars, the 60s and Dylan.
For example, Korean media reports there are a growing number of “dives with DJs and extensive collections of LPs,” many located in ultra-hip neighborhoods…. walls plastered with album covers from the likes of Pink Floyd, Jimi Hendrix and B.B. King. The interiors shrines to Bob Dylan and Neil Young and the cultural revolution of the 1960s.
One more thing,
I have a request for my friends both Korean and non-Korean expats in Korea to share their observations, especially on the emerging counter-culture.
I’ll also be pulling together some example of a budding Korean counter-culture scene and what I see as roadmap for workplaces looking to attract and groom creatives—not only for Korea, but also for their U.S. and global operations.
I truly enjoy sharing the nuances of Korean business culture—whether through my books, Vodcasts like this one, in media interview and articles, or coaching those new to the Korea facing workplace.
Long part of my core business has been On-boarding. In fact, this week I have a number of engagements scheduled in Southern California with some planned for San Francisco in the next future.
On-boarding or, organizational socialization is where new employees, from C-level staff to entry-level hires, acquire necessary knowledge, skills, and behaviors to be effective in their job. In most cases for my work this means those employed by Korean companies, but it also includes those partners that provide services to Korean global firms
A common false assumption taken by some is those new to the company or project “will get” the cultural nuances without considerable support. Nothing can be more mistaken.
I find the Struggles for non-Koreans can range from team members not dealing with matters feeling it may offend their Korea colleagues to being perplexed and frustrated why approval processes are so complex or why Finance appears to be the making final call in critical operational decisions. The later two situations covered extensively in my books Korea Facing and Korea Perspective. See link below.
All said, my role in On-boarding is to provide context and the reasons behind Korea facing business, while over time mentoring, coaching and steering teams and C-level leadership to solutions.
If coaching and mentoring is like something you and your company can benefit from, I have blocked out some times I’m available to discuss more. Just go to http://www.meetme.so/southerton Until next time…
I was on a conference call last week when asked how best to describe my work—and do I provide consulting for CEO and C-level management—her organization’s international development committee made up of a number of CEOs.
My short answer was that a client and long friend, then a CMO for a major company best described my practice to others as Everything Korea… I also like having been introduced as “ a high power consultant” or Don is “the guru, the guy CEOs want to have their voice heard with, “ the later shared on Seoul’s eFM tbs Koreascape.
Pondering over the weekend on the question from the conference call much of what I do is provide context and a strategy to decision-makers involved in Korean facing business projects that range into the hundreds of million of Dollars.
In particular, I provide counsel and solutions based on my years working with Korean business—a good part in the international expansion into new markets and the challenges that surface and as a client once asked “ where are the landmines he needs to be aware of and avoid.”
So this gets to why I post weekly Vodcasts, frequent media commentaries, case studies as well as books on Korea facing topics. They all serve as channels to support and educate.
This said, in my consultancy each engagement needs to be approached on a case-by-case basis—no two situations identical.
If you feel you might benefit from my C-level insights, I’ve blocked out my availability to chat and discuss…. Just go to http://www.meetme.so/southerton
In closing:
A great book on the reshaping of the American economy and the New Order… check out Richard Florida’s The Rise of the Creative Class, Revised Edition. I prefer the Hardcover.
And the music on Repeat Song listened to while drafting this week’s episode—Pink Floyd, “Wishing You Were Here” Re-mastered Available on iTunes.
Coming off the Memorial Day Weekend Holiday here. I use holidays as a time to write, read, recharge and re-focus. This means opting out perusing Facebook and Twitter, as well as checking emails. I’m happy this year both the American holiday and Buddha’s Birthday (a legal holiday in Korea) fall together.
I was again asked what’s been on my reading list. I recommend for starters, Brian Grazer’s (the Hollywood producer and with creative partner Ron Howard founded Imagine Entertainment) new book A Curious Mind
A second Book: The start-up of YOU, by Reid Hoffman, co-founder and Chairman of Linkedin
And, Hatching Twitter, by Nick Bilton
All three give some great insights into the varying aspect of American business–behind the scenes and sub-cultures.
This brings us to today’s topic—these recognizing diverse sub-cultures. To often like an iceberg what is seen on the surface only shares a potion of a business and in particular for that business model in a respective market or region.
What is truly deceptive is that on the surface business is business, and all can appear similar. Where the challenge emerges is that each business sectors can vary considerably in the West, and the three books I mention highlight just how different.
For example Brian Grazer, as a Hollywood insider and successful TV and film producer talks about expectations within filmmaking and specifically Hollywood that require special mindset— which at the core is “creating ideas.”
Building on this, the other two books look at recent trends and sub-cultures that exist within…
As the Linkedin Chairman points out that in contrast to an old model embodied by the once great Detroit, we find the entrepreneurial mojo of Silicon Valley embracing a willingness to take bold risks and accept failure, coupled with a network of alliances to work in collective action.
More revealing to inner workings, we find in Hatching Twitter that can things vary lots even across startups. Cited in the book one of the Twitter co-founders Biz Stone willingly went to a startup which would become Twitter from “unlimited free meals, free snacks, free buses to work, and a free inexhaustible everything at Google and replaced with a office where homeless people slept in stairway, the only free transportation was his two feet, and the only free food and drink was a beer after work if EV [his boss] picked up the tab.”
This said, the author notes, “ The cultural difference was incalculable. The sterile, robotic culture of Google, with its know-it –all engineers and bossy bosses, was now replaced with tattooed hackers with a do-what-you-want mentality.”
So what am I saying…
To my friends and clients in Korea, I’d share these are just several examples of the diversity in Western work culture and norms—a deep understanding required to be effective in the local market.
In contrast, although no two Korean Groups are entirely alike in their mindset and even Divisions and sister companies within a Group can vary some—workplace culture, norms and process are very relatively similar. For example, hierarchical titles, role of Finance, a team focus, a junior’s deference to seniors, pressure to take action over considerable upfront critical thinking, as well as top down oversight and decision making.
All said, I am often asked about a pet project of mine over the past year Mad For Garlic. My Korean friends and the expat community in Korea know the brand well. In short…. Mad For Garlic is known for its unique and innovative menu with garlic-specialized Italian cuisine.
I was asked to assist the team in US market entry. A rare and very smart move by the Korean team who recognized the need for local support. Our first round was getting the word out to the FSR industry. This is summed up nice in a PDF study. Link below.
As if often the best case, our original strategy to find a master developer for the US market has evolved to now finding a VC or Angel to invest in the International development of the brand. This makes considerable sense with a recent $48 MM investment by Standard Chartered Private Equity (SCPE) in the now 40 plus domestic Korea Mad For Garlic operations. This new partnership with SCPE will accelerate Mad for Garlic’s Korea expansion. Working with the Korean team we seek to accelerate the International development though a similar partnership. Questions, thoughts or an interest, please contact me directly and we’d love to discuss more.
Oh and one more thing…. I am off to Nashville, Tenn. area this week and more specifically as speaker a panel on international development held in Clarksville-Montgomery County, soon be home to a $180MM Hankook Tire plant.
Why hire local western teams? One challenge for Korean multi-national Groups has been launching overseas operations and staffing the local branch or subsidiary. As noted in previous updates, Korean overseas subsidiaries have Korean management assigned to the host country. The general term for these representative employees is ju jae won. The Korean model has a rotation cycle where teams and executives are assigned to overseas divisions for 3-5 years. They then return to Korea for reassignment with a replacement expected to take over-often with little preparation. Skills and experience vary.
Several years ago, in a group session I hosted for Korean and western senior managers the discussion turned to the “role” of the westerner teams in project development. The local western teams felt very under-utilized and wanted to contribute more. This, of course, led to considerable frustration, because the westerners previous employers had utilized their experience and expertise.
Pondering for a moment during the discussion a senior Korean pointed out that local input was respected, but perhaps feedback needed to be better communicated. The Korean manager went on to explain that his team knew how to do things “Korean style”…., but what was needed were other ways of approaching problems. Even if those ideas were not adopted, senior management reviewed those options and took them into consideration. In fact, Korean leadership had high trust in the local teams and their judgement…They hired local teams to provide much needed expertise and know-how.
Listening attentively, one of the western managers, grinned and as I recall, thanked his Korean co-worker for sharing and promised he’d convey the message to his team. He also wished he’d known this 2 years earlier, since it would have reduced lots of stress in his department.
On a similar topic… I have noted that unlike in Korea where there is considerable internal promotion, Korean overseas operations often do not fill new positions from within the local organizations. Again it’s not under-valuing local talent, but the belief that hiring New people will bring New ideas.
BTW The same is true for vendors and service providers-at times new partnerships are sought to replace a long standing provider. The thought behind finding a new firm is that it can bring new resources, ideas, and innovative solutions.
My note to Korean teams and management Take time to provide your local western teams and management with feedback-good or bad-when they contribute time and effort on a project. Sharing details on how their work impacted a project will go far in improving relations and morale, which leads to higher productivity.
Questions? Comments? Feedback (yes, I appreciate feedback, too).
Don This is really interesting stuff and is helping to give me a valuable insight into the working culture of my Korean colleagues.
Thank you.
…love your Korea Facing educational newsletters, it is really a great and easy way to get the basics so that you want to know more….
Great pieces!
Hi Don,
This information is very timely
Aloha Don, Again, great points! I liked Part 3. Like today’s organizations in America, Korean organizations are also presented with the internal challenge of bringing multi-generational employees together to create harmony and cohesiveness. Individuals from each generation, such as traditionalist, baby boomer, generation X, or generation Y, bring divergent values, beliefs, attitudes, and expectations based on their pivotal experiences and events that portrait both personal and societal backgrounds. These multi-generational terms may be not used exactly the same in Korea, but the challenges that Korean organizations face at the moment caused by the gap between different generations are virtually the same.
Individuals of each generation group were born and grew up in the same time period which allows them to witness/participate in common historical events such as political and economic changes. For this reason, individuals with shared experience have an easier time building bonds and working together in harmony rather than working with individuals from different generation groups. The particular characteristics of each generation group deeply influence how employees think about many aspects of organizational behavior such as motivation, satisfaction, creativity, innovation, loyalty, commitment, and team work. This accentuates the importance of understanding those distinctive characteristics of each generation group in order to engender successful outcomes while working with the multi-generational workforce in an organization.
In my opinion, this type of issue should be dealt at the top management level rather than middle or lower level management for more satisfying outcomes. As the middle managers noted, they are fearful of losing opportunities to get promoted or even losing jobs by provoking their superiors and subordinates in a negative way. Expecting them to make a difference in their views and behaviors without getting full support from top management may have a very little bearing on acquiring successful outcomes.
Change is not easy, but feasible as long as transformative leadership is practiced by every single member of an organization from top to bottom.
Thank you for sharing and allowing me to contribute my two cents!
Jennie
Chunghea (Jennie) Oliver shares that she grew up during the wild days as South Korea sought to shed its image as the Hermit Kingdom and to engage the hyper-modern world of global business as an engine of technologic wonder and manufacturing excellence. She travelled to the Philippines and to America to study, work, and discover a life for herself.
Along the way, Chunghea has earned degrees in both business and education, which culminated in her successful defense of an interdisciplinary dissertation looking at the question of cultural competence and second language acquisition in order to complete the Doctor of Education in Organizational Leadership offered by Argosy University/Hawaii.
PRLog (Press Release) – Sep 04, 2012 – Denver, Colorado. Global Korean business consultant and CEO Don Southerton has announced that with the ever-growing number of people employed by Korean-based companies outside South Korea now more than ever a strategy is needed to succeed.
Likewise, if your firm provides services or products to a South Korean overseas subsidiary or operations a Korea-facing strategy will be beneficial and offer tactics to strengthen and maintain the relationship. Finally, if your company has significant business in Korea, but leadership and headquarters is located in the West, key management need suggestions on how best to deal with pressing issues and challenges that surface
Southerton notes “Korea Facing is the title not only for my latest book in progress, but also for related seminars, coaching, and workshops we are offering Fall 2012 and into 2013.” Topics include:
1. K-Lobization—The outreach of Korea’s unique management style and corporate culture across international markets, especially among subsidiaries and branch offices.
2. Ju Jae Won—Another name for the Korean expats assigned to a host country to support their overseas operations.
3. Hierarchy– rank and title within the mother and subsidiary organization and its impact on day-to-day business operations.
4. Culture Shock–the cross-cultural acclimatizing that occurs when an individual is assigned to a different geographic location.
5. Generations– South Korea’s age groups influence their business culture, so knowing the differences in the mindset and values of recent Korean generations is valuable.
6. Planning and Decision-making— In a hierarchical system orders come from senior management, plus their requests override other plans and thus schedules are often revised at short notice.
7. Protocols and Culture—Korean culture has norms that dictate social interactions—especially during initial introductions and meet & greets. Cultural differences also impact communications style, decision-making, discussions, and presentation style.
8. Expectations—Most often the issues that surface include managing expectations. Usually each side has legitimate demands. For example, Korean side needs answers and information ASAP, US/ western side procedures take days to compile and approve, often from number of sources.
About Bridging Culture Worldwide When Fortune 500 companies, top Korean Groups, leading international law firms, and elite consultancies, such as Bain and Monitor, look for Korean-facing business strategy, coaching, and advice—they turn to Bridging Culture Worldwide and Don Southerton.
With over 35 years’ experience, Don Southerton is the definitive authority on Korean-facing global business–from automotive, golf, and QSR sectors to New Urbanism and Green technology. When problems and challenges surface in development, launch, or fulfillment, we provide sound solutions and comprehensive strategies.
Everything Korea: August 17 Korean Succession, A Commentary and FAQ
It’s hard not to be a watchdog for Korean facing issues that grow in concern and could potential have a global impact on the organizations and clients I support.
In an interview for an upcoming segment for the Korean media show “Koreascape” on globalization, I was also asked for my opinion on the recent drama within Lotte, Korea 5th largest chaebol over control of the Group. The host Kurt Achin, a seasoned journalist, shared concern over the bold move by one of the Founder’s son to take control of the Group, which has drawn considerable media and popular notice to the ongoing issue of succession among the chaebol. This media attention has not only been limited to Korea, but showed up on Page 1 of the WSJ as well as AP and the other leading wire and new service. [BTW Lotte is Korea’s largest retail, distribution, tourism and construction Group with a growing international presence and annual sales estimated at more than $100 billion. Also, Chaebol is a common South Korean term for their conglomerates, often multinational, global enterprises led by a Chairman and in most instances family controlled.]
This brings us to a media summary on the topic of Korean Family Succession, as well as a FAQ sharing my thoughts.
To prefix my comments, in her book, How to tell your story so the world listens, Bobette Buster author and USC Adjunct Professor notes:
“It has been said that Industrial Age ended after the end of World War Two. Then, it was superseded by the Age of Information via the computer, the 1960s boom in Madison Avenue advertising…and television. Then with the Internet boom of the 1990s, there followed in 2003 with viral explosion of the social media. With this a new deceiving conceit arose: anything worth knowing is available at our fingertips. This immediacy has curiously, made people less curious about discovering the world, at least to any depth.”
The author then points out; we often “… know the facts, but not the context in which they happen.”
Let’s start with what we know and specifically fueling so much concern, and then I will share some context in a FAQ.
An editorial on the Lotte controversy in Yonhap, the Korean newswire service, writer sums up popular sentiment:
“Koreans are sick and tired of these internecine fights when the managerial control of a chaebol moves between generations.” More so, “who will succeed a family decision, rather than a formal shareholders’ meeting.”
Fuel to the fire…
In July, amid considerable media attention, Samsung C&T and Cheil Industries agreed to an $8 billion merger that essentially consolidated the Samsung Group’s Lee family sway over Samsung Electronics, the Group’s flagship. This move sparked the ire of activist shareholder Paul Singer, CEO of U.S. hedge fund Elliott Associates. The American firm publically felt the deal would undervalued their substantial stock holdings in Samsung C&T while overvaluing Cheil to the benefit of the Lee family successor. Samsung rallied their supporters to win over Elliott in a heated vote.
Noting, I have prepared a three point FAQ look at context behind Korean succession, past and present.
1. What’s driving Korean family succession?
Looking back, Korea’s chaebol model is strongly rooted in their past. Neo-Confucianism, the dominant secular ideology of the nation going back to 1392, required all government officials and bureaucrats to pass rigid civil service examination for local, provincial or court positions. The Korean monarchy was the exception, male primogeniture used to determine the next ruler. Likewise, within Korean families, the eldest son and his descendants take precedence over siblings and their descendants. Elder sons took precedence not only over younger sons, but all sons took precedence over daughters—even elder daughters.
With the modern era and end of Japanese Colonial Rule, Korean business groups emerged. Family run, they gained considerable momentum during the 1960s, 1970s, and 1980s under the state-run policies mandated by the government.
At times this was a love/ hate relationship between the Groups and Government—with transfer of family wealth becoming an issue as the first generation of Founders handed over control to their children.
It is here we also see the first controversies surface. Following Korean traditional Confucian norms that dictated the eldest son be granted control over the family holdings as the next patriarch in some cases as with Samsung and Hyundai, a sibling or relative other than the eldest was selected by the Founder. In some instances, the elder sibling(s) fell out of favor of Founder, while in other cases a younger son assumed the role following the death of an elder son or if there was no son, a relative would take control.
2. How is the recent merger at Samsung associated with succession?
A second set of issues with wealth transfer centers on inheritance taxation—a tax levied up to 50% of the patriarch’s assets. To avoid the hefty tax, defacto holding companies allowed the second generation to gain control over the Groups with a marginal investment and little direct inheritance of the patriarch’s holdings.
As we move into a 3rd Gen of family control Groups like Samsung and Hyundai Motor have been engaged in similar lengthy and well orchestrated fiscal moves to transfer wealth and control. Much of this is through merging smaller companies, which the future successor has a substantial interest, with a larger Group’s firm, gaining control with no investment of monies. i.e. Samsung C&T and Cheil Industries.
A second method is work funneling.
In this process, Korean chaebol families have considerable ownership stakes in many of the privately held sister companies.
Next, the other subsidiaries give these smaller companies a huge amount of business to increase their revenue. Finally, these smaller companies grow considerably over time and can move to an IPO or sell some of their holdings to outside investors. i.e. Hyundai Glovis and Innocean Worldwide.
The families can then use the revenue stream to buy stock in other key publically traded subsidiaries and their chaebol’s defacto holding company.
In both cases, ownership stake along with circular, cross and pyramid (radiant) shareholdings give them direct and indirect control over the entire Group.
3. Noting public sentiment regarding succession, how likely is it for the South Korean President Park Geun-hye to toughen corporate laws?
As I note above, there has been a longtime Love/ Hate relationship between the chaebol and the Government. Despite the chaebols’ dominance and influence, they are increasingly coming under pressure from new laws and regulations designed to increase financial transparency and accountability of family members.
For instance, the government recently enacted a “deemed inheritance tax,” so that family members can’t get around South Korea’s inheritance tax laws, and has revised commercial laws to tighten requirements for reporting internal transactions.
This said, at time when addressing Korea’s sluggish economy is a priority for the current administration, few feel President Park Geun-hye will lash out at against the Groups. I see pressure being exerted on Lotte to resolve their family differences. I also see succession plans by Samsung and Hyundai continuing, with the reins of control and ownership transferred as planned—with hope to draw as little attention as possible.
To conclude, as a colleague expressed recently that for succession plans still in the works, their transition will come late in the cycle. As others bring attention to the issue, transitions that must and will occur from the current and aging leadership to the next generation will gets more a legal focus and public scrutiny.
I’d add this means focus and resources the Group’s leadership should have on running their business will be re-directed to dealing with succession. Decisions impacting their global operation could be delayed as well as the approval process, which require a high level sign off.
Question? Comments?
Why not schedule a chat? http://www.meetme.so/
Or, Direct Questions to questions@koreabcw.com
Links
How to tell your story so the world listens, Bobette Buster
http://www.amazon.com/