KOREAN

CAPITALISM
U N D E R S TA N D I N G K O R E A N C A P I TA L I S M :
C H A E B O L S A N D T H E I R C O R P O R AT E G O V E R N A N C E

Members :
Raunaque Quaiser (WMP12072)
Ravindra Singh (WMP12073)
Sakshi kulbhaskar (WMP12074)
Sanjay kumar (WMP12075)
Saurabh Sharma (WMP12077)
Shubham Kumar (WMP12078)
 INTRODUCTION

This article talks about the Korean capitalism and affect of big business
conglomerates on global economy, Korean politics and society.
Chaebols were contributors to the rapid development of the Korean
economy and at the same time they highlighted their problems such as
cronyism, corrupt relations with government, and economic concentration.

In Western countries conglomerate was created by merger and acquisition of

several enterprises. And opposed to chaebols, there is no dominant owner, and a
strict governance system (the role and responsibility of a board of directors)
prevails.
 WHO ARE CHAEBOLS
Chaebol is a Korean word that means group and party of wealth.
chae means wealth or fortune and bol means group or party.
They refer to a collective of formally independent firms under the single common
administrative and financial control of one family and they had a very strong hold
on Korean economy.
They were controlled by a single chongsu, an unofficial general manager who took
the final corporate decisions for the entire syndicate.
Chaebol is defined by three business structural traits:
it consists of many affiliated firms operating in a diverse number of industries.
ownership and control of the group lie in a dominant family.
and the business group accounts for a great percentage of the national
economy.
 CHAEBOLS BUSINESS CONTRIBUTION

The above chart shows the business growth of the Chaebols Business Organization in Korea
Chaebols have grown steadily and contributed a lot in the Korean Economy.
 WORKING STRUCTURE IN CHAEBOLS
Each Chaebols appear to be controlled by professionals responsible for individual
firms.
Actually all the Chaebols are controlled by single un-appointed General Manager
who makes the final decisions for the entire business.
He is the supreme commander and also the representative of the owner family.
The person is known as chongsu in Korean language which means general head.
For example, Mr. Lee, chongsu of the Samsung chaebol holds a mere 0.57% of the
overall group shares, and his family, only 1.07% of the entire groups stocks. He
has no formal power position in the group. He is not chairman of the board, nor
CEO of any of the main affiliates of the group, yet he exerts control through
Samsungs vast cross shareholding.
SAMSUNG STRUCTURE
CROSS SHARE HOLDING
 CROSS CULTURAL COMPARISON
Korea Japan

Chaebols, refer big conglomerate (collection of Zaibatsus were later evolved to Keiretsus,
independent firms under the single control of affiliations of firms whose CEOs would regularly
one family hold collaborative meetings.
External Monitoring function was lacking in Consisted of bank-dominated industrial groups
Chaebols. where bank center functioned as a capital
provider and instituted the monitoring function.
They were family-held, hierarchical, centralized, Family name carried more weight than blood
and relied more on government relations. Blood relation. Even adopted child can become
relation was most important. primary heir.

Korean chaebols were deliberately created to zaibatsus grew in response to the need for
become champions of a fast growing economy. procurement of military supplies that followed
Japanese expansion in the 1930s
 ROLE OF CHAEBOL IN THE KOREAN ECONOMY
Chaebol system was at its height during Jung-hee Parks rule (1961-1979) during which
preferential treatment was given to companies to promote economic growth.
During 1980s, Chaebols grew to become multinational businesses beyond the control of state
and no longer needed any financial assistance from state.
They had excessive and redundant industrial capacity, and as their participation in the global
market increased, weaknesses in their corporate governance was exposed.
With this, government started increasing regulatory policies, to balance their harmful effects on
economy.
Soon, anti-chaebol campaign emerged in 1993-1997. Several Chaebol chairmen were
prosecuted for bribing the former presidents.
When the Asian Crisis broke in 1997, the chaebols lost the support of the South Korean
banking sector, which quickly went bankrupt.
In August 1999, the Daewoo group was allowed to go bankrupt, clearly signaling that the age of
unwavering guarantees and political favors for chaebols was over.
 MEASURES TAKEN BY THE KOREAN
GOVERNMENT
Korean Government collaborated with IMF to clear the mess created by Chaebols.
The regulatory framework was strengthened and the business environment become
more globalized.
Korean Stock Exchange was opened to foreign investors , which led to increase in
direct financing in Korean firms via the stock market.
Chaebols also moved to shareholder oriented management model and shareholder
activism
Government made efforts to improve corporate transparency that made the
Chaebols to prepare combined financial statements.
Korean government revised the financial accounting standards to align them with
international accounting standards.
 PITFALLS OF CHAEBOL SYSTEM
Cross-shareholding, where companies within the same group own each others
shares, is pervasive in the Chaebol system.
Due to easy access to domestic bank loans, Chaebols tend to overinvest or make
dangerous investments. Chaebols had higher market-value-based debt ratios than their
non-chaebol counterparts.
Chongsus pushed to make investment diversifications that were not in line with
financial rationality.
Shareholders suffered from internal trading or tunneling among Chaebol affiliates.
Chaebols pursued policies emphasizing profit stability rather than profit maximization.
The most senior positions in the group or affiliates were not filled meritocratically
but through the tyranny of the owner family.
 VIRTUES OF THE CHAEBOL SYSTEM
The particular type of leadership developed by the chongsu can translate to specific
management advantages, especially when a charismatic leader develops a clear-cut
vision which is then implemented through carefully designed plans.
Success in political lobbying, developing social capital, and raising the support of
government and political leaders.
A high degree of entrepreneurship prevailed: Chaebols were aggressive in launching
new products, new product lines, buying and merging with existing corporations and
entering new domestic and international markets.
A tendency to risk aversion prevailed, which helped to guard the financial health of
group.
Sound management systems: some chongsus are autocratic, while others are more
group-oriented. Samsung and Hyundai, for example, are vertically organized, while
others are more horizontal
 VIRTUES OF THE CHAEBOL SYSTEM
Agility of decision-making: Chongsus usually lead the CEOs of affiliated firms
through regular meetings. All decisions related to CEO successions and large scale
investments were discussed. Most Chaebols had official or unofficial control towers
for the group, called strategy departments or president rooms. While this
practice is forbidden now, it is nevertheless prevalent for the majority of Chaebols.
Long-term perspective in management: Blood-related executives tend to behave
more responsibly and pursue long term strategies, as opposed to professional CEOs
who are inclined to follow more immediate, short-term goals.
The internal capital and labor market Chaebols generated for affiliated companies:
mutual assistance, know-how, skilled labor and executives flow throughout the
group.
 CONCLUSION

Through this article we understood, that how Chaebol system was effective in
generating economic development that shaped the country over the last 60
years.
To this day, this particular form of corporate governance which allowed the
chaebols to succeed as drivers of wealth creation remains highly relevant,
even after so many pitfalls and reforms.