A woman uses a Samsung Electronics Co. Galaxy S4 smartphone at night in Gwanghwamun Square in Seoul, South Korea, on Tuesday, Oct. 22, 2013. Samsung Electronics is scheduled to release third-quarter earnings on Oct. 25. Photographer: SeongJoon Cho/Bloomberg (Bloomberg)

The story of South Korea’s transformation from economic minnow to the world’s fifth-largest exporter owes much to its sprawling family-run conglomerates. Known as chaebol, these long-time pillars of the nation’s “miracle economy” include the likes of LG, Hyundai, SK, Lotte and — largest of them all — Samsung. Yet the chaebol’s oversized influence and cozy relationship with government, highlighted by an influence-peddling scandal that cost the country’s president and Samsung’s top executive their jobs, have cast an intense spotlight on the conglomerates at the same time as many are navigating generational transitions. Is it finally time for change at the chaebol?

The Situation

2017 was supposed to be a watershed year for chaebol after Samsung’s top executive was jailed as part of the scandal that toppled Park Geun-hye, South Korea’s president. Jay Y. Lee, the de facto head of Samsung Group, was sentenced to five years after a court convicted him of bribing his way to greater control of the Samsung empire his family founded. But Lee appealed the conviction and in February Seoul’s high court freed him after reducing and suspending the sentence, sparking public anger. In the past, a long list of business leaders, including Lee’s father, were convicted for corrupt behavior only to be let off easy. Lee, also the vice chairman of Samsung Electronics, was accused of playing a role in payments of tens of millions of dollars that Samsung made to benefit a close friend of deposed president Park. In February, the Lotte retail group’s chairman was convicted in a separate corruption trial relating to ex-president Park and handed a 30-month jail term. Eight months later, an appeals court freed him when it suspended his sentence. Public discontent with chaebol has long been brewing. At a hearing in 2016, nine chaebol leaders seated together faced a barrage of questions from lawmakers, as hundreds of thousands of protesters calling for the president’s ouster turned their anger to the country’s conglomerates. Sixteen months later, former president Park was sentenced to 24 years in prison after being found guilty of crimes ranging from bribery to coercion, abuse of power and the leaking of state secrets.  

The Background

The chaebol, which means “wealth clique” in Korean, is widely believed to have been influenced by Japan’s zaibatsus — both share the same Chinese characters and meaning. Like the chaebol, zaibatsus were family-controlled conglomerates that dominated Japan’s economy until they were disbanded by the U.S. government shortly after World War II. In Korea, establishing a chaebol was viewed as a key way to fast-track the country’s economic development. Shortly after taking over the government in a military coup in 1963, Park Chung-hee, the father of the deposed president, launched a modernization effort driven by “guided capitalism” in which government-selected companies undertook major projects often financed with government-backed loans. There are now 45 conglomerates that fit the traditional definition of a chaebol, according to Korea’s Fair Trade Commission. The top 10 chaebol own more than 27 percent of all business assets in South Korea.

The Argument

While the chaebol helped make South Korea an economic success story, many politicians and investors argue that the system is a cultural relic poorly suited to the 21st-century economy. The shares of chaebol-linked companies trade at lower multiples of earnings than their peers in the U.S., Europe or Japan (a phenomenon called the Korea discount) because of concern over cronyism and cross-ownership. Ordinary South Koreans are also increasingly questioning the consolidation of wealth among a handful of families and the stifling effect they’ve had on small businesses and startups. People are no longer prepared to turn a blind eye to illegal and improper relationships between government and business as they were in the past when the chaebol were seen driving growth and creating jobs, according to Professor Kim Sang-jo of Hansung University. Amid the public criticism, regulators and investors have been pushing to unravel cross-shareholdings and revamp governance structure of the chaebol.  

“It’s shocking that the disease of political-business collusion between Korea’s most powerful person, the president, and a conglomerate is not a thing of the past but still continuing. It will be hard to recover from this loss of faith.” Presiding judge Kim Jin-dong after Lee’s conviction, Aug. 25, 2017.

To contact the writer of this QuickTake: Peter Pae in Seoul at ppae1@bloomberg.net

To contact the editor responsible for this QuickTake: Grant Clark at gclark@bloomberg.net

First published Jan. 14, 2015

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