TEXT-Fitch:SK sentence won't improve corporate governance in Korea

Fri Feb 1, 2013 5:09am EST

(The following statement was released by the rating agency)

Feb 01 - The four-year prison sentence handed down to the SK Group chairman for embezzling around USD45m shows that court rulings are getting harsher, but will do little in the short term to change Korea's weak corporate governance culture.

Executives convicted of accounting fraud and other financial irregularities are not barred from returning to senior management roles in public companies. Corporate governance in Korea could improve significantly if those convicted of serious financial crimes were prohibited from exercising any influence over a public company. However, the culture is only likely to change when domestic investors and lenders become more aggressive in exercising their rights in enforcing greater discipline on management.

The courts ruled that Mr Chey Tae Won embezzled KRW49.7bn from SK Telecom (A-/Stable) and SK C&C in 2008, using the subsidiaries under his control. This is the second time that he has been sentenced, having been handed a three-year suspended sentence in 2003 for accounting fraud. On this latest occasion, a four-year sentence represents a tougher decision by a South Korean court, especially as the courts have historically showed leniency towards Korea's "chaebol" leaders in light of their contribution to the economy.

Exactly how long Mr Chey will remain in prison remains to be seen; and given that he has appealed the decision to a higher court, it will be interesting to see whether the harsher sentence is upheld.

Even if Mr Chey does serve the full four years, we do not expect any major change to the management and operations of the SK Group companies (including SK Telecom and SK Innovation (BBB/Stable)). Mr Chey's family will still be able to exercise their control and voting rights at all group company board meetings and shareholder meetings.

Weak corporate governance can contribute to slimmer margins and lighter free cash flow generation in a variety of ways. Typical examples include management acquiring non-core assets at inflated values, as well as overpaying for goods, services and capital equipment via separate entities that are unlisted and often majority-owned by the controlling shareholders.

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