August 28, 2018 / 3:19 AM / 24 days ago

Breakingviews - Korean chaebol overhaul runs into economic reality

HONG KONG (Reuters Breakingviews) - South Korea’s chaebol overhaul is running into economic reality. The country’s competition chief just unveiled new rules to rein in multi-layered conglomerates, in what will be the first rewrite of antitrust rules in nearly four decades. Slowing growth, however, has made the likes of Samsung even more important to the country’s jobs plight. That means corporate governance reform probably will wind up weaker than originally anticipated.

Lee Jae-yong, Samsung Group heir arrives at Seoul Central District Court to hear the bribery scandal verdict on August 25, 2017 in Seoul, South Korea. REUTERS/Chung Sung-Jun/Pool

The proposals come just over a year after President Moon Jae-in took office on promises to tame the country’s powerful, family-run corporate empires known as chaebol. The head of Korea’s Fair Trade Commission, Kim Sang-jo, is leading the charge. Nicknamed the “chaebol sniper”, Kim has publicly called out Samsung and Hyundai, the two largest, for their ownership structures and other control deficiencies. The third-generation scions of both companies exert clout by way of holdings in affiliates, a setup which tends to sideline minority shareholders.

Loosening the grip founding families have on their sprawling businesses is the aim. The new amendments include curbs on circular shareholdings, intra-conglomerate transactions and voting rights while also demanding greater disclosure.

Moon will struggle to gain political support to enact some of the new ideas, though. For one thing, his party lacks the required three-fifths majority in the National Assembly. His approval rating also has fallen to 56 percent, near its lowest level since taking office. North Korea’s lack of progress giving up its nuclear weapons is one likely factor. A weakening economy is another: average job growth in the year to July plummeted to 122,000, down from 353,000 a year earlier. That is bruising for the self-proclaimed “jobs president”.

That means Moon probably will have to soften his stance against the chaebol in return for help in boosting employment. Earlier this month, Samsung pledged to invest 130 trillion won ($116 billion) in South Korea along with some hiring plans.

Shares of Samsung C&T, the de facto holding company, for example, are trading roughly 50 percent below their net asset value, according to CLSA analyst Steve Chung. The historical average discount is 15 percent. That suggests investors are recalibrating their expectations about just how tough Seoul will be on chaebol.

Breakingviews

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