Americans are obsessing about the possibility of a new Korean war. But in Seoul, the talk is of another conflict: a renewed assault on the privileges and abuses of the chaebol, the giant business groups that still control much of the economy. If the case against the SK boss is any sign, then the nation's prosecutors are ready to pounce. The result could be a final purge of the practices that cheat minority shareholders while they strengthen the secret grip of Korea's business dynasties. But if the prosecutors go on a witch hunt and simply attack the chaebol because they are powerful, the effort could polarize the political classes even further and trigger a backlash against the new government.
That government was installed just three days after Chey's arrest, when President Roh Moo Hyun took the oath of office. A crusading human rights lawyer, Roh won the presidency partly because he made reining in the chaebol a major plank in his electoral platform. Roh pledged to continue the crackdown on corporate crime. "The time when privileges and violations of rules are tolerated must now come to an end," Roh said in his inaugural speech. When his administration is through, he promised, Korea's markets will meet the most rigorous international standards of fairness and transparency.
By most accounts, Roh has plenty of work ahead of him. His predecessor, Kim Dae Jung, enacted reforms that led to the breakup of Daewoo and Hyundai, two of the largest chaebol. But in the end, his administration never eliminated the worst abuses. "Unfortunately, SK is not the exception," says Park Kun Yong, an economic-reform expert at shareholder activist group People's Solidarity for Participatory Democracy, which triggered the SK probe when it alleged wrongdoing by Chey in January.
The chaebol's manipulations have long meant that foreign investors applied a "Korea discount" to Seoul-traded shares: Investors simply aren't willing to bid up the price of companies that may be secretly controlled by insiders. For example, SK Telecom -- which posted a net profit of $1.3 billion last year, up 36% from 2001 -- trades at 8.8 times its estimated 2003 earnings, compared with 63 times earnings for Japan's NTT DoCoMo. "Korea just doesn't have a quality reputation in terms of corporate governance," says George W. Long, chairman of LIM Advisors Ltd., a Hong Kong asset management firm.
If Roh does unleash an offensive against the chaebol, he will rely heavily on the activists who helped him win the election. People's Solidarity, for example, is busy digging out cases of alleged abuse by some of the bluest of Korea's blue-chips. The activist group says top executives of Samsung Group arranged a bond issue in February, 1999, that included warrants allowing holders to buy shares in Samsung's software affiliate at one-eighth market value. Nearly two-thirds of those bonds ended up in the hands of four children of Samsung Group Chairman Lee Kun Hee. People's Solidarity has also accused LG Group of carrying out various share transactions that effectively transferred some $160 million in profits from affiliated companies to the family of LG Group Chairman Koo Bon Moo. Samsung and LG both deny any impropriety in these transactions.
Don't expect the chaebol to accept new restrictions without a fight. Jang Ha Sung, a Korea University economist who started the country's shareholder-rights movement in 1997, points out that Korea's deep-pocketed chaebol chieftains have often defeated reform efforts, such as a plan to restrict cross-shareholdings among affiliated companies. "Unless a credible corporate-governance system is put in place, family-run chaebol can always roll back reforms and revert to their old practices," says Jang.
These days, the biggest chaebol are keeping a low profile as the SK scandal grabs the headlines. But newspapers with known sympathies to the conglomerates are already running editorials attacking prosecutors for acting hastily. These scribes warn that a rash of high-profile cases could spook investors and hurt the economy. Roh "shouldn't pursue a full-court press against the chaebol under the name of re-form," says the conservative daily Chosun Ilbo.
The SK case highlights the practice of prominent business families who use tiny stakes to win enormous power inside companies. Why go to such trouble? Because, technically, the chaebol are just loose groupings of companies. To win real control over these conglomerates, insiders have to construct a web of shareholdings. And sometimes they skirt the law to do it.
After Kim Dae Jung's early reform push, though, SK Group seemed to heed the call for reform. In 1998, SK Telecom, one of Asia's most profitable mobile-telephone operators, became the first Korean company to let minority shareowners appoint directors. And last year, SK Telecom agreed to change voting rules at its annual meetings to give small stakeholders a greater voice.
Still, prosecutors say Chey kept looking for ways to cement his control of SK companies. In March, 2002, SK C&C -- an unlisted software-development and computer-services firm that Chey controls -- bought a big interest in Seoul's Sheraton Walker Hill hotel from Chey. In return, the software company gave Chey its 5.1% stake in oil refinery SK Corp. in a deal that prosecutors say vastly overvalued Chey's hotel shares. The transaction made Chey SK Corp.'s largest shareholder and, after adding in stakes held by other SK affiliates he controls, gave him management control over the company. Even better -- for Chey, at least -- the deal allowed him to control SK Telecom, then 26.8% owned by the refinery. "He tried to rule the whole group with small shareholdings," says Lee In Kyu, a senior prosecutor at the Seoul Prosecutors' Office. Then, to pay his $18 million tax bill from the hotel-share swap, Chey forced the group's troubled trading house, SK Global, to buy his remaining stake in the hotel at an inflated price, prosecutors say. Chey's attorney declined to comment.
There's more. Prosecutors claim Chey and his top executives also arranged to buy out J.P. Morgan Chase & Co.'s stake in SK Securities Co., the group's brokerage arm. No problem there, but the government charges that Chey dipped into the pockets of affiliates to get the $93 million he needed to seal the deal. SK Group spokesman Lim Su Kil says the deal with J.P. Morgan was arranged to guarantee survival of the brokerage. But, he adds, "In the future, we will try to make our governance transparent," says Lim.
Roh rode into office on a wave of reformist sentiment. The SK case and others in the works will test his commitment to a true transformation of the markets. If Roh sticks to his calling as a crusader, Chey may soon have company in that cell of his. By Moon Ihlwan in Seoul, with Mark L. Clifford in Hong Kong