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Hither and Yon

Forbes: Arrested Development

Obsessed with Control, Some Korean Tycoons End Up In Handcuffs
Forbes Staff Forbes Staff , Contributor
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By Donald Kirk

The arrest records of some of South Korea’s top corporate chieftains are as remarkable as their commercial success. The leaders of the three biggest chaebol—and at least six members of this year’s rich list—have been convicted of major crimes, including embezzlement and tax evasion. Typically they avoid lengthy prison terms—getting suspended sentences and heavy fines instead—but Chey Tae-Won, chairman of third-biggest SK, remains behind bars after a judge refused to suspend a four-year sentence for embezzlement.
Does Chey’s imprisonment portend a trend? President Park Geun-Hye has promised no more pardons for executives convicted of crimes. Her predecessor, Lee Myung-Bak, had pardoned Chey for a previous conviction for a massive accounting fraud and pardoned the chairman of Samsung, Lee Kun-Hee, and Hyundai Motor ’s Chung Mong-Koo for embezzlement after they had already received suspended sentences. President Lee also pardoned Kim Seung-Youn, chairman of eighth-largest chaebol Hanwha, who was sentenced to 18 months for assaulting a nightclub worker with a pipe. Still, how much is really changing? Kim in February got off with a suspended sentence for embezzlement.

So why would rich and powerful men risk prison time and such public shame? It might be the law of unintended consequences at work: A regulation aimed at reining in the immense size and power of the chaebol may be driving the corporate crime wave. Added after the 1997–98 Asian economic crisis, it limits each shareholder to no more than 3% of the voting power of a company. So a chaebol chairman who wants to keep control of his empire may secretly put shares in the names of friends and relatives who will vote with him. “If the shares are in proxy, there is no way of knowing who owns the shares,” says Lee Jisoo, a lawyer with the Center for Good Corporate Governance.
Coming up with the money for these shares, in too many cases, leads tycoons to embezzle funds from their own companies. Since their wealth is tied up in their stakes, selling shares to raise this money defeats the purpose of maintaining control. Using dividends or other assets might show up on income or other government records. And with the tax rate on inherited wealth as high as 45%, money must also be found to pay estate taxes without diluting family control. “They’re concerned they might lose shares,” explains Lee. “One of the wishes of the controlling family is they want to maintain controlling power to the end.” He adds that chaebol leaders “always argue that the rule should be loosened.” But he says he doubts that the rule results in any increase in white-collar crime, because corporate corruption is so deep-seated.
Jang Ha-Sung, a finance professor at Korea University, traces corruption at top levels to the 1970s and 1980s, when chaebol were growing rapidly and beginning to compete globally. President Park’s father, Park Chung-Hee, president for 18 years until 1979, spurred the chaebol to excel at all costs. “When the economy was growing so fast, everything was justified,” says Jang. “The chaebol have political power. The corporate sector has influence in every corner of society. There’s no diversification.” And for those who might impose restraints on the chaebol, the lure of post-retirement jobs is irresistible, he says. “Retired bureaucrats, judges, everyone wants a job in a chaebol.”
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