11

South Korea – South Korea – Management Jurassic Management Jurassic

ParkPark

Week 4Week 4

22

Business EntitiesBusiness Entities The primary business entity in Korea and The primary business entity in Korea and

which is unique to that country iswhich is unique to that country is The ChaebolThe Chaebol These areThese are Conglomerates of many companies Conglomerates of many companies

clustered around one holding companyclustered around one holding company The parent company is usually controlled by The parent company is usually controlled by

one familyone family In 1988, the 40 top chaebol grouped a total In 1988, the 40 top chaebol grouped a total

of 671 separate companies.of 671 separate companies. The companies hold shares in each otherThe companies hold shares in each other

33

ChaebolsChaebols Their concentration is amazingTheir concentration is amazing The top four superchaebol have sales which The top four superchaebol have sales which

account for somewhere between 40 and 45 account for somewhere between 40 and 45 percent of South Korea's Gross National percent of South Korea's Gross National Product. Product.

The Chaebol do not have their own financial The Chaebol do not have their own financial institutions.institutions.

Much more dependent on government Much more dependent on government approvalapproval

Chaebol tend to spread across industriesChaebol tend to spread across industries Keiretsu in Japan tend to integrate vertically Keiretsu in Japan tend to integrate vertically

in the same industry.in the same industry. Chaebol are more centralised than keiretsuChaebol are more centralised than keiretsu

44

ChaebolsChaebols

Have formal structures and Have formal structures and centralised controlcentralised control

Chaebol are much more family Chaebol are much more family based based

Even though they have grown to Even though they have grown to vast proportions, most chaebol vast proportions, most chaebol continue to be overwhelmingly continue to be overwhelmingly family concernsfamily concerns

55

Entrepreneur or Dictator?Entrepreneur or Dictator? Chaebol leaders have a worrying tendency Chaebol leaders have a worrying tendency

to write autobiographies & philosophiseto write autobiographies & philosophise Kim Woo Chong, the founder of Daewoo, Kim Woo Chong, the founder of Daewoo,

wrote an autobiography called 'Every wrote an autobiography called 'Every Street is Paved with Gold‘Street is Paved with Gold‘

““Change everything except your wife and Change everything except your wife and children” - Lee Kun Hee, the head of the children” - Lee Kun Hee, the head of the Samsung groupSamsung group

Chung Ju Yung, who founded Hyundai Chung Ju Yung, who founded Hyundai wrote an autobiography called: "There are wrote an autobiography called: "There are Difficulties, but no Failures".Difficulties, but no Failures".

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Management Challenges in 21Management Challenges in 21stst Century (Lee 2004)Century (Lee 2004)

77

Lee’s management Lee’s management challengeschallenges

Long HoursLong Hours After hours “decompression”After hours “decompression” Recent consideration by government to shorten Recent consideration by government to shorten

hourshours Resistance from Chaebol leaders as would Resistance from Chaebol leaders as would

reduce outputreduce output Workers’ reaction - don’t work too hardWorkers’ reaction - don’t work too hard Long hours does not equal greater productivityLong hours does not equal greater productivity Sales OrientationSales Orientation For 36 years Korea’s export growth has averaged For 36 years Korea’s export growth has averaged

22.4% per annum22.4% per annum Constant pressure to increase salesConstant pressure to increase sales Sales driven management policySales driven management policy Ignores profitability and thus financial viabilityIgnores profitability and thus financial viability

88

Lee’s management Lee’s management challengeschallenges

Top ManagementTop Management Owner/Chairman has absolute power & no Owner/Chairman has absolute power & no

tenure limittenure limit Decisions made without consultationDecisions made without consultation e.g. Samsung and car manufacturee.g. Samsung and car manufacture Limited rewardsLimited rewards Management promotion based on Management promotion based on

– SenioritySeniority– PerformancePerformance

Lack of motivation to focus on performanceLack of motivation to focus on performance Short term planning horizonShort term planning horizon Manipulation of accounting information to Manipulation of accounting information to

meet short-term goalsmeet short-term goals

99

Lee’s management Lee’s management challengeschallenges

Unethical ExecutivesUnethical Executives Lack of transparency at high levelsLack of transparency at high levels Information shared by only a fewInformation shared by only a few Bribery as the “lubricant” of businessBribery as the “lubricant” of business Integral to business environmentIntegral to business environment Training & HRMTraining & HRM Much formalized trainingMuch formalized training Frequently insufficient depthFrequently insufficient depth HRM mismanagementHRM mismanagement Decision MakingDecision Making Complex and long decision making structureComplex and long decision making structure Decisions made at the topDecisions made at the top Introduction of “team” system in 1990sIntroduction of “team” system in 1990s Tends to be illusoryTends to be illusory

1010

Lee’s management Lee’s management challengeschallenges

Lack of FocusLack of Focus Try to do too many thingsTry to do too many things Try to do them all themselvesTry to do them all themselves Competitively weak systemCompetitively weak system Business PlanningBusiness Planning Yearly planningYearly planning Modification of previous year’s plansModification of previous year’s plans Not reactive to external environmentNot reactive to external environment Accustomed to routine workAccustomed to routine work Specialist = someone in same job for 20 Specialist = someone in same job for 20

yearsyears

1111

Indices of Korean National Indices of Korean National Economy ($US billions)Economy ($US billions)

1212

Determinants of corporate Determinants of corporate behaviour pre-1997behaviour pre-1997

Oh & Park (2002)Oh & Park (2002) There are many kinds of market There are many kinds of market

intervention by the state. intervention by the state. Specific to the Korean case is the Specific to the Korean case is the

awesome magnitudeawesome magnitude and frequency of and frequency of state intervention in the market. state intervention in the market.

They include, but are not exclusive They include, but are not exclusive to, financial regulation, infrastructure to, financial regulation, infrastructure building, initiating and implementing building, initiating and implementing entire economic development plans entire economic development plans and industrial targeting through and industrial targeting through preferential treatmentpreferential treatment

1313

Hyundai’s good fortuneHyundai’s good fortune The rise of Hyundai epitomised the entry of The rise of Hyundai epitomised the entry of

the chaebol onto the world stage with the the chaebol onto the world stage with the close ties between business dynasties and close ties between business dynasties and governmentgovernment

One story has it that Chung Ju Yung's One story has it that Chung Ju Yung's fortunes were sealed when President Park fortunes were sealed when President Park Chung Hee paid a surprise dawn visit to one Chung Hee paid a surprise dawn visit to one of Hyundai's installations by helicopter and of Hyundai's installations by helicopter and found him already hard at work. From that found him already hard at work. From that moment, Park decided Hyundai was a good moment, Park decided Hyundai was a good thing and promoted the company thing and promoted the company relentlesslyrelentlessly

1414

Corporate controlCorporate control Kim (2003)Kim (2003) Demonstrates in Doosan Demonstrates in Doosan

corporation between 1987 and corporation between 1987 and 1992 dominant entrepreneur was 1992 dominant entrepreneur was able to control Chaebol with only able to control Chaebol with only small shareholding by small shareholding by “interlocking ownership”“interlocking ownership”

Any effective corporate governance Any effective corporate governance must break this structuremust break this structure

Substance over FormSubstance over Form

1515

State of Corporate State of Corporate GovernanceGovernance

Taek & Soo (2004) argue lack of Taek & Soo (2004) argue lack of governance in Chaebols pre-97 wasgovernance in Chaebols pre-97 was– Weak accounting & auditing standardsWeak accounting & auditing standards– Minimal shareholder activism (not Minimal shareholder activism (not

possible – Kim 2003)possible – Kim 2003)– Financial institutions not source of Financial institutions not source of

outside disciplineoutside discipline– No threat of hostile takeovers (not No threat of hostile takeovers (not

permitted by law until 1998)permitted by law until 1998) Government reaction 2 foldGovernment reaction 2 fold

– Force restructuring of ChaebolsForce restructuring of Chaebols– Law reforms on commercial code, Law reforms on commercial code,

auditing, monopolies & securitiesauditing, monopolies & securities

1616

Intended effects of Law Intended effects of Law ReformsReforms

Strengthen the board of directors as the Strengthen the board of directors as the main decision-making body of a company main decision-making body of a company and make it independent of controlling and make it independent of controlling shareholdersshareholders

Strengthen minority shareholder rightsStrengthen minority shareholder rights Increase the accountability of controlling Increase the accountability of controlling

shareholders and directors on the boardshareholders and directors on the board Enhance transparency and disclosuresEnhance transparency and disclosures Strengthen accounting standards and Strengthen accounting standards and

internal controlsinternal controls Enhance the competitiveness of large Enhance the competitiveness of large

group companies group companies Facilitate corporate takeoversFacilitate corporate takeovers

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Positive outcomes of reformPositive outcomes of reform High profile case December 2001 97.7 High profile case December 2001 97.7

billion Won fine against Chairman & 9 billion Won fine against Chairman & 9 directors of Samsung Electronics Co for directors of Samsung Electronics Co for breach of fiduciary dutybreach of fiduciary duty– acquiring a majority stake in a company acquiring a majority stake in a company

that was financially unstablethat was financially unstable– having offered a bribe to a former having offered a bribe to a former

president of the country by using the president of the country by using the company's fundscompany's funds

– disposing of the shares of an affiliated disposing of the shares of an affiliated company within one year of having company within one year of having acquired them, at a price much lower acquired them, at a price much lower than their acquisition pricethan their acquisition price

1818

Extension of legal reformsExtension of legal reforms

Legislation being extended Legislation being extended January 2005 to include actions January 2005 to include actions againstagainst

company officers, managers, and company officers, managers, and controlling shareholders for controlling shareholders for – window dressingwindow dressing– inadequate auditsinadequate audits– false disclosuresfalse disclosures– stock price manipulationstock price manipulation– insider tradinginsider trading

1919

Drivers of Change – External Drivers of Change – External Impacts (law)Impacts (law)

Oh & Park (2002) studiedOh & Park (2002) studied Organisational dynamics of the ChaebolOrganisational dynamics of the Chaebol Despite corporate failures & extended legislative Despite corporate failures & extended legislative

pressurepressure Chaebols resist becauseChaebols resist because Institutionally predisposed to diversification as a Institutionally predisposed to diversification as a

way of reducing technological uncertaintiesway of reducing technological uncertainties Government’s “Big Deal” 1998 was largely Government’s “Big Deal” 1998 was largely

resistedresisted Suffer “organisational isomorphism” – trying to Suffer “organisational isomorphism” – trying to

preserve NOT technological cutting edge BUT preserve NOT technological cutting edge BUT organisational diversification & centralised organisational diversification & centralised decision makingdecision making– Chaebols are organisationally stable structuresChaebols are organisationally stable structures– Reactions to external shocks are only an attempt to Reactions to external shocks are only an attempt to

maintain same structuremaintain same structure

2020

Drivers of Change – External Drivers of Change – External Impacts (labour)Impacts (labour)

Indicators of Employment & Income Distribution (%)Indicators of Employment & Income Distribution (%)

2121

What about the workers?What about the workers? 1990s globalisation drive & 97 crisis had 1990s globalisation drive & 97 crisis had

profound effect on labour relationsprofound effect on labour relations Pre 97Pre 97 Globalisation required labour mobility Globalisation required labour mobility

reforms as conditions of joining OECDreforms as conditions of joining OECD Labour market flexibility was needed to assist Labour market flexibility was needed to assist

economic competitivenesseconomic competitiveness Influx of foreign workers caused labour unrestInflux of foreign workers caused labour unrest Post 97Post 97 IMF/World Bank intervention required IMF/World Bank intervention required

business restructuringbusiness restructuring Causing unemploymentCausing unemployment Need for “Social Net”Need for “Social Net”

2222

Social Pact 1998Social Pact 1998Key contentsKey contents

Employment stabilization and Employment stabilization and unemployment policyunemployment policy

Improvements on the employment Improvements on the employment insurance system and expansion of itsinsurance system and expansion of its

coveragecoverage Support for unemployed workersSupport for unemployed workers Enlargement of job placement serviceEnlargement of job placement service Expansion of vocational trainingExpansion of vocational training Job creationJob creation

2323

Social Pact 1998Social Pact 1998Key contentsKey contents

Extension and consolidation of social Extension and consolidation of social security systemsecurity system

Integration of health insurance system Integration of health insurance system and expansion of its coverageand expansion of its coverage

Enactment of Worker’s Wage Claims ActEnactment of Worker’s Wage Claims Act Wage stabilization and the promotion of Wage stabilization and the promotion of

labour-management cooperationlabour-management cooperation Securing the effectiveness of collective Securing the effectiveness of collective

agreementsagreements Enhancement of basic labour rightsEnhancement of basic labour rights Legalization of teachers’ unionsLegalization of teachers’ unions

2424

Social Pact 1998Social Pact 1998Key contentsKey contents

Trade unions’ right to political activitiesTrade unions’ right to political activities Establishment of works council for Establishment of works council for

government officials from January 1999government officials from January 1999 Recognition of unemployed workers’ Recognition of unemployed workers’

right to join trade unions organizedright to join trade unions organized beyond enterprise levelbeyond enterprise level Enhancement of labour market flexibilityEnhancement of labour market flexibility Introduction of a worker dispatch Introduction of a worker dispatch

schemescheme Deregulation of dismissals for Deregulation of dismissals for

managerial reasonsmanagerial reasons

2525

Korean HRM abroadKorean HRM abroad If Korean HRM is largely state guided – how If Korean HRM is largely state guided – how

does it transfer abroad?does it transfer abroad? Taylor, et al (2002) studied Korean plants in Taylor, et al (2002) studied Korean plants in

ChinaChina All companies stressed long-term strategy All companies stressed long-term strategy

(consistent with growth philosophy)(consistent with growth philosophy) HRM decision taken largely independent of HRM decision taken largely independent of

head officehead office Decision making splitDecision making split

– Administration – KoreanAdministration – Korean– Production – ChineseProduction – Chinese

HRM is horizontal and group oriented to HRM is horizontal and group oriented to greater extent than in Koreagreater extent than in Korea

Corporate structure & culture adapted to Corporate structure & culture adapted to Chinese environmentChinese environment

2626

Corporate CultureCorporate Culture

Korean companies are very Korean companies are very “corporate culture” oriented“corporate culture” oriented

Corporate culture used as basis Corporate culture used as basis for growthfor growth

Can be source of problem when Can be source of problem when environment changes rapidlyenvironment changes rapidly

Pre 97 strength now post 97 Pre 97 strength now post 97 liabilityliability

2727

Aekyung (Petrochemicals) Aekyung (Petrochemicals) Corporate LogoCorporate Logo

2828

So what does it mean?So what does it mean? Aekyung Group's Corporate symbol is AekyungCIS's Aekyung Group's Corporate symbol is AekyungCIS's

(Corporate Identification System) most basic (Corporate Identification System) most basic element, domestically expressing the enterprise's element, domestically expressing the enterprise's image, and is an emblem at the core of every visual image, and is an emblem at the core of every visual communications. communications. The corporate symbol's basic spirit being the The corporate symbol's basic spirit being the globalization and aim for the top through a stance of globalization and aim for the top through a stance of harmony and challenge in the 21st century, is a harmony and challenge in the 21st century, is a business culture creating happiness by taking the business culture creating happiness by taking the customer's appreciation and trust as its backbone. customer's appreciation and trust as its backbone. Moreover, the corporate symbol expresses a general Moreover, the corporate symbol expresses a general image of contentment and abundance. image of contentment and abundance. The English initials 'a' and 'k' form Aekyung's The English initials 'a' and 'k' form Aekyung's inexhaustible leap into the world, and the lower inexhaustible leap into the world, and the lower part's curve represents 'the large and crystalline part's curve represents 'the large and crystalline waves that break in'; expressing Aekyung's waves that break in'; expressing Aekyung's progressive and futuristic will in leading changes in progressive and futuristic will in leading changes in the 21st century.the 21st century.

2929

Changing Corporate CultureChanging Corporate Culture Park (2002) considered failures in Park (2002) considered failures in

changing corporate culturechanging corporate culture– Inappropriate understanding of the concept Inappropriate understanding of the concept

of organisational cultureof organisational culture– Lack of professional skills among campaign Lack of professional skills among campaign

managersmanagers– Hastiness in culture change movementHastiness in culture change movement– Failure to get employees’ interest & Failure to get employees’ interest &

participationparticipation– Lack of linkage between strategy & culture Lack of linkage between strategy & culture

change effortschange efforts– Lack of linkage between culture change Lack of linkage between culture change

efforts & other business innovation activitiesefforts & other business innovation activities

3030

Development of corporate Development of corporate cultureculture

Process of systematic corporate Process of systematic corporate culture managementculture management

Craft cultural vision/worldviewCraft cultural vision/worldview Educating corporate ideology Educating corporate ideology

(indoctrination)(indoctrination) Developing corporate emblems Developing corporate emblems

(symbolisation)(symbolisation) Modifying behaviour & systems Modifying behaviour & systems

(implementation)(implementation)

3131

Unique drivers of corporate Unique drivers of corporate cultureculture

Cho & Yoon (2002) develop the Cho & Yoon (2002) develop the internal forces at workinternal forces at work

Korea is collectivist cultureKorea is collectivist culture Corporate culture is based on Corporate culture is based on

“dynamic collectivism” – a tension “dynamic collectivism” – a tension between in-groups & out-groupsbetween in-groups & out-groups

3 dimensions of collective dynamism3 dimensions of collective dynamism– In-group harmonyIn-group harmony– Optimistic progressivismOptimistic progressivism– Hierarchical principle (Confucian 5 codes)Hierarchical principle (Confucian 5 codes)

3232

Paradox ResolutionParadox Resolution 3 dimensions can cause paradoxical situations 3 dimensions can cause paradoxical situations Leading to a process of “paradox resolution”Leading to a process of “paradox resolution”

3333

Chaebol post 1997Chaebol post 1997

External impacts have failed to External impacts have failed to fundamentally affect inherent fundamentally affect inherent corporate structure & processescorporate structure & processes

Processes shaped by leading & Processes shaped by leading & preferential role in economic policy in preferential role in economic policy in 70s and 80s70s and 80s

Chaebols remain institutionally Chaebols remain institutionally unresponsive to changeunresponsive to change

Continue to follow behaviour patterns Continue to follow behaviour patterns because they have existed in the pastbecause they have existed in the past