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South Korea – Management South Korea – Management Jurassic ParkJurassic Park

Week 5Week 5

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Business EntitiesBusiness Entities The primary business entity in Korea and which is unique The primary business entity in Korea and which is unique

to that country isto that country is The ChaebolThe Chaebol These areThese are Conglomerates of many companies clustered around one Conglomerates of many companies clustered around one

holding companyholding company The parent company is usually controlled by one familyThe parent company is usually controlled by one family In 1988, the 40 top chaebol grouped a total of 671 separate In 1988, the 40 top chaebol grouped a total of 671 separate

companies.companies. The companies hold shares in each otherThe companies hold shares in each other

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

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

The Chaebol do not have their own financial institutions.The Chaebol do not have their own financial institutions. Much more dependent on government approvalMuch more dependent on government approval Chaebol tend to spread across industriesChaebol tend to spread across industries Keiretsu in Japan tend to integrate vertically in the same Keiretsu in Japan tend to integrate vertically in the same

industry.industry. Chaebol are more centralised than keiretsuChaebol are more centralised than keiretsu

44

ChaebolsChaebols

Have formal structures and centralised Have formal structures and centralised controlcontrol

Chaebol are much more family based Chaebol are much more family based Even though they have grown to vast Even though they have grown to vast

proportions, most chaebol continue to be proportions, most chaebol continue to be overwhelmingly family concernsoverwhelmingly family concerns

55

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

autobiographies & philosophiseautobiographies & philosophise Kim Woo Chong, the founder of Daewoo, wrote an Kim Woo Chong, the founder of Daewoo, wrote an

autobiography called 'Every Street is Paved with Gold‘autobiography called 'Every Street is Paved with Gold‘ ““Change everything except your wife and children” - Change everything except your wife and children” -

Lee Kun Hee, the head of the Samsung groupLee Kun Hee, the head of the Samsung group Chung Ju Yung, who founded Hyundai wrote an Chung Ju Yung, who founded Hyundai wrote an

autobiography called: "There are Difficulties, but no autobiography called: "There are Difficulties, but no Failures".Failures".

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

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Lee’s management challengesLee’s management challenges Long HoursLong Hours After hours “decompression”After hours “decompression” Recent consideration by government to shorten hoursRecent consideration by government to shorten hours Resistance from Chaebol leaders as would reduce outputResistance from Chaebol leaders as would reduce 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 22.4% For 36 years Korea’s export growth has averaged 22.4%

per annumper 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 challengesLee’s management challenges Top ManagementTop Management Owner/Chairman has absolute power & no tenure limitOwner/Chairman has absolute power & no tenure 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 meet short-Manipulation of accounting information to meet short-

term goalsterm goals

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Lee’s management challengesLee’s management challenges 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

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Lee’s management challengesLee’s management challenges 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 yearsSpecialist = someone in same job for 20 years

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Indices of Korean National Economy Indices of Korean National Economy ($US billions)($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 intervention by There are many kinds of market intervention by

the state. the state. Specific to the Korean case is the Specific to the Korean case is the awesome awesome

magnitudemagnitude and frequency of state intervention in and frequency of state intervention in the market. the market.

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

1313

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

onto the world stage with the close ties between business onto the world stage with the close ties between business dynasties and governmentdynasties and government

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

1414

Corporate controlCorporate control

Kim (2003)Kim (2003) Demonstrates in Doosan corporation Demonstrates in Doosan corporation

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

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

Substance over FormSubstance over Form

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State of Corporate GovernanceState of Corporate Governance Taek & Soo (2004) argue lack of governance in Chaebols Taek & Soo (2004) argue lack of governance in Chaebols

pre-97 waspre-97 was Weak accounting & auditing standardsWeak accounting & auditing standards Minimal shareholder activism (not possible – Kim 2003)Minimal shareholder activism (not possible – Kim 2003) Financial institutions not source of outside disciplineFinancial institutions not source of outside discipline No threat of hostile takeovers (not permitted by law No threat of hostile takeovers (not permitted by law

until 1998)until 1998) Government reaction 2 foldGovernment reaction 2 fold

Force restructuring of ChaebolsForce restructuring of Chaebols Law reforms on commercial code, auditing, monopolies Law reforms on commercial code, auditing, monopolies

& securities& securities

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Intended effects of Law ReformsIntended effects of Law Reforms

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

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

and directors on the boardand directors on the board Enhance transparency and disclosuresEnhance transparency and disclosures Strengthen accounting standards and internal controlsStrengthen accounting standards and internal controls Enhance the competitiveness of large group companies Enhance the competitiveness of large 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 billion Won fine High profile case December 2001 97.7 billion Won fine

against Chairman & 9 directors of Samsung Electronics against Chairman & 9 directors of Samsung Electronics Co for breach of fiduciary dutyCo for breach of fiduciary duty acquiring a majority stake in a company that was acquiring a majority stake in a company that was

financially unstablefinancially unstable having offered a bribe to a former president of the having offered a bribe to a former president of the

country by using the company's fundscountry by using the company's funds disposing of the shares of an affiliated company within disposing of the shares of an affiliated company within

one year of having acquired them, at a price much one year of having acquired them, at a price much lower than their acquisition pricelower than their acquisition price

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Extension of legal reformsExtension of legal reforms

Legislation being extended January 2005 to Legislation being extended January 2005 to include actions againstinclude actions against

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

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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 pressureDespite corporate failures & extended legislative pressure Chaebols resist becauseChaebols resist because Institutionally predisposed to diversification as a way of Institutionally predisposed to diversification as a way of

reducing technological uncertaintiesreducing technological uncertainties Government’s “Big Deal” 1998 was largely resistedGovernment’s “Big Deal” 1998 was largely resisted Suffer “organisational isomorphism” – trying to preserve Suffer “organisational isomorphism” – trying to preserve

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

structurestructure

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 profound effect 1990s globalisation drive & 97 crisis had profound effect

on labour relationson labour relations Pre 97Pre 97 Globalisation required labour mobility reforms as Globalisation required labour mobility reforms as

conditions of joining OECDconditions of joining OECD Labour market flexibility was needed to assist economic Labour market flexibility was needed to assist economic

competitivenesscompetitiveness Influx of foreign workers caused labour unrestInflux of foreign workers caused labour unrest Post 97Post 97 IMF/World Bank intervention required business IMF/World Bank intervention required business

restructuringrestructuring Causing unemploymentCausing unemployment Need for “Social Net”Need for “Social Net”

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Social Pact 1998Social Pact 1998Key contentsKey contents

Employment stabilization and unemployment Employment stabilization and unemployment policypolicy

Improvements on the employment insurance Improvements on the employment insurance system and expansion of itssystem 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 security systemExtension and consolidation of social security system Integration of health insurance system and expansion of Integration of health insurance system and expansion of

its coverageits coverage Enactment of Worker’s Wage Claims ActEnactment of Worker’s Wage Claims Act Wage stabilization and the promotion of labour-Wage stabilization and the promotion of labour-

management cooperationmanagement cooperation Securing the effectiveness of collective agreementsSecuring the effectiveness of collective agreements 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 government Establishment of works council for government

officials from January 1999officials from January 1999 Recognition of unemployed workers’ right to join Recognition of unemployed workers’ right to join

trade unions organized beyond enterprise leveltrade unions organized beyond enterprise level Enhancement of labour market flexibilityEnhancement of labour market flexibility Introduction of a worker dispatch schemeIntroduction of a worker dispatch scheme Deregulation of dismissals for managerial reasonsDeregulation of dismissals for managerial reasons

2525

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

transfer abroad?transfer abroad? Taylor, et al (2002) studied Korean plants in ChinaTaylor, et al (2002) studied Korean plants in China All companies stressed long-term strategy (consistent All companies stressed long-term strategy (consistent

with growth philosophy)with growth philosophy) HRM decision taken largely independent of head officeHRM decision taken largely independent of head office Decision making splitDecision making split

Administration – KoreanAdministration – Korean Production – ChineseProduction – Chinese

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

Corporate structure & culture adapted to Chinese Corporate structure & culture adapted to Chinese environmentenvironment

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Corporate CultureCorporate Culture

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

Corporate culture used as basis for growthCorporate culture used as basis for growth Can be source of problem when Can be source of problem when

environment changes rapidlyenvironment changes rapidly Pre 97 strength now post 97 liabilityPre 97 strength now post 97 liability

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

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

cultureculture Inappropriate understanding of the concept of Inappropriate understanding of the concept of

organisational cultureorganisational culture Lack of professional skills among campaign managersLack of professional skills among campaign managers Hastiness in culture change movementHastiness in culture change movement Failure to get employees’ interest & participationFailure to get employees’ interest & participation Lack of linkage between strategy & culture change effortsLack of linkage between strategy & culture change efforts Lack of linkage between culture change efforts & other Lack of linkage between culture change efforts & other

business innovation activitiesbusiness innovation activities

3030

Development of corporate cultureDevelopment of corporate culture

Process of systematic corporate culture Process of systematic corporate culture managementmanagement

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 cultureUnique drivers of corporate culture

Cho & Yoon (2002) develop the internal forces at Cho & Yoon (2002) develop the internal forces at workwork

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

collectivism” – a tension between in-groups & out-collectivism” – a tension between in-groups & out-groupsgroups

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”

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Chaebol post 1997Chaebol post 1997

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

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

Chaebols remain institutionally unresponsive to Chaebols remain institutionally unresponsive to changechange

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