South Korea Management Jurassic Park

1
South Korea Management Jurassic Park

• Week 5

2
Business Entities

• The primary business entity in Korea and which is
  unique to that country is
• The Chaebol
• These are
• Conglomerates of many companies clustered around
  one holding company
• The parent company is usually controlled by one
  family
• In 1988, the 40 top chaebol grouped a total of
  671 separate companies.
• The companies hold shares in each other

3
Chaebols

• Their concentration is amazing
• The top four superchaebol have sales which
  account for somewhere between 40 and 45 percent
  of South Korea's Gross National Product.
• The Chaebol do not have their own financial
  institutions.
• Much more dependent on government approval
• Chaebol tend to spread across industries
• Keiretsu in Japan tend to integrate vertically in
  the same industry.
• Chaebol are more centralised than keiretsu

4
Chaebols

• Have formal structures and centralised control
• Chaebol are much more family based
• Even though they have grown to vast proportions,
  most chaebol continue to be overwhelmingly family
  concerns

5
Entrepreneur or Dictator?

• Chaebol leaders have a worrying tendency to write
  autobiographies philosophise
• Kim Woo Chong, the founder of Daewoo, wrote an
  autobiography called 'Every Street is Paved with
  Gold
• Change everything except your wife and children
  - Lee Kun Hee, the head of the Samsung group
• Chung Ju Yung, who founded Hyundai wrote an
  autobiography called "There are Difficulties,
  but no Failures".

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Management Challenges in 21st Century (Lee 2004)
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Lees management challenges

• Long Hours
• After hours decompression
• Recent consideration by government to shorten
  hours
• Resistance from Chaebol leaders as would reduce
  output
• Workers reaction - dont work too hard
• Long hours does not equal greater productivity
• Sales Orientation
• For 36 years Koreas export growth has averaged
  22.4 per annum
• Constant pressure to increase sales
• Sales driven management policy
• Ignores profitability and thus financial viability

8
Lees management challenges

• Top Management
• Owner/Chairman has absolute power no tenure
  limit
• Decisions made without consultation
• e.g. Samsung and car manufacture
• Limited rewards
• Management promotion based on
• Seniority
• Performance
• Lack of motivation to focus on performance
• Short term planning horizon
• Manipulation of accounting information to meet
  short-term goals

9
Lees management challenges

• Unethical Executives
• Lack of transparency at high levels
• Information shared by only a few
• Bribery as the lubricant of business
• Integral to business environment
• Training HRM
• Much formalized training
• Frequently insufficient depth
• HRM mismanagement
• Decision Making
• Complex and long decision making structure
• Decisions made at the top
• Introduction of team system in 1990s
• Tends to be illusory

10
Lees management challenges

• Lack of Focus
• Try to do too many things
• Try to do them all themselves
• Competitively weak system
• Business Planning
• Yearly planning
• Modification of previous years plans
• Not reactive to external environment
• Accustomed to routine work
• Specialist someone in same job for 20 years

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Indices of Korean National Economy (US billions)
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Determinants of corporate behaviour pre-1997

• Oh Park (2002)
• There are many kinds of market intervention by
  the state.
• Specific to the Korean case is the awesome
  magnitude and frequency of state intervention in
  the market.
• They include, but are not exclusive to, financial
  regulation, infrastructure building, initiating
  and implementing entire economic development
  plans and industrial targeting through
  preferential treatment

13
Hyundais good fortune

• The rise of Hyundai epitomised the entry of the
  chaebol onto the world stage with the close ties
  between business dynasties and government
• One story has it that Chung Ju Yung's fortunes
  were sealed when President Park Chung Hee paid a
  surprise dawn visit to one of Hyundai's
  installations by helicopter and found him already
  hard at work. From that moment, Park decided
  Hyundai was a good thing and promoted the company
  relentlessly

14
Corporate control

• Kim (2003)
• Demonstrates in Doosan corporation between 1987
  and 1992 dominant entrepreneur was able to
  control Chaebol with only small shareholding by
  interlocking ownership
• Any effective corporate governance must break
  this structure
• Substance over Form

15
State of Corporate Governance

• Taek Soo (2004) argue lack of governance in
  Chaebols pre-97 was
• Weak accounting auditing standards
• Minimal shareholder activism (not possible Kim
  2003)
• Financial institutions not source of outside
  discipline
• No threat of hostile takeovers (not permitted by
  law until 1998)
• Government reaction 2 fold
• Force restructuring of Chaebols
• Law reforms on commercial code, auditing,
  monopolies securities

16
Intended effects of Law Reforms

• Strengthen the board of directors as the main
  decision-making body of a company and make it
  independent of controlling shareholders
• Strengthen minority shareholder rights
• Increase the accountability of controlling
  shareholders and directors on the board
• Enhance transparency and disclosures
• Strengthen accounting standards and internal
  controls
• Enhance the competitiveness of large group
  companies
• Facilitate corporate takeovers

17
Positive outcomes of reform

• High profile case December 2001 97.7 billion Won
  fine against Chairman 9 directors of Samsung
  Electronics Co for breach of fiduciary duty
• acquiring a majority stake in a company that was
  financially unstable
• having offered a bribe to a former president of
  the country by using the company's funds
• disposing of the shares of an affiliated company
  within one year of having acquired them, at a
  price much lower than their acquisition price

18
Extension of legal reforms

• Legislation being extended January 2005 to
  include actions against
• company officers, managers, and controlling
  shareholders for
• window dressing
• inadequate audits
• false disclosures
• stock price manipulation
• insider trading

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Drivers of Change External Impacts (law)

• Oh Park (2002) studied
• Organisational dynamics of the Chaebol
• Despite corporate failures extended legislative
  pressure
• Chaebols resist because
• Institutionally predisposed to diversification as
  a way of reducing technological uncertainties
• Governments Big Deal 1998 was largely resisted
• Suffer organisational isomorphism trying to
  preserve NOT technological cutting edge BUT
  organisational diversification centralised
  decision making
• Chaebols are organisationally stable structures
• Reactions to external shocks are only an attempt
  to maintain same structure

20
Drivers of Change External Impacts (labour)

• Indicators of Employment Income Distribution
  ()

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What about the workers?

• 1990s globalisation drive 97 crisis had
  profound effect on labour relations
• Pre 97
• Globalisation required labour mobility reforms as
  conditions of joining OECD
• Labour market flexibility was needed to assist
  economic competitiveness
• Influx of foreign workers caused labour unrest
• Post 97
• IMF/World Bank intervention required business
  restructuring
• Causing unemployment
• Need for Social Net

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Social Pact 1998Key contents

• Employment stabilization and unemployment policy
• Improvements on the employment insurance system
  and expansion of its
• coverage
• Support for unemployed workers
• Enlargement of job placement service
• Expansion of vocational training
• Job creation

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Social Pact 1998Key contents

• Extension and consolidation of social security
  system
• Integration of health insurance system and
  expansion of its coverage
• Enactment of Workers Wage Claims Act
• Wage stabilization and the promotion of
  labour-management cooperation
• Securing the effectiveness of collective
  agreements
• Enhancement of basic labour rights
• Legalization of teachers unions

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Social Pact 1998Key contents

• Trade unions right to political activities
• Establishment of works council for government
  officials from January 1999
• Recognition of unemployed workers right to join
  trade unions organized beyond enterprise level
• Enhancement of labour market flexibility
• Introduction of a worker dispatch scheme
• Deregulation of dismissals for managerial reasons

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Korean HRM abroad

• If Korean HRM is largely state guided how does
  it transfer abroad?
• Taylor, et al (2002) studied Korean plants in
  China
• All companies stressed long-term strategy
  (consistent with growth philosophy)
• HRM decision taken largely independent of head
  office
• Decision making split
• Administration Korean
• Production Chinese
• HRM is horizontal and group oriented to greater
  extent than in Korea
• Corporate structure culture adapted to Chinese
  environment

26
Corporate Culture

• Korean companies are very corporate culture
  oriented
• Corporate culture used as basis for growth
• Can be source of problem when environment changes
  rapidly
• Pre 97 strength now post 97 liability

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Aekyung (Petrochemicals) Corporate Logo
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So what does it mean?

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

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Changing Corporate Culture

• Park (2002) considered failures in changing
  corporate culture
• Inappropriate understanding of the concept of
  organisational culture
• Lack of professional skills among campaign
  managers
• Hastiness in culture change movement
• Failure to get employees interest
  participation
• Lack of linkage between strategy culture change
  efforts
• Lack of linkage between culture change efforts
  other business innovation activities

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Development of corporate culture

• Process of systematic corporate culture
  management
• Craft cultural vision/worldview
• Educating corporate ideology (indoctrination)
• Developing corporate emblems (symbolisation)
• Modifying behaviour systems (implementation)

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Unique drivers of corporate culture

• Cho Yoon (2002) develop the internal forces at
  work
• Korea is collectivist culture
• Corporate culture is based on dynamic
  collectivism a tension between in-groups
  out-groups
• 3 dimensions of collective dynamism
• In-group harmony
• Optimistic progressivism
• Hierarchical principle (Confucian 5 codes)

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Paradox Resolution

• 3 dimensions can cause paradoxical situations
• Leading to a process of paradox resolution

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Chaebol post 1997

• External impacts have failed to fundamentally
  affect inherent corporate structure processes
• Processes shaped by leading preferential role
  in economic policy in 70s and 80s
• Chaebols remain institutionally unresponsive to
  change
• Continue to follow behaviour patterns because
  they have existed in the past