Chaebol Reform: A Top Priority for the Next South Korean Administration

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What are the primary economic concerns for the next South Korean administration?

According to a poll conducted by Han-kook Research on April 17, “Job Creation” (34.1%) ranked as one of the top priorities for the next administration. “Resolving polarization” (20.6%), “small and medium-sized enterprise (SME) empowerment” (20.4%) and “chaebol reform” (12%) were the next biggest priorities. However, considering the current Korean economic structure, there is no doubt that every economic concern mentioned above is chaebol (South Korean business conglomerate) related. According to statistics in 2015, the combined revenues of the five largest chaebols accounted for 58% of South Korea’s GDP. This figure already seems problematic, but in addition to this fact, it was further revealed by the political corruption case involving the former president that crony capitalism has confused the South Korean market and inhibited the growth of SMEs for a long period of time. As a result of the domestic economic situation, four presidential candidates, except Hong Jun-pyo of the conservative Liberty Korea Party, proposed a policy of “Grand Chaebol Reform” in order to establish a fair market-based democracy that provides fair competition in every sector of the domestic economy. The candidates strongly insist that a fair market system must be established in order for South Korea to reach its full economic potential.

Although the policy directions of the candidates advocating for economic democratization all vary, there is one policy all the candidates agree on: strengthening of a punitive compensation system. A punitive compensation system refers to a system to reform or deter a company from engaging in illegal acts by forcing them to financially compensate a victim for a certain amount of damages. In Korea, the influence and power exercised by chaebols has created a unfair business climate in South Korea and has become a controversial social issue. As a result, in March 2011, a bill calling for a punitive compensation system was first introduced, with a total of seven bills enacted so far. The amount of compensation stipulated in the current law is “triple the cost of damages“, however some say the law is far from being effective. According to a thesis by Professor KIM Cha-dong of Hanyang University’s School of Law, only a single case has been filed since 2011, when the compensation system was first introduced. This is because the compensation amounts are too low, which does not reflect the “punitive” element of the law, and from the SME’s perspective, they might fear that they will lose future business opportunities with the chaebol. Therefore, front-runner Moon Jae-in of the Democratic Party argues that compensation should be increased to up to 10 times the amount of the damages. The other candidates all have agreed that strengthening the punitive element is necessary to achieve effective lasting reforms.

However, there are opposing views of the effectiveness of the punitive compensation system. Corporations argue that the expansion of this policy will increase the “anti-corporate mentality” in South Korea and increased targeted litigation aimed at excessive compensation will cause more problems than it will solve. Furthermore, Professor Kim Du-eol of Myungji University has asserted that “the introduction of punitive compensation clauses cannot serve as a fundamental solution, so it could be a better solution to address issues to realign methods of calculating compensation.”

Presidential candidates Moon Jae-in (41%, 4/21 polls by Gallup Korea) and Ahn Cheol-soo (30%, 4/21 polls by Gallup Korea), who are fiercely competing to be in the lead during the campaign, all advocate this policy. What matters now is the completion of this policy. Strict verification processes to prove whether or not a company acted illegally should be developed and implemented. Otherwise, ambiguous judgment is highly likely to damage a company’s reputation.

I think that in order for a South Korean corporation to be viewed as an ethical business, incentives must be created to foster a culture of compliance and ethics. In this viewpoint, expansion of a punitive compensation system is believed to play a big role in influencing the chaebol’s ethical behavior since its purpose is to prevent illegal acts by imposing enormous financial penalties. In turn, corporate compliance needs to be modified to meet the requirements of a punitive compensation system. Empowering SME’s to have more authority when they enter into contracts and deal with the chaebol will give them a sense of greater autonomy to act in an ethical manner, separate from that of the chaebol. This will allow the SMEs to develop their own internal compliance mechanism, so that they don’t have to blindly follow the actions of the chaebol and have the ability to decide what is ethical and unethical. As a result, the Korean economic market will be viewed as more transparent and in turn will encourage international investment. This will also bring positive benefits to the chaebol for developing competitiveness in the global market. I hope this policy will be a pro-business policy that will reform the current South Korean economic atmosphere for the better.

Changhee Jeong is an ASAN Academy Fellow at CIPE