Korea's Chaebols Are A Corporate Governance Fiasco

By Kap Su Sol, Research Analyst

The latest annual corporate sustainability survey of South Korea published by SolAbility is an interesting read. It rightly points to the interplay between South Korea’s nominally comprehensive, but ultimately loophole-ridden regulatory framework and the pervasive power of the country’s family-controlled conglomerates, or chaebols.

According to the SolAbility survey, most respondents single out CEOs and top management as the key driver of sustainability. What is notable by its absence is mention of the role of corporate boards. However, this is not a surprise. Thanks to their own political and economic clout and existing regulatory ambiguities, the chaebols, can dodge regulatory efforts and outside pressure to strengthen sustainability initiatives.

Though it is legally required of public corporations to fill half their boards with outside directors, current regulations do not draw a clear distinction between an “outside” versus an “independent” director. As a result, chaebols can still fill their boardrooms with what are essentially management allies. The result is that corporate leadership, the majority of who are scions of the chaebols’ founding families, do not have a strong incentive to initiate sustainability practices because of the lack of public accountability. Additionally, the ambiguous Korean regulatory climate and poor enforcement regime remain road blocks.

A case in point is the recent fatal gas leak at a semiconductor plant of Samsung Electronics Co., Ltd. On Jan. 27-28, Samsung, the world’s largest memory chip maker, concealed two separate leaks of hydrofluoric acid gas from authorities for 26 hours until a contract worker died from exposure and three others were injured. The incident revealed that Samsung had been outsourcing safety management of the acid to a contractor who in turn outsourced parts of its job to a spin-off. Samsung did not immediately report the leaks because it did not want to get stripped by the government of a higher environmental/safety rating, which had been exempting the company from more rigorous safety inspections.

In all fairness, the progress South Korea has made in corporate governance and sustainability should not be downplayed. The term “corporate governance” only came into the country’s lexicon in the late 1990s when the country began to restructure its economy amid the Asian financial crisis. The concept of “sustainability” is still in its infancy. However, the world’s 11th largest economy has yet to fully develop its own ESG identity. Good corporate governance and sustainability are inseparable. For South Korea, improving public accountability of corporate boards and strengthening the regulatory landscape is a good start towards achieving corporate sustainability gains.

The post Corporate Sustainability Korea – A review of the SolAbility 2013 survey appeared first on GMI Ratings.

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