[Asia Approach] Pros and Cons of Listed vs Unlisted Companies Seen Through Shin Kyuk-ho

Shin Kyuk-ho, Honorary Chairman of Lotte Group, who established Lotte in Japan and entered Korea following the normalization of Korea-Japan relations in 1965 (first on the right).

Quotation

Shin Kyuk-ho, the founder of the Lotte Empire in Korea and Japan,
Insisted on being unlisted but transformed into 'New Lotte'
Furniture empire IKEA remains unlisted and closed
Oil empire Aramco's IPO approaches a corporate value of 1,900 trillion KRW

Shin Kyuk-ho, the late honorary chairman of Lotte Group who passed away on the 19th, built the Lotte empire in both Korea and Japan but was criticized for his insistence on remaining unlisted, leading to a closed management style. Until his son Shin Dong-bin declared the 'New Lotte' and pushed for a holding company system and the listing of major affiliates, Korean Lotte maintained control mostly through unlisted affiliates and circular shareholding, except for Lotte Chilsung Beverage (listed in 1973) and Lotte Shopping (listed in 2006). Although this has been negatively evaluated as an emperor-style management with a small minority stake, circular shareholding was once considered a legal and efficient means to maximize management efficiency and strengthen group control. Japanese Lotte has no listed companies at all.

When looking at honorary chairman Shin Kyuk-ho, one is reminded of Ingvar Kamprad, the founder of the furniture giant IKEA, who passed away in January 2018 at the age of 91. Kamprad was born in 1926 in Sm?land, Sweden, and founded IKEA at age 17 in 1943. (Shin was born in 1921 in Ulsan and started the chewing gum business in Tokyo in 1948, founding Lotte Co., Ltd., and established Lotte Confectionery in Korea in 1967 following the normalization of Korea-Japan relations in 1965.) Kamprad was proud of his frugal lifestyle, driving an old car and seeking low prices, but he is known to have lived in Lausanne, Switzerland, to avoid Sweden’s high income tax. Despite IKEA’s sales exceeding 50 trillion KRW, its ownership structure has never been fully disclosed. Management has passed to the next generation, but it still insists on being unlisted, owned by foundations dispersed across several countries. In contrast, Saudi Arabia’s state-owned oil giant Aramco, synonymous with oil money, decided to go public and was listed on the Saudi stock market last month. Although only 1.5% of its shares were listed, the initial public offering raised a record $25.6 billion, the largest IPO in history. Aramco’s total corporate value is estimated at around $1.6 trillion, which is close to 1,900 trillion KRW.

Ingvar Kamprad, founder of IKEA.

Quotation

Listed companies with majority shareholder stakes and small float
Wanted to remain unlisted but forced to list during the Developmental Dictatorship era

"The majority shareholder and related parties hold over 50% of shares and the float is small, so why bother listing?"

"Would they have done it willingly? The government ordered it, so what could they do? They only feel sorry for the shareholders."

I recall a conversation with an executive from a mid-sized company. This company, entering its second generation of ownership and suffering from a downturn, eventually changed owners and experienced delisting. However, when it listed in the 1970s, it was a solid company. The owner family wanted to remain unlisted but was included in President Park Chung-hee’s forced IPO policy and had no choice but to list. Although it was a listed company in name, there were no market-moving issues or a need for capital increases. The owners were not interested in managing the stock price, and it was not an attractive stock for investors to buy or sell. Many other companies also went through forced listings and some remain listed companies caught in a difficult position.

Though hard to imagine now, during the Developmental Dictatorship era (from the 1960s to the 1980s), the government implemented capital market policies such as inducive IPO policies (1968?1971), forced IPO policies (1972?1978), and stock issuance expansion policies (1985?1988). Due to poor results from inducive IPO policies, the forced IPO policy was introduced alongside the Yushin regime. According to a 2012 report titled 'Experience of IPO and Secondary Market Policies' published by the Financial Services Commission and KDI School of Public Policy and Management to share Korea’s experience with developing countries, the process is detailed. It states that on May 29, 1974, President Park Chung-hee issued a 'Special Directive of Five Articles for IPO and the Creation of a Sound Corporate Culture' to the cabinet.

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Park Chung-hee’s Special Directive of Five Articles Announced
Inheritance by specific individuals and families is a bad custom
Ordered to expand capital without relying on finance or foreign capital

The special directive can be summarized as follows:

"Today, certain family-centered corporate groups have formed, so-called groups that forcibly control various types of companies under their umbrella. As a result, some focus not on creating and growing companies with pride but cling to old customs and inertia, concentrating corporate assets in the hands of a few specific individuals and their families. This reality greatly hinders sound corporate development. Of course, Korean companies originally started with weak equity capital and short histories, so they had to rely on finance and foreign capital to grow.

However, now is the time to break away from such excessive management styles of the founding period and widely open corporate shares to overcome individual limitations in capital and management.

Therefore, the government must strengthen corporate financial structures, prevent the concentration of financial or foreign capital support in some companies, especially unlisted large corporations, and vigorously promote IPO policies while strengthening tax management of companies and major shareholders. Meanwhile, businesspeople must recognize their social responsibilities and functions, open corporate doors widely, establish innovative management systems, and enable Korean companies to leap forward as genuine international enterprises, improving the economy’s structure and ushering in a prosperous 1980s."

The five articles of the special directive include: actively inducing IPOs in financial, foreign capital, or tax operations, prioritizing support for publicly listed companies established by innovative managers; comprehensively managing loans and tax situations of unlisted large corporations (including affiliated groups) and their major shareholders; strengthening loan management for large corporations, especially unlisted ones, to correct excessive financial dependence; guiding entrepreneurs who rely excessively on finance to raise funds by selling part or shares of existing companies before pursuing new businesses; and strengthening tax management and external audit systems to enhance corporate credibility and asset soundness.

On January 4, 1973, at the opening ceremony of the stock market, Nam Deok-woo, then Minister of Finance, is striking the ceremonial gong.

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Hyundai Construction wins Jubail project
Delayed listing due to large price gap, compromises with government
Hyundai Asan Hospital born from prioritizing public health over stock market

The government sought cooperation from Kim Seong-gon, then chairman of the Chamber of Commerce and Industry, to encourage voluntary participation from economic organizations. Kim Yong-hwan, then senior secretary for economic affairs, summoned Kim Seong-gon to the Blue House and urged the public listing of Ssangyong Cement. On July 8, 1974, Kim Seong-gon finally announced Ssangyong Cement’s IPO at a press conference.

From September 1975 to December 1978, 104 companies listed and still hold the trading codes assigned at that time as of August 2011 (when the report was published). These include Samsung C&T (listed December 12, 1975), Seonkyung (SK Networks, June 30, 1977), Hanwha (Korea Explosives, June 24, 1976), Daewoo Securities (September 30, 1975), Hyundai Securities (September 30, 1975), Taekwang Industrial (December 27, 1975), Geumseong Cable (LS, June 30, 1977), Nongshim (June 30, 1976), Seonkyung Synthetic Fiber (SK Chemicals, June 29, 1976), Korea Steel (May 25, 1976), and Namyang Dairy Products (June 24, 1978).

According to the memoir titled 'Civil Servants with Soul' by former Minister of Construction Ko Byung-woo in 2008, Hyundai Construction, which won the $960 million Saudi Jubail port construction project in 1976 and rose to become a global construction company, delayed its IPO due to a large gap in the issuing price between the company and authorities. Although the IPO was decided in 1977 after government persuasion, the company was allowed to remain unlisted for a while on the condition of building five general hospitals nationwide. The president agreed to this, reasoning that if the company went public and sold shares cheaply, 50 billion KRW would flow into the stock market, but that money would be better spent on public health. The hospital created at that time is known as Hyundai Asan Hospital.

Tesla CEO Elon Musk is dancing the makchum at the Tesla factory handover ceremony held in Shanghai, China, on January 7.

Quotation

Although listing is the trend, being unlisted has many advantages
Elon Musk’s delisting episode plagued by short selling

As the saying goes, "There is no royal road to management," the advantages and disadvantages of being listed or unlisted coexist like two sides of the same coin. The choice is up to shareholders and management. Listing through an IPO makes fundraising easier and increases corporate credibility and recognition. Listed companies receive many legal benefits, and if the stock price rises, shareholders (customers, investors, employees, etc.) benefit. Conversely, the disadvantages of listing become the advantages of being unlisted. When listed, the major shareholder’s stake inevitably decreases compared to when unlisted. There is no need to worry about the stake ratio. Raising or defending management rights requires huge funds, often exceeding the benefits gained from listing. Listed companies face interference from institutions, foreigners, minority shareholders, and authorities, and various disclosures expose the company’s true nature.

Elon Musk, CEO of Tesla, posted on Twitter in 2018 that he was considering taking Tesla private at $420 per share, claiming funds were secured, but faced strong backlash and withdrew the plan. Musk gave several reasons for this bombshell announcement. One was that the Saudi Public Investment Fund (PIF) showed interest in Tesla’s privatization, though this remains unconfirmed. Another, more credible explanation was that he was suffering extreme harassment from short sellers. What is confirmed is that Musk remains an eccentric CEO and Tesla’s stock price and performance continue to improve.