[Desk Column] Profit Sharing in the Era of Deficits

Kyung-ho Lee, Head of Editorial Planning Team

Due to the impact of the novel coronavirus infection (COVID-19), major industries including the aviation sector posted consecutive losses in the first quarter. Although the deficits were anticipated, not only low-cost carriers (LCCs), which mainly operate domestic and short-haul international routes, but also the two major airlines that have flown across global skies, suffered expected yet painful losses. As COVID-19 shows signs of spreading again, both inbound and outbound overseas travel, already struggling, are unlikely to recover anytime soon. Even darker financial results are forecasted ahead.

While COVID-19 has accelerated the untact (contactless) society, leading to unexpected booms in untact industries such as distribution logistics, food and beverage, gaming, and payment services, it will take a very long time to offset the sluggishness in key industries that have driven our economy so far, including automobiles, smartphones, semiconductors, petrochemicals, shipbuilding, steel, and refining.

Amid this, Namyang Dairy Products recently decided to pilot the profit-sharing system called the Cooperation Profit Sharing System, the first of its kind among domestic companies. Among various provisions, the most notable is the distribution of 5% of the net operating profit generated from deliveries to Nonghyup to its dealerships. If the amount corresponding to 5% of operating profit is less than 100 million KRW, a minimum guaranteed amount of 100 million KRW will be paid.

The Cooperation Profit Sharing System is a scheme where profits generated through transactions are shared according to a prior agreement. It has been actively promoted by the current ruling party and progressive opposition parties, with the government and ruling party pushing for legislation, which is now on hold. Hong Jong-hak, the first Minister of SMEs and Startups, took the lead. Similar systems aimed at sharing profits between large corporations and their partners have existed under the names of 'win-win growth' and 'co-prosperity' during the Roh Moo-hyun, Lee Myung-bak, and Park Geun-hye administrations. Regardless of the administration, large corporations seem to do well, but small and medium enterprises, small business owners, local markets, and dealerships have continuously faced difficulties. Some view Namyang Dairy Products' move as a positive step to make amends for a series of power abuse controversies. However, many voices caution that it is a hasty decision in this era of widespread losses, warning against the spread or legalization of the Cooperation Profit Sharing System originating from Namyang Dairy Products. Although it is voluntary, many do not see it as truly voluntary.

Even those unfamiliar with management understand how profits should be used when a company makes a profit. Profits should be allocated for shareholders, employees, the company, and consumers. For shareholders, this means enhancing stock value or paying dividends; for employees, investing in wages and welfare; for the company, spending on future facility investments, research and development, and talent acquisition, which ultimately benefits consumers through price reductions or quality improvements.

The biggest concern among opponents of the Cooperation Profit Sharing System is market distortion. They argue that if a forced order operates instead of natural distribution according to market rules, it could damage price, quality, and cost competitiveness, ultimately disadvantaging consumers and partner companies. When the Lee Myung-bak administration’s Win-Win Growth Committee promoted the Excess Profit Sharing System (sharing large corporations’ profits or losses with partners), the National Assembly Legislative Research Office pointed out that "the goal of win-win growth is achieved at the expense of market competition."

In an era of growth, earnings surprises, and profits, calls for profit sharing seem justified. However, an era of contraction, earnings shocks, and losses is approaching. The priority now is not profit sharing but sharing pain and losses to protect workplaces and jobs. If the government and ruling party are considering the 'big nail theory'?"If we don't drive the big nail now, we won't be able to later"?it is time to listen to the voices of labor and management, shareholders, consumers, and experts from all sectors.