Abuse of Power, Lies, Moral Hazard... This Is How Companies Collapse

Spilled Milk 'Bukaliseu'
Irrecoverable 'Ban ESG' Crisis

Three Weeks After the COVID Symposium Incident
Chairman Hong Won-sik Steps Down from Management
"Neither of My Two Sons Will Succeed the Business"

Ten Years of Unending Controversy
'Unethical' Label... Declining Performance
Need to Improve Closed Organizational Culture

[Asia Economy Reporter Lim Hye-sun] This was the third public apology to the nation following the 2013 'Dealer Power Abuse Scandal' and the 'Granddaughter Drug Incident.' Ultimately, Hong Won-sik, the owner and chairman of Namyang Dairy Products, bowed his head in public for the first time and stepped down from management. He also announced that he would not pass on the management rights to his two sons. This came just three weeks after the symposium on 'Development of Antiviral Foods in the COVID-19 Era,' which triggered the 'Bulgaris Incident.'

◇Bulgaris Falsehood Incident

The incident began with the symposium on 'Development of Antiviral Foods in the COVID-19 Era,' hosted by the Korea Medical Science Institute on the 13th of last month. Namyang Dairy Products' Antiviral Immunity Research Institute announced that it had confirmed for the first time in Korea that the Bulgaris fermented milk product was effective against the COVID-19 virus. Immediately after the announcement, Namyang Dairy Products' stock price surged, and Bulgaris was sold out in some stores. The Korea Disease Control and Prevention Agency intervened directly, stating that "it is difficult to confirm the preventive effect against COVID-19 using the method of contacting the product," putting an end to the claims.

The situation escalated to a serious level. However, Namyang Dairy Products remained silent. The Ministry of Food and Drug Safety judged that since the research did not undergo animal testing or clinical trials, Namyang Dairy Products had effectively promoted the Bulgaris product and filed a complaint for violating the Food Labeling and Advertising Act. Only then did Namyang Dairy Products issue a statement and apologize. On the same day, Sejong City pre-notified an administrative suspension of operations for the Sejong factory, which accounts for 40% of Namyang Dairy Products' sales. The police also launched an investigation and conducted raids on six locations, including Namyang Dairy Products' headquarters and the Sejong Research Institute, on the 30th of last month.

◇Power Abuse and Owner Family Moral Hazard

Since its establishment, Namyang Dairy Products has focused on infant formula and played a leading role in the domestic infant formula market. Until the dealer power abuse scandal broke out, Namyang Dairy Products was the number one company in the infant formula industry and had a strong image of trust among mothers. However, in May 2013, the company was stigmatized as the 'first power abuse company' due to the dealer push-out scandal, causing its corporate image to plummet. Although Namyang Dairy Products issued a public apology seven days after the incident, further revelations of dealer power abuse led people to continue the boycott movement.

Owner-related risks also surfaced repeatedly. In 2019, Hwang Hana, the granddaughter of Namyang Dairy Products' founder Hong Doo-young, was arrested on drug charges. Chairman Hong Won-sik issued an apology, but the corporate image could not be restored. Last year, Chairman Hong himself became embroiled in controversy. He was investigated for continuously posting defamatory comments about Maeil Dairies' products online through a public relations agency. Recently, Hong's eldest son, Executive Director Hong Jin-sung, was dismissed from his position last month amid allegations of embezzling company funds, including leasing luxury foreign cars.

Since the power abuse scandal, Namyang Dairy Products has carried the label of an 'unethical company.' Due to the ongoing boycott, Namyang Dairy Products' performance has been on a downward trend. Sales have stagnated for eight years, and profitability has been severely damaged. Last year, the company posted a loss of 77.1 billion KRW. Its stock price has also dropped to one-third of what it was in 2013.

◇Closed Organizational Culture Holds Back Progress

The business community has identified the root cause of the Namyang Dairy Products incident as the closed organizational culture centered around the owner family. On the surface, Chairman Hong does not participate in management, but the owner family's control over the company has been absolute.

Namyang Dairy Products' largest shareholder, Chairman Hong, holds 51.68% of the shares, and the total family ownership reaches 53.85%. The board of directors, the company's ultimate decision-making body, has three of its four inside director seats occupied by members of Chairman Hong's family. The two outside directors are appointed by the board rather than a nomination committee, making it difficult to exercise checks and balances. There are also voices that the repeated 'delayed responses' to incidents are due to the difficulty in expressing opinions because of the owner's influence.

In the early 2000s, Yukijirushi (雪印), Japan's top dairy company, sparked social backlash due to insincere responses to a mass food poisoning incident, leading to consumer boycotts and eventual bankruptcy. Enron, once one of the top seven companies in the U.S., disappeared from history after being exposed for cooking the books with double ledgers, falsifying $1.5 billion over four years. "It takes 20 years to build a reputation and five minutes to lose it." This Warren Buffett quote is exemplified by these cases. A business community official evaluated, "Namyang Dairy Products also collapsed due to a 'lack of ethical awareness' in corporate management."