[Opinion] Saneun Walking the Path of a Chaebol

Only About 30% Recovery Rate of Public Funds
Government-Led Corporate Restructuring Method
Needs to Be Supplemented by Increasing Market Utilization

On July 22nd, the 51-day strike by subcontracted workers at Daewoo Shipbuilding & Marine Engineering (DSME) was dramatically resolved. Since the 1997 IMF financial crisis, when the Daewoo Group was dismantled due to financial difficulties, DSME has been managed by the Korea Development Bank (KDB), the creditor bank, as its subsidiary for 22 years. The total public funds injected so far amount to a staggering 11.8 trillion KRW, with over 7 trillion KRW spent since 2015 alone, yet the company has failed to resolve its fragile financial structure caused by chronic deficits. Attempts to sell DSME to Hyundai Heavy Industries were again thwarted earlier this year by opposition from the European Union (EU) competition authorities.

Of the approximately 22 trillion KRW of public funds KDB has invested in restructuring insolvent companies over the past 20 years since the global financial crisis, 98% has been used for major domestic conglomerates including DSME, Kumho Tire, STX Shipbuilding, Asiana Airlines, SsangYong Motor, and HMM (formerly Hyundai Merchant Marine).

However, the recovery rate of funds provided by KDB to restructured companies over the past 20 years is only about 30%. In contrast, during the 2008 global financial crisis, the United States injected a total of 426.4 billion USD (approximately 555 trillion KRW) of public funds to rescue many domestic companies such as GM, BOA, and AIG, and recovered the principal within six years, subsequently earning an additional 15.3 billion USD in profits.

Looking at the case of DSME alone, serious doubts arise as to whether KDB truly has the will and capability to restructure insolvent companies, or if it is merely content with managing these companies and enjoying the associated benefits.

In 2016, a prosecution investigation led by the author as the chief investigator uncovered various management scandals at DSME, including accounting fraud involving trillions of won, bribery for supply contracts, and requests for the CEO’s reappointment. The inflated performance through accounting fraud led to executives and employees receiving 500 billion KRW in bonuses, starkly revealing the moral hazard of an ownerless company.

Key executives at DSME, including the CFO, are former KDB officials, and other positions such as the CEO are filled by parachuted individuals from political circles or power institutions. These flawed management and personnel practices continue not only at DSME but also at most companies under KDB’s control.

The management goals of retired KDB officials or parachuted personnel occupying senior positions in acquiring companies seem clear: rather than improving the company’s performance and corporate value, their aim is likely just to pass audits by the Board of Audit and Inspection during their tenure. How can we expect such individuals to successfully carry out the difficult task of restructuring insolvent companies and achieve results?

South Korea should complement the existing government-led corporate restructuring approach through national policy banks by adopting a more market-oriented method. Proper incentives should be provided to corporate management and restructuring experts entrusted with management, while KDB, as the major shareholder, should oversee and evaluate their performance.

President Yoon Suk-yeol stated in his inaugural speech, "It is difficult to solve our society’s problems without achieving a leap and rapid growth, which can only be accomplished through science, technology, and innovation." The current bureaucratic, KDB-led approach to restructuring insolvent companies is a major obstacle blocking Korea’s innovation and leap forward.

Kim Ki-dong, Chief Attorney, Law Firm Robex