Owner Risk Spreads to Kakao... Revising Autonomous Management System

'SM Market Manipulation Allegation' Kim Beom-su to Appear at FSC Today
Comprehensive Review of Autonomous Management System... Strengthening Role of CA Council

Kakao, facing its greatest crisis since its founding, is revising its autonomous management system. The role of the group control tower, the 'CA Council,' will be expanded to strengthen risk management. This is to overcome the unprecedented situation where the judicial risk faced by Kakao has spread to owner risk. Kim Beom-su, founder and head of the Kakao Future Initiative Center, has become a subject of investigation over allegations of market manipulation during the acquisition process of SM Entertainment (SM). As the crisis expands across the Kakao community, there are growing calls to thoroughly review Kakao's management approach.

Kim Beom-su, former chairman of Kakao, is attending an investigation on the 23rd at the Financial Supervisory Service in Yeongdeungpo-gu, Seoul, regarding allegations of stock price manipulation related to the acquisition of SM Entertainment. Photo by Kang Jin-hyung aymsdream@

On the 23rd, Kim is currently undergoing investigation after appearing at the Financial Supervisory Service (FSS) at 10 a.m. The FSS special judicial police notified Kim to appear in order to investigate allegations of market manipulation during the SM acquisition process. Following the arrest of Bae Jae-hyun, Kakao's Chief Investment Officer and Kim's close aide, the investigation has now sharply focused on Kim.

Bae is accused of artificially inflating SM's stock price by purchasing a large volume of shares through his acquaintance, One Asia Partners. At that time, as SM's stock price soared, competitor HYBE abandoned its bid to acquire SM. Financial authorities are focusing on the possibility that Kim was involved behind the scenes, rather than Bae acting solely on personal connections to commit the criminal act of market manipulation.

As the risk expands to the entire management team, Kakao has begun reorganizing its management system centered on the CA Council. They are considering a plan where the CA Council would be involved in new business initiatives and mergers and acquisitions (M&A), which were previously decided by each business head or affiliate CEO, and make final decisions. Until now, Kakao has grown by having young CEOs, selected by Kim, independently manage affiliates and develop new businesses.

Last month, Kakao expanded the CA Council. In addition to the existing decision-making members?Kim, Hong Eun-taek (Kakao CEO), Song Ji-ho (former Crust CEO), and Bae?Kim Jung-ho, chairman of the Brian Impact Foundation and co-CEO of Bear Better, Jung Shin-ah, CEO of Kakao Ventures, and Kwon Dae-yeol, head of the Kakao Policy Center, joined as senior members of the council. Kim oversees management support, while Jung and Kwon are responsible for business management and crisis management, respectively. Additional organizational restructuring within Kakao is also being discussed to enable the CA Council to play a substantive role.

The comprehensive overhaul of the decision-making system reflects the severity of the crisis Kakao is facing. Even looking at the current market manipulation allegations alone, the impact is expected to extend beyond Kakao's entertainment business to the entire community. For instance, the Fair Trade Commission's ongoing corporate merger review of Kakao and SM may be halted. Kakao Entertainment's planned initial public offering (IPO) and overseas business plans are inevitably on hold. If the Supreme Court issues a final ruling on the market manipulation case, Kakao Bank's status as a major shareholder could be jeopardized. In the worst case, forced sale is possible. Currently, Kakao holds the largest stake (27.17%) in Kakao Bank. According to the Internet Specialized Bank Act, a major shareholder of an internet bank (exceeding ownership limits) must not have been fined or punished with a penalty of imprisonment or higher within the past five years for violations of financial laws, tax evasion, specific economic crimes, or the Fair Trade Act.

Other major affiliates are also under investigation. The Ministry of SMEs and Startups plans to submit the issue of Kakao Mobility's alleged preferential treatment of affiliated taxi calls to the mandatory reporting review committee within this year. If the issue is approved, the Fair Trade Commission will be required to file a criminal complaint against Kakao Mobility with the prosecution. The civic group Economic Democracy 21 has filed a criminal complaint with the prosecution against Kim and executives of Kakao's blockchain affiliate Ground X on charges of embezzlement and breach of trust.

Kakao's existing businesses are in decline. With the economic slowdown causing stagnation, third-quarter earnings are expected to be at a 'shock' level. Daum, which was spun off as an independent company-in-company (CIC), has become marginalized. Its portal market share and revenue contribution to Kakao have shrunk, diminishing its presence for a long time. As judicial risks spread to Kakao, there are predictions that the politically burdensome portal service will be sold.

Kim is reportedly feeling the need to reconsider Kakao's management system from scratch. It was Kim who entrusted Kim Jung-ho with overall management support of the CA Council. Kim Jung-ho is a senior figure trusted by Kim, having been a senior at Samsung SDS with Lee Hae-jin, Naver's Global Investment Officer (GIO), and Kim Beom-su. He co-founded Naver in 1999 with Lee and has served as CEO of NHN Hangame and NHN China. As a seasoned figure in the IT industry, he has been assigned the role of savior for the Kakao community.

Until now, Kakao has grown by allowing affiliates to operate independently. The Kakao-style growth model has been for rapidly growing affiliates to generate profits after IPOs. However, as Kakao's size has rapidly increased, the existing growth method and leadership model have reached their limits. Particularly, management, who should manage risks, have instead become risks to the group due to inappropriate conduct. Ryu Young-jun, former CEO of Kakao Pay and the designated next leader of Kakao, voluntarily resigned amid controversy over stock sell-offs. Last month, Kakao's head of finance (vice president) was reported to the police on charges of breach of trust and embezzlement for using corporate cards to purchase game items worth about 100 million won. An industry insider said, "Questioning Kakao's growth model has been a long-standing issue," adding, "Even internally, there is disappointment that 'there is no answer,' and voices calling for change to survive are growing."