[Disabled Wings Public Interest Corporations] From the Start, Obstacles vs. Self-Defeat by Abuse... "Carrot and Stick Must Be Used Together"

Some Abuse Cases but Limited Flexibility
Restrictions on Using Donation Assets Increase... Conservative Management
"Should Encourage Giving Back to Society"

Photo by Getty Images Bank

Analysts suggest that the reason large conglomerates contribute shares to their affiliated public interest corporations is ultimately a safeguard to secure control over the group. Although various systems have been established to prevent this, it is pointed out that battles over loopholes and solutions will continue endlessly. The advice is to move beyond futile debates and use both carrots and sticks together.

Exploitation and Prohibition... A Battle of Spear and Shield

There are claims that large conglomerates contribute shares to foundations to secure voting rights and maintain control within the group. Several chaebols have a history of controlling affiliates and exerting influence through shares contributed to foundations. The Fair Trade Commission (FTC) has occasionally investigated the operation status of public interest corporations in this context.

According to the FTC investigation, Samsung SDI released 5 million shares of Samsung C&T held in early 2016 to resolve circular shareholding within the group. Of these, 1.3 million shares were purchased by Lee Jae-yong, then Vice Chairman and now Chairman of Samsung Electronics, and the remaining 2 million shares were bought by the Samsung Life Public Welfare Foundation affiliated with Samsung Life Insurance for over 300 billion won. Lee Jae-yong served as chairman of the Samsung Life Public Welfare Foundation from 2015 to 2021.

While Samsung used the foundation for control, Hanjin used it as a channel to indirectly support affiliates. In early 2017, Korean Air, part of the Hanjin Group, conducted a paid-in capital increase worth 457.7 billion won to raise operating funds. At that time, the late Cho Yang-ho, chairman of Hanjin Group and chairman of the Jungseok Inha Foundation, utilized the foundation. The Jungseok Inha Foundation received 4.5 billion won in cash donations from five affiliates including Jin Air, then invested about 5.2 billion won in Korean Air's capital increase. The FTC pointed out that this was "an investment for Korean Air unrelated to the foundation's original public interest purpose."

To prevent such cases, the revised Fair Trade Act in 2020 generally prohibits public interest corporations affiliated with large business groups from exercising voting rights on shares they acquire or hold, except in cases where the public interest corporation is the sole shareholder (100% ownership) of a specific affiliate. Violations are subject to criminal penalties.

Limitations in Active Activities Due to Public Interest Corporation Donations

There is also a somewhat unfair argument that public interest corporations have only increased assets without significant growth in public interest activities. This is because the operation of donated assets by public interest corporations has been strictly restricted from the outset, greatly narrowing their scope of action. According to the Act on the Establishment and Operation of Public Interest Corporations, assets acquired by donation or gratuitously must be classified as basic assets. Other assets are classified as ordinary assets. This means that separate bank accounts must be maintained, and when using the funds, they must be tagged accordingly.

Once classified as basic assets, it is difficult to convert them into ordinary assets. Also, if the proportion of basic assets is large, it may be difficult to operate the foundation solely with income from fund management. If bold investments are attempted and fail, strong supervision and sanctions from the competent authorities follow. As a result, basic assets may only receive dividends and be left idle, leading to a vicious cycle. Park Hoon, dean of the Graduate School of Taxation at the University of Seoul, pointed out, "Of course, there are public interest corporations that do not properly engage in public interest activities, but basically, unlike overseas countries such as the U.S. where donations are actively invested and activities are conducted, we have a controlled system where spending money requires permission, which is a limitation."

Need for Trickle-Down Effect... Prevent Abuse but Open Path for Social Return

Ultimately, there is a call to prevent abuse with a "stick" but also to present various "carrots" that enable active public interest activities. Support should be provided so that the wealth of asset owners can effectively flow back to society. A representative of a domestic public interest corporation said, "Despite all the talk, it is true that donations from companies and asset owners greatly contribute to foundations and their public interest activities," adding, "Without this, many places would face severe drought."

Professor Park said, "Basically, cases of abusing donations should be properly taxed through tax investigations, but at the same time, donation activation should be promoted by realistically adjusting various inheritance tax and gift tax exemption limits," and explained, "If the dividend amount of shares accumulated by public interest corporations is less than 1% of the valuation, institutional devices such as mandatory use regulations that require selling some shares to use for purpose projects are needed to ensure that wealthy donors spend donations appropriately."

He emphasized that now is the right time to address these issues, as the generations and perceptions of asset owners are changing over time. Professor Park advised, "This period, when new wealthy individuals are passing middle age, can be a turning point to shift the culture from inheriting wealth to children to donating to society," and added, "Even with some tax incentives, the system can be steered toward returning wealth to society rather than to children and family."