Recently, in one of the most comprehensive and influential surveys of corporate governance published in the 1990s, Andrei Shleifer and Robert W. Vishny criticized the Korean chaebol structure (1) as among the least investor-protective corporate systems in the world. In one representative passage, Shleifer and Vishny allege that "In many countries today, the law protects investors better than it does in Russia, Korea, or Italy." (2) This statement provokes several questions regarding corporate governance in Korea. For instance, do Korean chaebol firms have weak governance structures? If so, which aspects of the legal and economic environment in Korea enable such weak governance structures? In today's globalized business environment, how is it possible that chaebol can engage in such practices and yet still be so persistently successful? What does the future hold for such a weak corporate governance system? Are changes in the ownership structure a necessary or sufficient condition for overcoming the weakness of this system? Although it will not be possible to discuss all of these issues presently, the purpose of this Article is to explore the theoretical foundations of better corporate governance in Korea against the backdrop of the current legal and economic environment.
Putting aside for the moment the accuracy of the charge quoted above, it must be acknowledged at the outset that the chaebol remains the dominant business form in Korea. (3) Indeed, many large Korean firms belong to one of the chaebol, and around 30% or more of Korea's wealth has been created by the top thirty chaebol. (4) In 1997, the total assets of the top thirty chaebol amounted to nearly 52% of the total assets available in the whole national economy. (5) Often, large chaebol contain forty to fifty member firms, (6) including--most importantly from a corporate law perspective--financial institutions. (7) Overall, it is fair to say that the Korean economy is a chaebol-driven or chaebol-centered system, and thus, it might also be fair to say that the efficiency and soundness of the Korean economy as a whole depends primarily on the efficiency and soundness of the current chaebol system.
As is widely noted, the two principal distinguishing features of the chaebol system are its concentrated minority ownership structure and its centralized management style. Chaebol firms are effectively controlled by the original founder or his family, despite the fact that each family is typically entitled to receive only a small fraction of the total cash flows generated by each chaebol's business and investment activities. In other words, such families have been able to separate the cash flow rights from voting rights associated with the stock of the firms. For example, a chaebol founder or his family might, in this way, turn a 10% stake in total cash flow rights into a 40% stake in total voting rights. (8) Partly because of this concentrated minority ownership structure and partly because they were formed within a cultural context characterized by a hierarchical social system, chaebol have developed a centralized management style at both the firm and the group level. In individual firms, for instance, fundamental corporate decisions are, in effect, made not by the board of directors, but by a member of the controlling shareholder family or a third party CEO appointed by such family. Moreover, although each of these chaebol affiliates maintains an independent legal identity, the management of each firm is not separated from the control of the group's headquarters. In an economic sense, therefore, a chaebol is just like a large single firm with multiple divisions spread across a variety of industries. Consequently, most Koreans, including the controlling families themselves, are accustomed to viewing a certain group as the personal property of a certain controlling family. …