7

A look at Korean corporate codes of conduct

Craig P. Ehrlich and Kang Dae-Seob


Introduction

In early 2003, prosecutors were investigating questionable stock transactions at the SK Group when they discovered a $1.2 billion accounting fraud involving inflated profits and hidden debts within SK Global, the SK Group's trading arm. The scale of the fraud, and the fact that it involved one of the country's largest chaebol, made the event noteworthy even by the standards of scandal-ridden Korea. In mid-June, SK Corporation's chairman Chey Tae-Won was sentenced to three years in prison for masterminding the fraud. Nine other group executives received suspended sentences. Two days later, the board of SK Corporation agreed to bail out their ailing affiliate with a debt equity swap, at the urging of Global's creditors, but over the objection of SK Corporation's foreign investors, who argued that the chaebol should stop the practice of using healthy companies to prop up failing affiliates. In late June, the SK Group promised, as is now customary in the aftermath of scandal, to disband the group's central control and command office and to ensure that affiliates would enjoy managerial independence.

Shortly thereafter, James Fitter, the Chief Operating Officer of Sovereign Asset Management, gave an interview to Business Week magazine (Business Week 2003). The Monaco-based fund was then SK Corporation's largest single shareholder, with just under a 15 percent stake. Mr Fitter was asked what steps were necessary to improve SK's corporate governance. His answer included "the adoption of an ethics code." He was hardly alone in looking to ethics codes as a panacea for corporate scandal. In 2003, dozens of large Korean firms - once again - declared an intention to adopt "ethical management," a set of practices including a code of ethics. Following allegations that SK and Hyundai had paid tens of millions of dollars to an aide to former President Kim Dae-Jung, some 200 member companies of the Federation of Korea Industries (FKI) (the voice of the chaebol) promised on 5 September 2003 to refrain from political bribery, to establish in-house ethics panels, to adopt codes of ethics, and to abide by the laws regulating corporate entertainment expenses and political donations.

-95-

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