1. 1 South Korea – Management Jurassic Park Week 4

2. 2 Business Entities The primary business entity in Korea and which is unique to that country is The primary business entity in Korea and which is unique to that country is The Chaebol The Chaebol These are These are Conglomerates of many companies clustered around one holding company Conglomerates of many companies clustered around one holding company The parent company is usually controlled by one family The parent company is usually controlled by one family In 1988, the 40 top chaebol grouped a total of 671 separate companies. In 1988, the 40 top chaebol grouped a total of 671 separate companies. The companies hold shares in each other The companies hold shares in each other

3. 3 Chaebols Their concentration is amazing Their concentration is amazing The top four superchaebol have sales which account for somewhere between 40 and 45 percent of South Korea's Gross National Product. The top four superchaebol have sales which account for somewhere between 40 and 45 percent of South Korea's Gross National Product. The Chaebol do not have their own financial institutions. The Chaebol do not have their own financial institutions. Much more dependent on government approval Much more dependent on government approval Chaebol tend to spread across industries Chaebol tend to spread across industries Keiretsu in Japan tend to integrate vertically in the same industry. Keiretsu in Japan tend to integrate vertically in the same industry. Chaebol are more centralised than keiretsu Chaebol are more centralised than keiretsu

4. 4 Chaebols Have formal structures and centralised control Have formal structures and centralised control Chaebol are much more family based Chaebol are much more family based Even though they have grown to vast proportions, most chaebol continue to be overwhelmingly family concerns Even though they have grown to vast proportions, most chaebol continue to be overwhelmingly family concerns

5. 5 Entrepreneur or Dictator? Chaebol leaders have a worrying tendency to write autobiographies & philosophise Chaebol leaders have a worrying tendency to write autobiographies & philosophise Kim Woo Chong, the founder of Daewoo, wrote an autobiography called 'Every Street is Paved with Gold Kim Woo Chong, the founder of Daewoo, wrote an autobiography called 'Every Street is Paved with Gold Change everything except your wife and children - Lee Kun Hee, the head of the Samsung group Change everything except your wife and children - Lee Kun Hee, the head of the Samsung group Chung Ju Yung, who founded Hyundai wrote an autobiography called: "There are Difficulties, but no Failures". Chung Ju Yung, who founded Hyundai wrote an autobiography called: "There are Difficulties, but no Failures".

6. 6 Management Challenges in 21 st Century (Lee 2004)

7. 7 Lees management challenges Long Hours Long Hours After hours decompression After hours decompression Recent consideration by government to shorten hours Recent consideration by government to shorten hours Resistance from Chaebol leaders as would reduce output Resistance from Chaebol leaders as would reduce output Workers reaction - dont work too hard Workers reaction - dont work too hard Long hours does not equal greater productivity Long hours does not equal greater productivity Sales Orientation Sales Orientation For 36 years Koreas export growth has averaged 22.4% per annum For 36 years Koreas export growth has averaged 22.4% per annum Constant pressure to increase sales Constant pressure to increase sales Sales driven management policy Sales driven management policy Ignores profitability and thus financial viability Ignores profitability and thus financial viability

8. 8 Lees management challenges Top Management Top Management Owner/Chairman has absolute power & no tenure limit Owner/Chairman has absolute power & no tenure limit Decisions made without consultation Decisions made without consultation e.g. Samsung and car manufacture e.g. Samsung and car manufacture Limited rewards Limited rewards Management promotion based on Management promotion based on –Seniority –Performance Lack of motivation to focus on performance Lack of motivation to focus on performance Short term planning horizon Short term planning horizon Manipulation of accounting information to meet short-term goals Manipulation of accounting information to meet short-term goals

9. 9 Lees management challenges Unethical Executives Unethical Executives Lack of transparency at high levels Lack of transparency at high levels Information shared by only a few Information shared by only a few Bribery as the lubricant of business Bribery as the lubricant of business Integral to business environment Integral to business environment Training & HRM Training & HRM Much formalized training Much formalized training Frequently insufficient depth Frequently insufficient depth HRM mismanagement HRM mismanagement Decision Making Decision Making Complex and long decision making structure Complex and long decision making structure Decisions made at the top Decisions made at the top Introduction of team system in 1990s Introduction of team system in 1990s Tends to be illusory Tends to be illusory

10. 10 Lees management challenges Lack of Focus Lack of Focus Try to do too many things Try to do too many things Try to do them all themselves Try to do them all themselves Competitively weak system Competitively weak system Business Planning Business Planning Yearly planning Yearly planning Modification of previous years plans Modification of previous years plans Not reactive to external environment Not reactive to external environment Accustomed to routine work Accustomed to routine work Specialist = someone in same job for 20 years Specialist = someone in same job for 20 years

11. 11 Indices of Korean National Economy ($US billions)

12. 12 Determinants of corporate behaviour pre-1997 Oh & Park (2002) Oh & Park (2002) There are many kinds of market intervention by the state. There are many kinds of market intervention by the state. Specific to the Korean case is the awesome magnitude and frequency of state intervention in the market. Specific to the Korean case is the awesome magnitude and frequency of state intervention in the market. They include, but are not exclusive to, financial regulation, infrastructure building, initiating and implementing entire economic development plans and industrial targeting through preferential treatment They include, but are not exclusive to, financial regulation, infrastructure building, initiating and implementing entire economic development plans and industrial targeting through preferential treatment

13. 13 Hyundais good fortune The rise of Hyundai epitomised the entry of the chaebol onto the world stage with the close ties between business dynasties and government The rise of Hyundai epitomised the entry of the chaebol onto the world stage with the close ties between business dynasties and government One story has it that Chung Ju Yung's fortunes were sealed when President Park Chung Hee paid a surprise dawn visit to one of Hyundai's installations by helicopter and found him already hard at work. From that moment, Park decided Hyundai was a good thing and promoted the company relentlessly One story has it that Chung Ju Yung's fortunes were sealed when President Park Chung Hee paid a surprise dawn visit to one of Hyundai's installations by helicopter and found him already hard at work. From that moment, Park decided Hyundai was a good thing and promoted the company relentlessly

14. 14 Corporate control Kim (2003) Kim (2003) Demonstrates in Doosan corporation between 1987 and 1992 dominant entrepreneur was able to control Chaebol with only small shareholding by interlocking ownership Demonstrates in Doosan corporation between 1987 and 1992 dominant entrepreneur was able to control Chaebol with only small shareholding by interlocking ownership Any effective corporate governance must break this structure Any effective corporate governance must break this structure Substance over Form Substance over Form

15. 15 State of Corporate Governance Taek & Soo (2004) argue lack of governance in Chaebols pre-97 was Taek & Soo (2004) argue lack of governance in Chaebols pre-97 was –Weak accounting & auditing standards –Minimal shareholder activism (not possible – Kim 2003) –Financial institutions not source of outside discipline –No threat of hostile takeovers (not permitted by law until 1998) Government reaction 2 fold Government reaction 2 fold –Force restructuring of Chaebols –Law reforms on commercial code, auditing, monopolies & securities

16. 16 Intended effects of Law Reforms Strengthen the board of directors as the main decision-making body of a company and make it independent of controlling shareholders Strengthen the board of directors as the main decision-making body of a company and make it independent of controlling shareholders Strengthen minority shareholder rights Strengthen minority shareholder rights Increase the accountability of controlling shareholders and directors on the board Increase the accountability of controlling shareholders and directors on the board Enhance transparency and disclosures Enhance transparency and disclosures Strengthen accounting standards and internal controls Strengthen accounting standards and internal controls Enhance the competitiveness of large group companies Enhance the competitiveness of large group companies Facilitate corporate takeovers Facilitate corporate takeovers

17. 17 Positive outcomes of reform High profile case December 2001 97.7 billion Won fine against Chairman & 9 directors of Samsung Electronics Co for breach of fiduciary duty High profile case December 2001 97.7 billion Won fine against Chairman & 9 directors of Samsung Electronics Co for breach of fiduciary duty –acquiring a majority stake in a company that was financially unstable –having offered a bribe to a former president of the country by using the company's funds –disposing of the shares of an affiliated company within one year of having acquired them, at a price much lower than their acquisition price

18. 18 Extension of legal reforms Legislation being extended January 2005 to include actions against Legislation being extended January 2005 to include actions against company officers, managers, and controlling shareholders for company officers, managers, and controlling shareholders for –window dressing –inadequate audits –false disclosures –stock price manipulation –insider trading

19. 19 Drivers of Change – External Impacts (law) Oh & Park (2002) studied Oh & Park (2002) studied Organisational dynamics of the Chaebol Organisational dynamics of the Chaebol Despite corporate failures & extended legislative pressure Despite corporate failures & extended legislative pressure Chaebols resist because Chaebols resist because Institutionally predisposed to diversification as a way of reducing technological uncertainties Institutionally predisposed to diversification as a way of reducing technological uncertainties Governments Big Deal 1998 was largely resisted Governments Big Deal 1998 was largely resisted Suffer organisational isomorphism – trying to preserve NOT technological cutting edge BUT organisational diversification & centralised decision making Suffer organisational isomorphism – trying to preserve NOT technological cutting edge BUT organisational diversification & centralised decision making –Chaebols are organisationally stable structures –Reactions to external shocks are only an attempt to maintain same structure

20. 20 Drivers of Change – External Impacts (labour) Indicators of Employment & Income Distribution (%) Indicators of Employment & Income Distribution (%)

21. 21 What about the workers? 1990s globalisation drive & 97 crisis had profound effect on labour relations 1990s globalisation drive & 97 crisis had profound effect on labour relations Pre 97 Pre 97 Globalisation required labour mobility reforms as conditions of joining OECD Globalisation required labour mobility reforms as conditions of joining OECD Labour market flexibility was needed to assist economic competitiveness Labour market flexibility was needed to assist economic competitiveness Influx of foreign workers caused labour unrest Influx of foreign workers caused labour unrest Post 97 Post 97 IMF/World Bank intervention required business restructuring IMF/World Bank intervention required business restructuring Causing unemployment Causing unemployment Need for Social Net Need for Social Net

22. 22 Social Pact 1998 Key contents Employment stabilization and unemployment policy Employment stabilization and unemployment policy Improvements on the employment insurance system and expansion of its Improvements on the employment insurance system and expansion of its coverage coverage Support for unemployed workers Support for unemployed workers Enlargement of job placement service Enlargement of job placement service Expansion of vocational training Expansion of vocational training Job creation Job creation

23. 23 Social Pact 1998 Key contents Extension and consolidation of social security system Extension and consolidation of social security system Integration of health insurance system and expansion of its coverage Integration of health insurance system and expansion of its coverage Enactment of Workers Wage Claims Act Enactment of Workers Wage Claims Act Wage stabilization and the promotion of labour- management cooperation Wage stabilization and the promotion of labour- management cooperation Securing the effectiveness of collective agreements Securing the effectiveness of collective agreements Enhancement of basic labour rights Enhancement of basic labour rights Legalization of teachers unions Legalization of teachers unions

24. 24 Social Pact 1998 Key contents Trade unions right to political activities Trade unions right to political activities Establishment of works council for government officials from January 1999 Establishment of works council for government officials from January 1999 Recognition of unemployed workers right to join trade unions organized Recognition of unemployed workers right to join trade unions organized beyond enterprise level beyond enterprise level Enhancement of labour market flexibility Enhancement of labour market flexibility Introduction of a worker dispatch scheme Introduction of a worker dispatch scheme Deregulation of dismissals for managerial reasons Deregulation of dismissals for managerial reasons

25. 25 Korean HRM abroad If Korean HRM is largely state guided – how does it transfer abroad? If Korean HRM is largely state guided – how does it transfer abroad? Taylor, et al (2002) studied Korean plants in China Taylor, et al (2002) studied Korean plants in China All companies stressed long-term strategy (consistent with growth philosophy) All companies stressed long-term strategy (consistent with growth philosophy) HRM decision taken largely independent of head office HRM decision taken largely independent of head office Decision making split Decision making split –Administration – Korean –Production – Chinese HRM is horizontal and group oriented to greater extent than in Korea HRM is horizontal and group oriented to greater extent than in Korea Corporate structure & culture adapted to Chinese environment Corporate structure & culture adapted to Chinese environment

26. 26 Corporate Culture Korean companies are very corporate culture oriented Korean companies are very corporate culture oriented Corporate culture used as basis for growth Corporate culture used as basis for growth Can be source of problem when environment changes rapidly Can be source of problem when environment changes rapidly Pre 97 strength now post 97 liability Pre 97 strength now post 97 liability

27. 27 Aekyung (Petrochemicals) Corporate Logo

28. 28 So what does it mean? Aekyung Group's Corporate symbol is AekyungCIS's (Corporate Identification System) most basic element, domestically expressing the enterprise's image, and is an emblem at the core of every visual communications. The corporate symbol's basic spirit being the globalization and aim for the top through a stance of harmony and challenge in the 21st century, is a business culture creating happiness by taking the customer's appreciation and trust as its backbone. Moreover, the corporate symbol expresses a general image of contentment and abundance. The English initials 'a' and 'k' form Aekyung's inexhaustible leap into the world, and the lower part's curve represents 'the large and crystalline waves that break in'; expressing Aekyung's progressive and futuristic will in leading changes in the 21st century. Aekyung Group's Corporate symbol is AekyungCIS's (Corporate Identification System) most basic element, domestically expressing the enterprise's image, and is an emblem at the core of every visual communications. The corporate symbol's basic spirit being the globalization and aim for the top through a stance of harmony and challenge in the 21st century, is a business culture creating happiness by taking the customer's appreciation and trust as its backbone. Moreover, the corporate symbol expresses a general image of contentment and abundance. The English initials 'a' and 'k' form Aekyung's inexhaustible leap into the world, and the lower part's curve represents 'the large and crystalline waves that break in'; expressing Aekyung's progressive and futuristic will in leading changes in the 21st century.

29. 29 Changing Corporate Culture Park (2002) considered failures in changing corporate culture Park (2002) considered failures in changing corporate culture –Inappropriate understanding of the concept of organisational culture –Lack of professional skills among campaign managers –Hastiness in culture change movement –Failure to get employees interest & participation –Lack of linkage between strategy & culture change efforts –Lack of linkage between culture change efforts & other business innovation activities

30. 30 Development of corporate culture Process of systematic corporate culture management Process of systematic corporate culture management Craft cultural vision/worldview Craft cultural vision/worldview Educating corporate ideology (indoctrination) Educating corporate ideology (indoctrination) Developing corporate emblems (symbolisation) Developing corporate emblems (symbolisation) Modifying behaviour & systems (implementation) Modifying behaviour & systems (implementation)

31. 31 Unique drivers of corporate culture Cho & Yoon (2002) develop the internal forces at work Cho & Yoon (2002) develop the internal forces at work Korea is collectivist culture Korea is collectivist culture Corporate culture is based on dynamic collectivism – a tension between in- groups & out-groups Corporate culture is based on dynamic collectivism – a tension between in- groups & out-groups 3 dimensions of collective dynamism 3 dimensions of collective dynamism –In-group harmony –Optimistic progressivism –Hierarchical principle (Confucian 5 codes)

32. 32 Paradox Resolution 3 dimensions can cause paradoxical situations 3 dimensions can cause paradoxical situations Leading to a process of paradox resolution Leading to a process of paradox resolution

33. 33 Chaebol post 1997 External impacts have failed to fundamentally affect inherent corporate structure & processes External impacts have failed to fundamentally affect inherent corporate structure & processes Processes shaped by leading & preferential role in economic policy in 70s and 80s Processes shaped by leading & preferential role in economic policy in 70s and 80s Chaebols remain institutionally unresponsive to change Chaebols remain institutionally unresponsive to change Continue to follow behaviour patterns because they have existed in the past Continue to follow behaviour patterns because they have existed in the past