Tsk, Tsk. Tantrums and Tellings-Off Are What Fix Chaebol

(Bloomberg) -- What does it take to engender change atop South Korea’s chaebol? Not vulture-like activists, it seems, but temper tantrums over macadamia nuts and water throwing.

Until recently, the nation’s conglomerates, characterized by complex webs of family cross-shareholdings, had managed to shake off criticisms around corporate-governance lapses. But on Sunday, Cho Yang-ho, chairman of Hanjin Group’s Korean Air Lines Co., fired one of his daughters after allegations she threw water in the face of an advertising agency worker during a business meeting, and her sister for good measure after she spent five months in jail following the so-called nut rage incident.

Cho said in an email that he would promote professional business managers to replace them. The family has faced scrutiny over whether it evaded customs duties on luxury goods brought in via company planes.

The dismissals underscore the fear trickling through South Korea Inc. When President Moon Jae-in came to power last year, it was on the promise of sweeping chaebol reform. A shakeup at Samsung Electronics Co. toppled the country’s former President Park Geun-hye and has snared several executives, including Vice Chairman Jay Y. Lee.

The country adopted a stewardship code in late 2016 that the National Pension Service is looking at implementing. It includes guidelines that encourage institutional investors to exercise their voting rights and be more actively involved in corporate management. It’s also foreigner friendly.

Pressure is mounting, and anyone wanting fresh evidence need look no further than Hyundai Motor Group.

Elliott Management Corp., the activist fund headed by billionaire Paul Singer, earlier this month revealed it had acquired more than $1 billion in stakes of three group units -- Hyundai Motor Co., Kia Motors Corp. and parts maker Hyundai Mobis Co. It says the conglomerate’s planned 10.6 trillion won ($9.9 billion) merger of two units shortchanges some shareholders, and lacks business logic.

Elliott wants units to return more than 12 trillion won in excess cash to shareholders, raise dividends, and cancel treasury shares, targeting capital returns of around 40 to 50 percent of net income, as opposed to free cash flow. Those asks, while broadly sound, are aggressive.

An earlier restructuring plan unveiled by Hyundai in March was underwhelming, paying lip service to investor concerns with vague promises. The group’s current cost structure makes for large inefficiencies, with about 40 percent of total transactions being related-party ones, a level that’s high even for chaebol. Hyundai’s controlling shareholders reap the benefits of that.

Hyundai Motor’s return on capital has fallen to 3 percent, well below the global average for automakers, while operating margins are under pressure.

There’s no doubt value can be extracted. Investors have pushed stock in the automaker up 8 percent since talk of streamlining its circular ownership structure emerged late last month.

The nation’s companies have long traded at a discount to peers in places such as Japan, where dividend payout ratios average 28 percent versus 17 percent. Korean firms’ balance sheets are also packed with more cash as a proportion of their market capitalization than other regional players, according to Goldman Sachs Group Inc.

Part of it is because minority investors and controlling shareholders can’t see eye to eye. But with even the nation’s patriarchs getting the message, the onus is on the likes of Hyundai to respond with meaningful change.

©2018 Bloomberg L.P.

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