Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part VI): Limited Managerial Restructuring after the 1997 Crisis

As mentioned in the previous posts, the 1997 Asian financial crisis has forced leading Korean electronics firms to rethink their strategic direction and managerial practices. Although restricting efforts were limited due to various factors (e.g., government-led restructuring effort), the crisis appeared to force open the closed management structure and disrupt conventional organizational forms to some extent…

Rigid hierarchies, promotion based on seniority rather than merit, authoritarian management styles, and centralized decision making have been deeply rooted problems. Moreover, stable but immobile workforce, scarce debates, and the Korean culture that emphasizes relationships (the so-called inmak) have hindered innovation. These old structures and strategies succeeded in producing mass standard products for predictable markets. These old practices still persist to a large degree and hamper the creative inputs from young designers and engineers…

Note: A detailed analysis on this topic won’t be shared due to the proprietary nature of the content.

Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part V): Policy Measures to Revamp the Corporate Goverance Structure

There has been a legal move to dismantle the cross-shareholding structure. The convoluted governance structure “allows the family to wield voting power for some 16 percent of Samsung Electronics shares, five times what it actually owns, and enough to control the board of directors.” Yet, it may all change once a new law is enacted.

As discussed in the previous posts, one of the main culprits of the 1997 financial crisis was corporate overborrowing. The pending regulatory measures are intended to avert a repeat of the 1997 crisis.

“By April 2012, under a law that prohibits finance companies’ owning stakes of more than 5% in non-financial firms, Samsung Card will have to sell a 20.6% stake in Everland. Such a sale may trigger a restructuring that could generate big tax bills for Samsung and might threaten the Lee family’s control of the group.”

Regulatory measures may be the only way to force Korean chaebols to overhaul their convoluted governance system.

However, the recent ruling of the Korean Supreme Court seems to favor the practice of cross-shareholdings in chaebols. Samsung’s 67-year-old patriarch, Lee Kun-hee, who succeeded his late father, Lee Byung-chul, has presided over the Samsung empire for two decades. Although he has led Samsung to become the global leader in the electronics industry by focusing on research and development, industrial design, and marketing, he stepped down after being charged with tax evasion and artificially low priced-share selling to his son.

The Korean Supreme Court recently ruled that Samsung’s bond sale was legitimate, clearing of charges. This ruling would allow transferring control of the Samsung group to Mr. Lee’s son, Lee Jae-yong. This succession process is unprecedented among publicly traded companies.

At any rate, whether the Korean government would succeed in taming the chaebols through chaebol-reform laws remains unclear.

Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part IV): Two Paths and Professional Managers in Chaebols

The owner-centered management system and corporate governance structure also bring up another significant issue: the role of professional managers in the chaebol system. Professional managers have largely been in charge of operational decision making. Their managerial competence has not been fully utilized due to their limited responsibilities.

However, there has been a move among Korean chaebols to get out of this owner-centered system. Unlike Samsung, another major chaebol, LG has maintained more transparent management structure since 2003 by making professional managers run its system.

As such, Korean chaebols have taken two distinct paths. Which chaebol would sustain its competitive edge over the long haul remains to be seen.

Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part III): Lack of Social Capital

In understanding the Korean management system and practice, one may need to look into their unique relationship-driven culture: the family, school alumni, and regional relationships. Of course, in the Western economies, alumni and social networks are crucial elements of business activities. The Korean businesses, both chaebols and SMEs, have been the family businesses in many cases. As Korean workers and managers climb the corporate ladder, they often face a subtle regional relationship. The underlying concern seems to lie in trustworthiness. The Koreans tend to trust people based on these relationships. Although things are changing, the velocity of change has been rather slow. The Chaebol’s succession process through generations may need to be understood in this context.

Why can’t the founding families of chaebols leave management to their most capable professional managers? This may be largely related to the issue of social capital, as mentioned in my previous post.

“Social capital refers to the existence of a certain set of informal values or norms shared among members of a group or society that allow cooperation among them on the basis of interpersonal trust. This includes virtues like truth-telling, the meeting of obligations and reciprocity.”

How to forge social capital can be a major challenge for the Korean high tech firms and policy makers alike.

Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part II): The Owner-Centered System and Convoluted Governance Structure

One of the main characteristics of chaebols is their owner-centered management system. The founding families have exerted their influence through their corporate governance structures. The chaebol’s inadequate governance system has come under sharp criticism. Their weak system has been considered the main culprit of many problems chaebols have faced including obscure accounting system, overlending practices among affiliates, and ill-conceived diversification. Apart from this, one of the most appalling aspects of this structure, which is often overlooked, is the fact that it cripples innovation.

Let’s take a look at the case of Samsung Electronics, Asia’s most valuable high-tech company, in the context of the chaebol system to understand chaebols’ managerial practices.

Samsung Electronics is a part of Samsung Group, and the Lee family’s power at Samsung Group flows around a circle. “The Lee family now owns 46% of Everland, which in turn owns 13.3% of Samsung Life, South Korea’s biggest life insurer. Samsung Life owns 7.2% of Samsung Electronics, the world’s biggest electronics company, which owns 35.3% of Samsung Card, the country’s biggest credit-card firm – which in turn owns 25.65 of Everland.”

It has been criticized that Samsung Everland, an unlisted amusement-park operator and real-estate developer has been served as the Lee family’s de factor holding company. Samsung Life, an unlisted insurance company, is the largest single shareholder in Samsung Electronics and has played a role as a shield to protect their entire Samsung system. The Lee family has been allowed to control the entire Samsung Group through enlisted group affiliates. However, there is a concern that this may all change when Samsung Life becomes listed since it would trigger a class-action lawsuit by Samsung Life shareholders. Financial companies are not allowed to control industrial companies neither in the States nor in Europe.

The biggest flaw of this structure lies in their financial intricacy, causing conflicts of interest: owning each other’s shares and holding debt in one another. A good example is failed auto venture where Samsung affiliates became vulnerable to the chairman’s overleveraged project.

While this owner-centered managerial system had worked to their advantages in making speedy strategic decision-making needed for scale-intensive products in the risky high tech industry, it triggered bad repercussions such as unfair internal business trade practices. Furthermore, it has often hampered their affiliates’ independent strategy.

In many cases, the founding families of Korean chaebols still oversee their big businesses. It is not surprising to find out that the second and third generation family members continue to run the company. Even in the case that they put professional managers in the top position, the critical strategic decisions are often made by their core controlling family members.

The effects of this structure on innovation activities seem to be profound. It causes not only overlending problem among affiliates but its baneful effect on product innovations. It dampens entrepreneurial spirit, risk taking behavior and independent thinking. The reason Korean high-tech chaebols can’t go beyond the fast-follower stage runs deeper than a lack of the capacity to develop proprietary technology.

The fact that there is an indisputable power behind all the major decisions can foster an unconstructive culture in which cronyism and conformity are rampant. In the case of Samsung, it is so ironic that the products they produce are based on the state of art technology, yet their internal management system is outmoded. Improving corporate governance along with proper organization structure and managerial practices seems to be far more critical than reshuffling its workforce whenever a crisis arises.

Their convoluted governance system has been geared to keep the founding family’s influence over the chaebol intact. However, their cross-shareholding structure seems to be hanging by a tread: if one link is severed, the entire system breaks.

Why does a majority of Korean chaebols hang on to the owner-centered management system through inadequate governance structure? There can be many reasons for that. One seems to be closely related to social capital. The issue of social capital has been a deeply rooted problem in Korea, which will be discussed in the next post.

Ongoing Challenges on Managerial Innovation at the Korean High-Tech Firms (Part I)

In discussing innovation endeavors at the Korean high-tech firms, several challenging issues facing them have arisen: too much dependence on hardware-oriented, scale-intensive technology, weakness on software and basic proprietary technology, no breakthrough products yet to move beyond the fast-follower status, and so on. Dealing with these issues entails the confluence of several factors, of course. The often overlooked issues are their managerial practices in managing innovation. Managerial system and practices such as organizational structure and processes, and human resource system are crucial for product innovations since it nurtures the capability to generate an ongoing stream of product innovations. In many cases, there has been a dissonance between their innovative product strategy and managerial practices at the Korean high-tech firms. Moreover, the corporate governance problem has generated fundamental structural weaknesses including overlending practice and cronyism at some Korean high-tech firms.