Korean prosecutors gunning
for Hyundai boss By Andrew Salmon
SEOUL - South Korean prosecutors are out
for blood - and they are gunning for some very big
game indeed.
On Thursday, the Supreme
Public Prosecutors office announced that it was
seeking an arrest warrant for Hyundai Motor Group
chairman Chung Mong-koo. Chung is allegedly
involved in a complex range of schemes of the kind
formerly beloved of chaebol (conglomerate)
bosses: political slush funds, bribery,
embezzlement and murky wealth/power transfers. His
only son, Chung Eui-sun, head of Hyundai affiliate
Kia Motors Corp, has been indicted but not
detained. Probes into the group's activities
have
so far resulted in the arrest of three people and
travel bans on 10 Hyundai-related executives.
The possibility of a detained chairman
casts a long shadow over the future managerial
direction of Hyundai, the world's seventh-largest
auto maker, where Chung is seen as monopolizing
managerial decision-making. It also raises
questions as to why the government of President
Roh Moo-hyun is targeting South Korea's most
successful businesses.
However, it is not
clear yet whether the prosecutors will get their
warrant.
"If the court grants the warrant,
then Chung will go to jail," said Hwang Ju-myung,
a founding partner of Seoul law firm Hwang, Mok,
and Park. "The court has to review the merits and
demerits of the case to decide whether or not to
grant it. That process will probably take about
one day." Even so, Hwang, a former judge himself,
added: "I think they will issue the warrant."
Embezzlement and misappropriation of
corporate funds carry maximum sentences of 10
years, but whether the Korean public would want to
see one of their top business figures in jail for
any significant period is a different matter.
There is a precedent for chaebol
chairmen deemed critical to the economy being
whisked from their jail cells: SK Corp chairman
Chey Tae-won, convicted of fraud, was bailed out
after serving seven months of a three-year
sentence, and reinstated as head of his company.
An appeal against his conviction early last year
failed, but Chey remained free and in charge of
SK, South Korea's largest oil refiner.
A
key question is whether - or how successfully -
Hyundai Motor Group could operate should its
chairman be in the slammer. Analysts see Chung Sr
as a figure very much in the mold of his father,
the late Hyundai patriarch Chung Ju-young: A
powerful, hands-on boss who runs his business
empire with a tight rein and a strong hand.
"Hyundai Motor Group is composed of
Hyundai Motor, Kia Motors and Hyundai Mobis, and
there is a lot of conflict of interest inside the
group," said Kim Hak-ju, an automotive analyst at
Samsung Securities. "If the chairman is away, the
decision-making process will be slower than
before, while Japanese and US auto makers are
challenging Hyundai."
People familiar with
Hyundai's internal politics say there is
resentment within the group at the directors of
parts maker Hyundai Mobis, who allegedly dominate
the board; whether Chung Eui-sun or, indeed, any
other figure in the group has the force of
personality to overcome these conflicts is highly
questionable.
The uncertainty surrounding
the companies has already forced the postponement
of some very high-profile plans - most notably the
groundbreaking of Kia's US plant at West Point,
Georgia, originally planned for this month, and
for Hyundai's Czech Republic plant, scheduled for
May 17.
"We are considering delaying the
groundbreaking but no decision has been made," a
Hyundai Motor spokesman said of the Czech plant.
Asked whether the Czech investment might be
delayed or canceled, the spokesman was guarded: "I
think it will go ahead, but we have no official
comment on this."
The Czech Republic's
ambassador to Seoul expressed concern. "When there
is this kind of problem [at] Hyundai, we are
unsure of what kind of impact it will have," Tomas
Smetanka said in a telephone interview. He added,
though: "So far we have not had any official
indication from Hyundai that anything has
changed."
The news of Chung's possible
arrest has generated comment in high places. "We
think that it will inevitably have some impact on
the economy, but it won't be that huge," Finance
Minister Han Duck-soo said at a regular press
briefing. Hyundai and Kia are responsible for
almost 10% of South Korea's total exports.
After last year's high-profile
investigation into South Korea's top company,
Samsung, on slush-fund charges, some observers,
notably in the conservative press and in
big-business lobby groups, have questioned why the
Roh government appears to be so keen to attack
business and humiliate key chaebol figures
such as the Lee and Chung families - the nearest
thing South Korea has to royalty.
Others
see it differently. "I think it's too simplistic
to say the government is anti-business; the
government is very driven by the concerns of civic
groups," said Mike Breen, author of The
Koreans. "I think those groups have
highlighted abuses by the chaebol, and I
think that is where this is coming from."
Although Koreans routinely band together
to defend the chaebol against perceived
foreign threats - such as that by Dubai-based
private-equity fund Sovereign Asset Management,
which tried to dethrone SK's Chey in a two-year
proxy battle - the conglomerates are not
particularly well liked by the public at large.
The chaebol are seen as overly dominant in
the economy and abusive of their power - be it by
bribing politicians or paying their suppliers
late.
The Roh administration, meanwhile,
has made clear its determination to clear up the
political corruption that has long plagued South
Korea.
The news of the prosecution's hard
line must be a special shock to the Chung family's
personal accountants: last week, the family had
apologized to the public and announced a US$1.1
billion donation to "society" in a ham-fisted
attempt to atone for their alleged sins.
In this, they may have been taking a leaf
out of Samsung's book. After being investigated on
similar charges last year, Samsung head Lee
Kun-hee (aka "Korea's most powerful man")
announced this February that he would make a
donation of $800 million to benefit society. Lee
was not charged.
Coincidentally, US
private-equity fund Lone Star, under intense fire
from media and regulators for allegedly taking
excessive profits on its Korean investments, also
made a public, charitable donation of $106 million
on the same day as did the Chungs. But the timing
of the Hyundai and Lone Star moves appears to have
angered regulators.
"The Fair Trade
Commission's head has reacted with umbrage to both
Hyundai's and Lone Star's offer," said Hank
Morris, a director at Seoul-based consultancy IRC
Ltd. "Samsung made its offer when the
investigation was nearly complete, but Hyundai and
Lone Star seem to be making theirs in the middle
of the process."
The public donation, in
fact, has much in common with the slush-fund
issue. "These donations appear to be intended to
influence a process that should not be open to
influence," said Morris.
The Chungs'
gesture also annoyed many members of the public.
The donation to society came in the form of shares
from Hyundai shipping affiliate Glovis - the
company in the group through which the alleged
wealth transfers, and hence control of management
were being passed from father to son. The move
triggered a plunge in Glovis's share price,
angering individual investors.
Observers
are divided over whether the scandal rocking the
family and the group will damage Chung Eui-sun's
inheritance of his father's empire. Some say he
could inherit his father's very considerable
wealth, pay the appropriate taxes and still
acquire the requisite number of shares to control
the group. Others say the Chung family's
reputation is now so seriously damaged that there
is no chance of the younger Chung's making a move
for control.
Andrew Salmon is
the Seoul-based author of American Business
and the Korean Miracle: US Enterprises in Korea,
1866-the Present and a frequent contributor to
the South China Morning Post, the Washington Times
and The Times.
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