Corporate soundness of top 16 biz groups plunged in `11

#1. Lotte Shopping, a listed company, distributed profits worth 43.5 billion won (39 million U.S. dollars), or 4.3 percent of 1.01 trillion won (901 million dollars) in net profits of 2010, to the company’s shareholders in January last year.

By contrary, BNF Trading, a non-listed company owned by a grandchild of Lotte Group Chairman Shin Kyuk-ho, distributed 2 billion won (1.8 million dollars), or 87 percent of the previous year’s net profit, in 2008 and 1 billion won (890,000 dollars), 59 percent of net profit, in 2010. More than 70 percent of the company’s sales come from the supply of its products to Lotte Shopping.

#2. CheilJedang, an affiliate of CJ Group, has four external directors among its seven board members. On the surface, the company has an ideal form of the board but in eight board meetings last year, external directors never presented opposing opinions on major issues, such as purchases of stocks in affiliates and sales of shares in financial companies.

In CJ E&M, an external director resigned six months after his appointment and never participated in board meetings.

According to a corporate soundness assessment of Korea’s top 16 business groups conducted by The Dong-A Ilbo’s economics desk and the Corporate Governance Service, the conglomerates got 42.1 points out of 100. This is because they received low marks in profit distribution, the operation of board of directors, and public announcements.

The evaluation items included protection of shareholder rights; board of directors; public announcements; audit organizations; and profit distribution.

○ Board, profit distribution ignore ordinary shareholders

The average score in profit distribution was the lowest at 22.2 points due to stinginess in distributing profits to shareholders. As seen in Lotte Group, listed companies distributed a small portion of profits to shareholders while non-listed companies owned by family members of a group owner showed largesse in sharing profits with shareholders.

The score for board of directors also plunged from 36.3 points in 2007 to 28.9 points last year. Hyundai Motor Group, the second-largest conglomerate in Korea, was no exception in poor management of board of directors. In all affiliates excluding HMC Investment Securities, CEOs chair the board. In addition, they have no compensation committees that evaluate management performance and decide compensation levels. Board members do not have any training.

Public announcements showed the largest drop from 45.7 points to 35.3. A case in point is LG Electronics. Foreign media said that before the opening of the stock market in early November last year, the company would increase its capital. The stock exchange urged the company to make this public, but the latter kept mum all day.

After the stock market closed at 6 p.m., the company made an announcement on capital increase. By that time, however, LG`s share had plunged 13.7 percent and stocks of all LG Group affiliates had tanked simultaneously.

Jeong Jae-gyu, a department head at the Corporate Governance Service, said, “If interest in corporate governance falls, check systems such as board of directors and public announcement suffer first.”

○ Widening soundness gap

Doosan, Hyundai Motor, Hanwha and Dongbu groups made progress, however. The gap between the aforementioned four groups and the remaining 12 conglomerates further widened.

The difference between Doosan, which has ranked at the top for several years, and Lotte, which finished last, was a whopping 27.5 points, up from 17.3 points in 2007.

All Doosan Group affiliates have internal trade committees inside the board of directors. Though mandatory organizations, the committees reviewed cross-affiliate trade to enhance transparency. Due to such efforts, the ratio of payment guarantees for affiliates to assets dropped from 0.07 percent in 2007 to 0.014 percent last year. The share of sales to affiliates to total sales also plummeted from 15.2 percent to 6 percent.

By contrast, Lotte received low scores in all areas. Lotte Samgang, in particular, got the lowest score among the group’s 16 affiliates. The company has yet to introduce electronic or written votes to the board of directors, and sends notice of a board meeting shortly before the legal deadline (two weeks before the meeting).

Lotte Samgang has no committee that recommends candidates for external directors or a compensation committee. Another reason for the low score is the share of external directors. The figure barely reached the legally required 25 percent.

GS, STX, Hanjin, CJ and Kumho groups failed to make the top 10 list. Large volume of internal trade is blamed for the failure of STX and GS. GS ITM is a data-processing affiliate of GS Group. Eighteen relatives of the group owner, including GS Group Chairman Huh Chang-soo’s only son Yoon-hong, hold 93.34 percent of the affiliate’s shares. GS ITM posted 101.2 billion won (90.2 million dollars) in sales in 2010, but 81.7 billion won (72.8 million dollars) came from affiliates.

The entire revenue of STS Logistics worth 5.8 billion won (5.3 million dollars) came from the delivery of petroleum goods produced by GS Caltex in 2010. The former is owned by the group chairman’s 11-year-old and 9-year-old nephews.

The share of sales from affiliates in STX Construction, whose major shareholders are STX Chairman Kang Deok-soo’s two daughters, was 75.6 percent.

Kim Hyun-chul, a professor of international studies at Seoul National University, said, “Government pressure has its limit in making corporate governance transparent,” adding, “In the end, management awareness of governance should be raised and the level of social awareness that evaluates it should also be enhanced.”

yunjung@donga.com libra@donga.com