Government trumpets ‘chaebol reform’ after giving special benefits to Lotte

In the wake of dispute over managerial control at Lotte Group, growing voices are calling for reform of governance structure of chaebol or family-controlled Korean conglomerates. The government and the ruling Saenuri Party will hold a party-government consultative meeting on Friday and discuss ways to reform conglomerates’ governance structure, and to regulate monopoly and expedite fair trade. The National Tax Service has started tax probe into Daehong Communications, a Lotte subsidiary, while the Korea Customs Office is considering from square one whether to renew its license to Lotte Duty Free Shop or not.

From the establishment of Lotte Confectionary in 1967 to today when it has become Korea’s fifth largest conglomerate with 97 trillion won (82.8 billion dollars) in total asset, Lotte has grown through diverse special benefits accorded by the government. Lotte constructed Lotte Hotel at the former site of National Library, and built the main store of Lotte Department Store at the former site of state-run Korea Development Bank in Sogong-dong in central Seoul. The conglomerate installed shops at prime locations at major new subway stations including Jamsil and Yeongdeungpo, and raked in a mountain of cash. Hotel Lotte, whose 99-percent stake is held by Japanese capital, is controlling 50.2 percent of the Korean duty free shop market by banking on licenses from the government.

Lotte is reportedly earning about 95 percent of its sales revenue in Korea. Given its ownership structure and managerial practice, however, it is confusing whether it is a Japanese or Korean company, or whether it is real company or so-called paper company. Gwangyoon-sa, a packaging material producer with only 200 million won (171,000 dollars) in owner’s capital that is based in Japan, is controlling large listed companies in Korea and Japan through Japan-based Lotte Holdings. The founder’s family who controls merely 2.41 percent stake in the group is implementing "emperor-like management" through 416 cross-subsidiary shareholdings, and the founder’s younger brother, who has no official title at the conglomerate, is interfering with company affairs. Honorary Chairman Shin Kyuk-ho ordered dismissal of board members and executives by using his "own fingers" without taking the necessary process through the company’s official decision-making bodies such as shareholders’ meetings or board meetings.

The Korean government seems to be more hopeless to learn that it has not regulated Lotte because an unlisted company in Japan is controlling Lotte Group. The Fair Trade Commission, the powerful trade watchdog in the business community, was not aware what type of governance structure the nation’s No. 5 chaebol manages, and is belatedly scrambling to figure out the structure now. Korea should introduce supplementary measures including one that enables the government to figure out ownership structure if a certain portion of business operations is done within Korea even if its holding company is based overseas. Whoever takes Lotte’s managerial control, whether the conglomerate remains intact under the current one-top system or is split, it is okay as long as such issues are addressed through the official courses such as a shareholders meeting. However, the government should not allow Lotte to retain its non-transparent governance structure or managerial practice like an emperor’s. It is desirable that Lotte Group presents reform plans that are convincing the Korean people and society by itself, before the government and political circle force Lotte to change.