LG leads corporate governance reform

The 1997 financial crisis has triggered major structural changes in Korea`s family-controlled conglomerates, placing the nation at the forefront of corporate governance reform seen in Asia over the past few years.

Companies have tightened rules for disclosure and regulatory filings, filled at least half of their boards with outside directors, and strengthened internal codes of conduct and monitoring in a bid to promote transparent management.

The government, for its part, has imposed stricter governance codes on Korean conglomerates, adopting measures such as a law on securities-related class action lawsuits and an investment ceiling designed to prevent companies from reckless expansion.

Among others, LG Group is at the vanguard of this nationwide effort to improve corporate governance and increase management transparency, with unprecedented reforms in Corporate Korea.

Of the nation`s top 10 family-controlled conglomerates, or chaebol, LG Group is the first and only one to have so far streamlined its governance structure into a single holding company, LG Corp.

Still an unfamiliar concept in the local business community, a holding company refers to a corporation that owns enough voting stocks in another firm or firms to control management and operations either by influencing or electing the board of directors.

Most Korean conglomerates, on the other hand, have a structure in which affiliates make investments in each other without the presence of a holding company.

Transforming into a governance structure that is believed to ensure more transparency than the traditional chaebol system, LG Group dismantled its complex web of cross-shareholdings and reorganized the majority of its affiliates under LG Corp. in March 2003.

It took more than four years for LG Group to arrange the founding families` stakes in subsidiaries and affiliates in a way to meet the government`s requirements for the establishment of a holding company. A holding company is required to own 30 percent of listed and 50 percent of unlisted subsidiaries, and maintain a debt-to-equity ratio of less than 100 percent.

"One of the advantages of having a holding company structure is that there`s a clear separation between manufacturing and finance sector," said Jang Ha-sung, a professor at Korea University who has spearheaded minority shareholder activism in Korea.

In July last year, LG went further in its campaign to focus on core areas and enable its affiliates to act more independently, separating the conglomerate into two entities.

Under the separation, 14 units focused on retail and service businesses were spun off from LG Corp. into a new holding company called "GS Holdings Corp."

The companies, including LG Home Shopping Co., refiner LG-Caltex Oil Corp. and retailer LG Mart, were officially incorporated into the new wing of "GS Group" this year.

GS, the seventh-largest private corporation, is run by the Hur family, one of LG`s two founding families. All affiliates will soon be christened to include "GS" in their titles.

The Koo family continues to manage chemicals and electronics divisions like LG Electronics Inc. and LG Chem Co. under the LG brand.

LG Group`s assets were slashed to about 45 trillion won following the breakup, forcing it to lose its second position and compete for third place with SK Group. The number of its affiliates was also reduced to 37, including LG Corp.

"The dynamics of the Koo and Hur families has stimulated the separation and played a catalyst for a better corporate structure. The risk of a power struggle between the two families has been dissolved and the market perceived that as very positive," said Ryan S. Song, a corporate governance expert at McKinsey & Co.`s Seoul office.

In effect, the holding company structure puts LG on open display. The framework facilitates the government`s supervision of any unfair practices, thus enhancing transparency and efficiency, experts say.

They also say the holding company structure helps prevents healthy affiliates from being used to prop up failing units, a practice that is mentioned as a main culprit behind corporate failures during the 1997-98 financial crisis.

Apart from the sweeping structural reforms, LG Group is also trying to strengthen internal monitoring with the aim of fostering an honest and fair corporate culture.

In 2003, LG set up a 20-member taskforce to enhance transparent management, which assists auditing at the group`s affiliates and investigates suspected unfair practices by its employees.

The team also tries to prevent any moral hazard or management risks beforehand through group-wide education programs.

LG plans to appoint more accounting experts to its boards to strengthen financial expertise and cater to growing market demand for more transparent management.

LG is also operating an online bulletin where people can inform any unfair practices under identity protection.

Such continued reform efforts have paid off in the market. Market capitalization for its 11 listed companies has almost tripled over the past two years to 36.7 trillion won as of March 2005, from 13.6 trillion won in Feb. 2003.

Several economic organizations, and even foreign capital that is usually critical of Korea`s corporate governance, have praised LG for recent moves toward better corporate governance.

During a press conference to announce its investments in LG Electronics Inc. and LG Corp. last month, James Fitter, chief executive of Sovereign Asset Management Ltd., touted the companies` management, saying "We support role-model companies for good corporate governance."

Sovereign has invested 1 trillion won for a 5.7 percent stake in LG Electronics, the nation`s second-largest electronics maker, and a 5.5 percent stake in LG Corp.

The Monaco-based fund`s praise on LG draws a sharp contrast with its corporate governance crusade against SK Corp., the de-facto holding company of SK Group.

The nation`s five main economic organizations also recognized LG Electronics` efforts toward greater transparency, handing the electronics giant the top transparent management prize in January.

"Transparent management is the leading player changing management-labor relations, promoting a passionate working atmosphere, and eventually renewing corporate culture," said LG Vice Chairman Kim Ssang-su at a press conference.

"Transparent management is a trend of the times demanded by the society, employees and customers alike, and is what we should move toward. As LG Electronics has made utmost efforts to this aim so far, we will continue to be at the forefront of efforts to be able to become a transparent company and a good example to others," Kim said.

(soyoung@heraldm.com)



By Kim So-young