Korea is probably the first country in the world to develop an index to measure how large corporations treat their small subcontractors. On Wednesday, the Commission on Shared Growth for Large and Small Companies disclosed a draft plan to introduce the so-called “win-win index.”
If enforced as planned, the index is expected to provide a turning point in transforming trade practices in the domestic business community. If fair trade becomes the norm, the large wage gap between workers at big firms and their smaller parts suppliers will begin to narrow, thereby easing the worsening economic and social polarization of Korean society.
The index will consist of two components. First it will use the Fair Trade Commission’s annual evaluation of corporations’ performance in observing the fair trade rules and providing support ― financial, R&D, production technology, managerial, etc. ― to their subcontractors. The other component is small firms’ subjective assessment of large companies’ commitment to fair trade and shared growth.
Chung Un-chan, a former prime minister who now leads the shared-growth commission, said his panel would initially measure the performance of 56 corporations in six key industrial fields. Their scores will be announced next year, possibly in February at the earliest.
The commission’s plan has met with a mixed response. Small firms generally welcomed the initiative, hoping that it would serve as a powerful incentive for big corporations to significantly improve their business practices toward subcontractors.
In contrast, large businesses did not hide their dissatisfaction about the plan. They said they all understand the need to promote shared growth with their subcontractors and are willing to provide support to them. But they were averse to the idea of letting others gauge how they do business with parts suppliers.
But they have no one but themselves to blame for the introduction of the index. They have repeatedly pledged to put their suppliers on an equal footing but have thus far failed to deliver on their promises. Therefore they are in no position to reject the index scheme.
Big firms say the index has some problems because companies engaged in different industrial fields cannot be assessed by a one-size-fits-all yardstick. In this regard, they are opposed to the panel’s plan to disclose each company’s score. Doing so, they say, is to punish low-ranking companies by tarnishing their images.
This argument has a point. The win-win index is more about promoting cooperation between small and big firms than about penalizing low-ranking corporations. For this, incentives will work better. In this respect, the commission is right to consider offering tax benefits to well-behaved firms. At the same time, it needs to reconsider its plan to rank the companies based on their scores.
The most controversial element of the commission’s scheme is its plan to introduce a “profit-sharing” system. Chung said if large businesses cut down on production costs as a result of innovations by their parts suppliers, they should share the extra profits with the innovative subcontractors.
Chung’s idea drew fire from economists as well as large firms. They argued it goes against the principles of a market-based economy. Even if a company is willing to share the cost savings with its parts suppliers, they said, it would be practically impossible for it to calculate the contribution by each supplier if its product uses a large number of parts.
Devising a profit-sharing formula between large firms and their subcontractors may not be totally impossible in light of POSCO’s “benefit sharing” arrangement. The steelmaker shares the cost savings with its parts suppliers when they provide high-quality goods at lower costs.
However, Chung is advised not to press ahead with the profit-sharing scheme, given the expected backlash from large companies. His top priority is to ensure that the win-win index system takes root. He needs to guide big firms toward creating corporate ecosystems in cooperation with their subcontractors.