1

The 14th International Economic History Congress, 21-25 August 2006, Helsinki, FinlandSession 6: Beyond Chandler. The Survival of the Family Firm in Europe, Asia and North America in the 19th and 20th Centuries

Personal and Managerial Capitalism: Evidence from Management in the Korean Chaebol

Dong-Woon Kim,Dong-Eui University, Korea dongwoon@deu.ac.kr

________________________________________________________________________Contents

1. Introduction2. Interlocking ownership: (1) Participants and their shareholding

(2) Mechanism of interlocking ownership3. The controlling body: (1) The dominant entrepreneur

(2) Aides-de-camp4. Member companies5. Personnel6. The board of directors7. Management or executive managers8. Family members involved in management: (1) Samsung (2) LG (3) SK (4) Hyundai Motors9. Management organization resembling M-form10. Summary and conclusion________________________________________________________________________

(* This paper has yet to be completed and revised.)

2

1. Introduction:

In the Korean economy, British-style personal and American-style managerial

capitalism coexist. The economy may be called ‘personal and managerial’, or

‘personalized managerial’, capitalism. It is personal capitalism in that the dominant

business organization called chaebol is both owned and controlled by a family; it is

managerial capitalism in that the chaebol’s member companies have their own modern

managerial hierarchies. In Korea, a managerial revolution did take place without the

separation of ownership from control.

The chaebol is a business conglomerate where extremely diverse interests are run by a

large number of member companies. Each member company has its own professional

managers and workers organized into a well-developed hierarchy. In particular, larger

industrial companies, which are generally accompanied by the three-pronged investment,

have larger and more sophisticated managerial hierarchies.

Yet, all legally independent member companies are owned by a family and controlled

by a family member, who, as the dominant entrepreneur, takes the status of both the

representative owner and the group chairman. This is made possible by strategic

interlocking ownership. First, the entrepreneur, who himself has a tiny shareholding,

organizes his intimate group consisting of three clusters of in-house shareholders - family

members, family-owned charities, and top professional managers of member companies.

Then, they together have controlling interests in a few member companies, which, as

quasi-holding companies, control the other companies.

The dominant entrepreneur is usually a full-time board member and the chief

executive officer only in a few companies; sometimes, he is a part-time board member

also in some others. He is not involved in management of most other companies, which,

3

however, is under the control of members of the entrepreneur’s intimate group and other

top managers as the entrepreneur’s proxies. As the result, all legally independent member

companies, informally or even illegally, constitute one inter-related and interdependent big

business with one large-scale managerial hierarchy headed by one dominant entrepreneur.

As such, the chaebol’s overall management structure is ‘personalized M-form’ (Figure 1).

Indeed, this sort of unification of ownership and control has enabled Korean chaebols

to contribute to the country’s rapid economic growth. On the other hand, the informality or

illegality in the governance system, together with resultant anti-capitalistic business

customs such as abnormal transactions and loans among member companies, has worried

the business community and the general public alike since the inception of chaebols in the

early 1960s.

Thus, larger chaebols, or more generally ‘groups of companies’, began to be regulated

by the government through the Fair Trade Commission and the Fair Trade Act from 1987,

when ‘Declaration for Democratization’ was about to pave the way for the end of the long-

lasting autocratic military governments. The 1997 financial crisis was such an epoch-

making event that a considerable number of existing chaebols disintegrated and new ones

appeared, but, significantly, most major chaebols remained unchanged.

This paper explores Korea’s peculiar business system with an emphasis on

management. Main concerns are what the management structure looks like, whether and to

what extent it resembles M-form, and how frequently family members are involved in

management. While being freely referred to a larger population and a longer period, these

issues are addressed especially with regard to the four largest chaebols after the 1997 crisis.

First, the focus is on the period from 1998 to 2005, when the new Kim Dae Jung and

succeeding governments, supported by IMF, punished and attempted to transform chaebols

4

and, accordingly, some important, though not satisfactory, changes took place in the

personalized governance system. Four benchmark years - 1998, 2000, 2003 and 2005 - are

introduced to see changes over time. Second, the four most influential chaebols - Samsung,

LG, SK and Hyundai Motors - are scrutinized. A number of member companies of

significance are selected and their management structures analyzed. And third, the main

data source is the annual business report, which is compulsorily submitted to the

government and available on the web.

Section 2 introduces interlocking ownership. Five groups of in-house shareholders and

their collective shareholdings are examined and how strategic interlocking ownership

works is explained. Then, section 3 to section 9 analyzes aspects of management: the

controlling body consisting of the dominant entrepreneur and his aids-de-camp (section 3);

the number of member companies (section 4) and of personnel (section 5); the legal

governing body consisting of the board of directors (section 6) and management (section

7) with regard to their size and composition and with special attention to the widespread

recruitment and functioning of outside directors, who are widely expected to cure the

personalized governance; family members’ involvement in management (section 8); and,

to what extent the business structures in the major companies resemble the M-form

(section 9). Section 10 summarizes and concludes the proceeding discussions.

5

Figure 1. Management Structure in the Korean Chaebol: Personalized M-form

Dominant Entrepreneur (Representative Owner

and/orGroup Chairman)

Aides-de-camp Chairman’s secretariat

Restructuring office Holding company

Member Companies_____________________________________________

1 2 3 - - N

General Meeting of Shareholders

Board of Directors Audit Committee

Management

Units: Upper__________________________________________

Planning/Supporting Production R&D Marketing

Units: Middle

Units: Lower

6

2. Interlocking ownership

It is strategic interlocking ownership that enables a large number of legally

independent companies to become interdependent and a family member to become the

dominant entrepreneur and to exert control over all companies.

(1) Participants and their shareholdings

Five groups of in-house shareholders participate in interlocking ownership (Table 2

(1) (2)). First, at the center of ownership is the representative owner who is a leading

family member. He has only a tiny interest. His average shareholding in the 30 largest

chaebols ranged from 1.5% (in 2000) to 4.1% (in 1993). The owners in Samsung (Lee

Kun-Hee, 0.3-2.1%) and LG (Koo Bon-Moo, 0.2-1.2%) had much fewer shares. The

owner’s shareholding sharply decreased in SK (12.5% in 1993 and 1% in 2005) and, to a

lesser degree, Samsung (2.1% and 0.3%). On the other hand, it increased in LG (0.2% in

1993 and 1.2% in 2005) and Hyundai Motors (2.1% in 2001 and 2.8% in 2005); in LG, the

adoption of the holding company system was the main cause of the increase after 2000.

Second, the representative owner organizes an intimate group consisting of the

owner’s family members, family-owned charities and top professional managers.

Number of family members involved in ownership depends on chaebols, companies and

years, but it is generally small, under 10 in most cases. One exception is LG: this chaebol

was founded by two business families of big size and their descendants - more than 50 or

sometimes more than 100 - have actively participated in the ownership of major

companies. Number of family-owned charities is usually one or two, and that of

professional managers is also very small, five or so in most cases. Together, these three

7

clusters of in-house shareholders in the 30 largest chaebols had, on average, a collective

interest of 4.5% (in 2000) to 8% (in 2005), which was larger than the owner’s interest but

still small enough; in SK and Hyundai Motors, the intimate group’s interest remained

smaller than the owner’s.

And third, the most important participants in interlocking ownership are a small group

of key member companies. Usually under five in number, they together had an interest

much larger than that of the owner, his intimate group or both. Member companies’

collective shareholdings ranged from 32% (in 1989) to 44% (in 2005) in the 30 largest

chaebols. They were larger in Samsung (41-50%), SK (29-56%) and Hyundai Motors (42-

49%), while smaller in LG (24-39%); in SK, they were sometimes more than 50% (in

2000 and 2003).

In all, all the five groups of in-house shareholders usually had some 50% interest

between them through interlocking ownership.

Table 2. Collective shareholding, 1987-2005 (%):Representative owner (A), Intimate group (B), Owner group (A+B),Subsidiaries (C), In-house shareholders (A+B+C)

(1) Average of 30 largest chaebols________________________________________________________________________

1987 1989 1993 1997 1998 2000 2003 2005________________________________________________________________________A 4.1 3.7 1.5 3.7 2.9B 6.2 4.8 4.5 5.1 8.0A+B 15.8 14.7 10.3 8.5 6.0 8.8 10.9C 40.4 32.5 33.1 34.5 38.9 42.9 43.4------------------------------------------------------------------------------------------------------------A+B+C 56.2 47.2 43.4 43.0 44.9 51.7 54.3

8

________________________________________________________________________Note: 2003, 2005 - excluding groups (6 and 7), in each of which owner is a company.(2) Four largest chaebols________________________________________________________________________

1989 1993 1997 1998 2000 2003 2005________________________________________________________________________A1 Samsung 2.1 1.0 1.0 0.6 0.4 0.32 LG 0.2 0.3 0.3 0.4 0.9 1.23 SK 12.5 8.4 6.0 3.1 1.4 1.04 Hyundai Motors 2.1 2.6 2.8* Hyundai 5.6 3.3 2.8 0.9 1.1 0.7------------------------------------------------------------------------------------------------------------B1 3.0 2.6 1.9 1.2 1.6 2.62 5.1 5.1 5.0 4.2 6.5 4.13 7.1 5.7 3.6 1.2 0.7 1.54 0.1 0.1 1.7* 16.5 10.5 8.4 2.9 0.5 3.1------------------------------------------------------------------------------------------------------------A+B1 8.0 5.1 3.5 2.9 1.8 2.0 2.82 9.8 5.3 5.4 5.3 4.6 7.4 5.23 15.5 19.6 14.1 9.7 4.3 2.1 2.44 2.2 2.8 4.5* 27.9 22.1 13.8 11.2 3.8 1.6 3.8------------------------------------------------------------------------------------------------------------C1 42.3 47.8 43.1 41.7 42.7 40.8 49.82 24.0 33.6 34.6 36.6 38.5 38.0 35.13 30.6 29.0 30.6 48.8 52.9 55.9 48.94 42.8 47.2 49.0* 41.1 35.7 42.4 42.5 39.4 31.0 16.4------------------------------------------------------------------------------------------------------------A+B+C1 50.3 52.9 46.7 44.6 44.5 42.8 52.62 33.8 38.8 40.1 41.9 43.1 45.4 40.33 46.1 48.6 44.7 58.4 57.2 58.0 51.34 45.0 50.0 53.5* 69.0 57.8 56.2 53.7 43.2 32.6 20.2________________________________________________________________________Note: Hyundai Motors – the year of 2000 = 2001.

9

(2) Mechanism of interlocking ownership

How interlocking ownership works is demonstrated with regard to Doosan in 1987.

Primary data relating to ownership in this chaebol, the 14th largest, between 1987 and 1992

were exceptionally available to and analyzed in detail by the author of the present paper

(Kim (2003)). They are more detailed and comprehensive than those contained in the

annual business report submitted to the government, on which the paper is mainly based.

Korean chaebols generally tend not to permit scholars to have access to any primary

sources. Importantly, it appears that the mechanism of interlocking ownership in this

particular chaebol has applied to all others over the last 20 years and still does so.

1) The overall ownership structure resembles a grid in which individual companies’

ownership structures are intermingled (Figure 2-1).

First, in the first row appear 16 shareholders and in the first column all 21 member

companies. Among the shareholders are the representative owner (Park Yong-Kon, A),

his intimate group ( family members (B1), a family-owned charity (Yonkang

Foundation, B2) and top managers (B3)), and 12 of 21 companies, of which six (C2-

4, 6-8) are public companies.

Second, a percentage is calculated from [(a shareholder’s shareholding in a company ÷

the company’s taken-up capital) ×100].

Third, each column shows in which companies each shareholder holds shares; each

row by which shareholders shares in each company are held. For instance, the owner (A)

holds shares in six companies (C2, 3, 4, 6; C1, 14), while shares in C2 are held by eight

10

shareholders (A, B1, B2, B3; C4, 7; C1, 14).

And fourth, percentages in black indicate the largest shareholdings. Those in grey

mean that they add up to a shareholding larger than the largest one of an outside

institutional shareholder in C3 (42.5% vs. 40%), C7 (55.1 vs. 32.9) and C12 (51 vs. 49);

they do not in C13 (31.1 vs. 51.5).

2) Within this structure, ownership is interlocked through two stages (Figure 2-2).

First, in stage 1, the owner and his intimate group (A+B1+B2+B3) holds shares in a

small number of companies, eight in total, mainly public companies (five) [CI].

And second, in stage 2, 12 companies, including all six public companies, hold shares

in themselves and the other nine companies through three dimensions (or phases).

In dimension 1, all the eight of CI hold shares in themselves (CI) and eight other

private companies (CII), totaling 16.

In dimension 2, three of CII hold shares in four of CI, two of CII, and three others

(CIII), totaling nine.

In dimension 3, one of CIII holds shares in two (CIV).

3) In this process, a chain of dominant shareholders emerges (Figure 2-3). In stage 1,

the owner group has controlling interests only in four, less than one-fifth of all 21 member

companies; three (C2, 3, 4) of them are public companies. In stage 2, these four control all

the other member companies except one (C13). In all, two public companies (C2 and, to a

lesser degree, C3) are key member companies, controlling 10 and four, respectively.

11

Figure 2-1. Interlocking ownership in Doosan, 1987: (1) Overall structure (%)

A B1 B2 B3 C2 C3 C4 C6 C7 C8 C1 C5 C9 C10 C14 C17

C2 8.3 19.1 3.3 5.1 4.4 1.1 0.3 0.8

C3 6.7 12.9 8.8 2.1 7.5 2.3 0.2 2.0

C4 7.9 21.2 4.7 3.7 1.4

C6 0.2 1.8 10.0 0.2 31.0 0.8 3.6 1.0 0.7 1.0 1.5

C7 10.0 16.4 4.9 10.0 3.8 10.0

C8 78.0

C1 1.4 4.0 34.5 34.2 13.1 2.2 10.6

C5 79.1 0.9 20.0

C9 90.3 0.4 9.4

C10 6.7 13.5 10.0 12.0 2.5 6.8 48.5

C11 60.0

C12 13.4 37.6

C13 9.9 12.7 4.7 3.8

C14 16.8 53.9 13.7 1.0 0.7 13.4

C15 83.0 10.0 2.0 2.0 1.0 2.0

C16 76.8 23.2

C17 100

C18 100

C19 100

C20 100

C21 100

Notes: A - The representative owner.B - Intimate group: B1 - family members, B2 - family-owned charity,

B3 - managers.C - Member companies: C2-4, 6-8 - public companies; the remaining - private

companies.

12

Figure 2-2. Interlocking ownership in Doosan, 1987:Stages/dimensions through which ownership is interlocked(Number of companies)

_____________________________________________________________________________ Stage 1 Stage 2

Dimension 1 Dimension 2 Dimension 3

A+B1+B2+B3 8(5) 3 1(1) 12(6) of CI of CII of CIII (C)_________________________________________________________________________CI 8(5) 8(5) 4(2) 8(5)_________________CII 8 2 8

_______________________________CIII 3(1) 3(1)

______________________________________________CIV 2 2

_____________________________________________________________________________CI+CII+CIII+CIV 16(5) 9(3) 2 21(6)_____________________________________________________________________________

13

Figure 2-3. Interlocking ownership in Doosan, 1987:(3) A Chain of dominant shareholders

A+B1+B2+B3Stage 1

+C2 C3 C4 C14

Stage 2Dimension 1 + + C1 C5 C6 C9 C11 C15 C7 C17 (C13) C12 C10

Dimension 2

C16 C8 C18 C19

Dimension 3 C20 C21

Note: ‘+’ indicates that, in C3, 7 and 12, in-house shareholders, led by the second largestshareholder ((A+B1+B2+B3), C3, and C4, respectively) collectively have ashareholding larger than the largest one of an outside institution; they failed to do soin C13.

14

3. The controlling body

(1) The dominant entrepreneur

At the top of managerial hierarchy is the dominant entrepreneur. He is usually a

member of a business family, usually a founder or his son. He is legally called ‘the

representative owner’ and informally ‘the group chairman’. He is usually both the

representative owner and the group chairman. In a few cases, however, there are two

dominant entrepreneurs in a chaebol: a family member has the status of the owner as the

potential and ultimate controller, while a non-family member is appointed the group

chairman as the owner’s proxy.

Between 1987 and 2006, a total of 74 chaebols were, once or more, included in the 30

largest chaebols. In 53 of them (72%), representative owners were family members, while

in 12 (16%) they were companies; in one, the owner was a family member followed by a

company (Table 3).

1) In most (44; 83%) of the 53 chaebols including Samsung and Hyundai Motors, the

status of the owner was held by one family member as an inheritor or a founder. In

Samsung, Lee Kun-Hee inherited the status from his father, the founder, in 1980; and, in

Hyundai Motors, Chung Mong-Koo founded in 2001 his own chaebol consisting of a

number of former member companies of Hyundai, which was founded by his father and

remained the largest chaebol until 2000.

In eight chaebols, the status of the representative owner was succeeded by two family

members. First, in seven chaebols including LG and SK, the owner was first the founder

and then his son: in LG, Koo Bon-Moo became both the owner and group chairman in

15

1996; and, in SK, Choi Tae-Won took over the status of the owner in 1999 but the

chairmanship five years later. Second, in one (KumhoAsiana), the owner was first the

founder’s son and then the inheritor’s younger brother. And third, in the remaining one

(Hyundai), there were three representative owners: the founder (Chung Joo-Young, until

2000), his son Mong-Hun (Mong-Koo’s younger brother, until 2003) and Mong-Hun’s

wife (Hyun Jung-Eun, from 2004). Between 1996 and 2000, when the founder was the

owner, his two sons were the group chairmen: first elder son (Mong-Koo, in 1996-1997),

then both sons (in 1998-1999), and then younger son (Mong-Hun, from 2000).

2) A significant feature is that, of the 53 chaebols whose owners were family members,

15 (28%) are under the control of three business families: the Chung families were

involved in Hyundai Motors (headed by Chung Mong-Koo) and six satellite chaebols; the

Lee families in Samsung (Lee Kun-Hee) and four others; and, the Koo families in LG

(Koo Bon-Moo) and two others.

3) In 12 groups of companies, the respective representative owner was a company.

They are not chaebols, which are defined as family-owned business conglomerates, but

rather ‘private’ business groups. These groups are quite new: nine of the 12 appeared after

2001. Five are based on former member companies of a leading chaebol called Daewoo,

which was founded by Kim Woo-Joong, the forerunner of Korea’s FDI, but disintegrated

soon after the 1997 crisis; and, three are former government-owned companies.

16

Table 3. Representative owners in 74 chaebols that were included, once or more,in the 30 largest chaebols, 1987-2006

______________________________________________________________________Owner Number of Notes

chaebols______________________________________________________________________Family member 53

1 person 44 Inheritor or founder

2 persons 8 7: Father Son1)

1: Brother Brother2)

3 persons 1 Father Son Son’s wife3)

------------------------------------------------------------------------------------------------------- Independent 38

Inter-related 15 5: Samsung and 4 satellite chaebols4)

3: LG and 25)

7: Hyundai Motors and 66)

______________________________________________________________________Company 12

1987-2000 2 Kia (1990-1997)

2001-2006 10 5: Former member companies of Daewoo7)

3: Formerly government-owned companies8)

______________________________________________________________________Family member

Company 1 Kohab (1987-2000 2001)______________________________________________________________________Total 74 * Unknown 8______________________________________________________________________Notes: 1) DongKuk Steel, Daelim, Daesang, Youngpoong, SK, LG, Hanjin.

2) KumhoAsiana.3) Hyundai.4) CJ, Hansol, Saehan, Shinsegye.5) GS, LS.6) Halla, Hyundai, Hyundai Department Store, Hyundai Heavy Industrial

Corporation, Hyundai Industrial Development, KCC. 7) Daewoo Construction, Daewoo Motors, Daewoo Electronics, Daewoo

17

Shipbuilding Ocean, GM Daewoo.8) KT, KT&G., POSCO.

(2) Aides-de-camp

The dominant entrepreneur is assisted by a small staff, which plans and supervises all

key managerial decisions. Before the 1997 financial crisis, the typical aide-de-camp was

the group chairman’s secretariat. After the crisis, it was the restructuring office, which was

introduced, in accordance with the government’s policies, with a view to curing negative

aspects of the personalized governance system but soon changed into a new and more

powerful aide-de-camp.

In 1998 when the restructuring office first appeared, the staff in Hyundai and SK

numbered, respectively, 90, followed by some 80 in Samsung and 62 in LG. By 2003,

Samsung (some 100) increased its staff, while the other three (13 in Hyundai, some 40 in

SK and some 50 in LG) decreased them and eventually abolished their offices.

As long as the dominant entrepreneur exists, he must be accompanied by any kind of

aide-de-camp. So, abolished restructuring offices were replaced by new types of

organization. In Hyundai and SK, a department in a key family-owned member company,

which, together with other key companies, controls most other companies through

interlocking ownership, was newly set up. In LG, the former restructuring office was

enlarged into a holding company (LG Inc.).

The government has encouraged chaebols to transform the intimate and complex

interlocking ownership into the transparent and simple one by adopting the holding

company system. LG is the first chaebol that successfully accomplished this

transformation between 2001 and 2005. LG’s satellite chaebol, GS, also took the same

18

direction. The problem is that while the ownership structure did change, the control system

never became democratic: Koo Bon-Moo is now only the chairman of the holding

company, but, nevertheless, he still acts as the group chairman as the representative owner

as he did before. Also, the personnel, departments and functioning of the holding company

are nearly the same as those in the former restructuring office. The essence of the

personalized governance system remains unchanged in LG.

4. Member companies

Korea’s chaebols have been notorious for their gregarious diversification. They were

ready and eager to be involved in any prospective businesses including those that were

successfully, and could be more efficiently, done by small and medium companies.

This was true particularly before the 1997 crisis and with regard to the larger chaebols

(Table 4; see also Table 3). The average number of member companies per chaebol in the

five, 10 or 30 largest chaebols had increased until 1997. After that, the number sharply

decreased, but it soon began to increase again. The average number per chaebol in the five

largest chaebols was 35 in 1987, reached the peak (52) in 1997, dropped to 36 by 2000,

and rose to 45 by 2006. These numbers are nearly double those relating to the 30 largest

chaebols.

As far as the four largest chaebols under consideration are concerned, Samsung had 80

companies in 1997, the largest ever among the 30 largest chaebols after 1987. In LG, its

member companies have drastically decreased for the last three years (from 50 in 2003 to

30 in 2006). This was because a number of companies in LG were transferred to two

satellite chaebols (GS and LS), whose member companies numbered, respectively, 50 and

19 in 2006. This was also true of Hyundai and its six satellite chaebols. While Hyundai’s

19

largest number in 1998 (62) became just seven in 2005, Hyundai Motors, now the core

among the seven chaebols run by the Chung families, increased its companies from 16 in

2001 to 40 by 2006. Finally in SK, member companies in 1987 (16) had doubled by 1993

(32), again nearly doubled by 2003 (60) and thereafter decreased only slightly.

Table 4. Number of member companies, 1987-2006________________________________________________________________________

Average number per chaebol: Total number: 4 largest chaebols30, 10 and 5 largest chaebols ----------------------------------------------------------------------------------------------- Samsung LG SK Hyundai *Hyundai

30 10 5 Motors________________________________________________________________________1987 16.4 27.2 35.2 36 57 16 321989 17.8 30.4 37.4 42 59 22 371993 20.1 32.3 41.6 55 54 32 451997 27.3 40.0 52.4 80 49 46 571998 26.8 38.9 51.4 61 52 45 622000 18.1 27.5 36.0 45 43 39 16 352003 20.3 32.0 41.6 63 50 60 25 122005 21.5 35.1 43.8 62 38 50 28 72006 21.5 34.0 45.6 59 30 56 40 9________________________________________________________________________Notes: As of April; Hyundai Motors, 2000 = 2001.

20

5. Personnel

Number of managers and workers depends on member companies and years. Five

major companies in each of the four largest chaebols are selected and their sizes in terms

of personnel are examined with regard to recent three years (2000, 2003 and 2005). The

selected companies account for some 10% of total member companies in Samsung, LG

and SK, and some 20% in Hyundai Motors (Table 5).

Of the 20 selected companies, five employed more than 10,000 persons: Samsung

Electronics (44,000-71,000), LG Electronics (27,000-34,000), LG Chemical (10,000 in

2005), Hyundai Motors (48,000-55,000) and Kia Motors (29,000-33,000). Employees in

two companies (Samsung Electronics and Hyundai Motors (in 2003-2005)) numbered

more than 50,000. All these five are industrial companies involved in the manufacture of

electronics, motors or chemicals, which tends to be big, through the three-pronged

investment, in order to achieve economies of scale and scope. By comparison, SK

Corporation, the key, oil refining company in SK, had much fewer personnel (some 5,000).

Most of the remaining 15 companies had 1,000-5,000 persons and two in Samsung

(Samsung SDI and Samsung Life Insurance) 5,000-10,000 persons. One company in LG

(LG Inc.), which is the holding company, had only 75 persons (in 2005). As explained in

section 3, this company was transformed from, and similar in size and functioning to, the

earlier restructuring office and now acts as the new aid-de-camp of the representative

owner.

The majority of personnel are, of course, staff and workers, while persons taking

21

charge of management usually account for 1% or less of the other employees.

Table 5. Personnel in key companies in 4 largest chaebols:Number of managers (M (board members, D)) and staff/workers (W)

___________________________________________________________________________________Company 2000 2003 2005 ------------------------------ ------------------------------- ------------------------------- Total M(D) W Total M(D) W Total M(D) W___________________________________________________________________________________Samsung1 44,345 349(20) 43,996 55,957 578(13) 55,379 70,228 678(13) 69,5502 4,841 101(12) 4,740 4,349 118(10) 4,231 4,389 127(8) 4,2623 8,252 63(12) 8,189 8,222 82(9) 8,140 9,967 87(8) 9,8804 8,087 61(10) 8,026 6,308 64(10) 6,244 6,103 63(10) 6,0405 1,797 14(7) 1,783 - - (9) 1,568 - - (8) 1,549___________________________________________________________________________________LG1 31,982 208(8) 31,774 27,914 231(7) 27,683 33,197 252(7) 32,9452 - - (9) 12,257 - - (6) 9,097 10,049 66(7) 9,9833 3,631 25(7) 3,606 3,290 24(7) 3,266 3,111 41(7) 3,0704 1,283 30(7) 1,253 1,731 25(6) 1,706 2,018 31(7) 1,9875 - - (8) 72 75 13(7) 62___________________________________________________________________________________SK1 4,466 32(10) 4,434 4,984 68(9) 4,916 5,098 97(10) 5,0012 3,009 47(12) 2,962 4,233 69(12) 4,164 4,357 75(11) 4,2823 2,471 59(10) 2,412 1,836 33(8) 1,803 2,183 41(7) 2,1424 1,800 17(5) 1,783 2,418 32(7) 2,386 2,070 29(8) 2,0415 1,210 16(7) 1,194 1,047 16(10) 1,031 1,334 22(8) 1,312___________________________________________________________________________________Hyundai (2001)Motors1 48,963 132(6) 48,831 51,632 161(8) 51,471 54,488 159(7) 54,3292 29,497 120(7) 29,377 31,411 133(8) 31,278 32,688 138(7) 32,5503 4,583 30(10) 4,553 4,365 38(8) 4,327 5,297 49(9) 5,2484 4,832 38(8) 4,794 3,868 39(6) 3,829 4,335 43(8) 4,2925 1,137 13(8) 1,124 1,105 12(8) 1,093 1,179 15(6) 1,164___________________________________________________________________________________Notes: 1) Samsung 4, 5 - non-floated companies. 2) Names of companies: A. Samsung - 1 Samsung Electronics, 2 Samsung General Trading, 3 Samsung SDI,

4 Samsung Life Insurance, 5 Samsung Everland.B. LG -1 LG Electronics, 2 LG Chemical, 3 LG Wire, 4 LG Telecom, 5 LG Inc..

22

C. SK - 1 SK Corporation, 2 SK Telecom, 3 SK Networks, 4 SKC, 5 SK Chemical. D. Hyundai Motors - 1 Hyundai Motors, 2 Kia Motors, 3 INI Steel, 4 Hyundai Mobis,

5 Hyundai Hisco. 3) Number of total member companies:

A. Samsung - 45 (in 2000), 63 (in 2003) and 62 (in 2005). B. LG - 43, 50 and 38.C. SK - 39, 60 and 50. D. Hyundai Motors - 16 (in 2001), 25 and 28.

6. The board of directors

The board makes all key managerial decisions. It is the de facto highest organization in

the legal governing body, at the top of which, though, the general meeting of shareholders

is (Table 6 ; see also Table 5).

In most of the selected 20 companies, the board consisted of 5-9 directors; in some,

10-13 directors. In Samsung Electronics with the largest personnel (44,000-71,000

persons), directors numbered 20 in 2000, but later decreased to 13, which was still large

enough and the largest among all the cases under consideration.

Some features are observed with regard to the composition of the board. First, the

number of directors generally tended to decrease over time, although, in some companies,

it remained nearly the same or increased a little in some years. Companies with more than

10 board members were eight of the 20 in 2000, but five in 2003 and four in 2005.

Second, outside directors increasingly joined the board, whereas the reverse was true

of ‘inside’ directors. The result is that, in most companies, the former came to outnumber

the latter or, at least, the both sides became equal in number. In some companies in 2005,

outside directors were nearly double inside directors; in one (Hyundai Hisco), they were

double; and, in another (SK Corporation), they were more than double.

In non-floated Samsung Everland, which is a quasi-holding company of Samsung and

whose largest shareholder is the only son of the representative owner of Samsung (Lee

Kun-Hee), no outside directors were invited. By comparison, in another non-floated

company, Samsung Life Insurance, which is another quasi-holding company, outside

23

directors joined the board.

The appearance and gradual dominance of outside directors is because of the

government’s policies. After the 1997 financial crisis, chaebols have been criticized for

having contributed to the crisis and their personalized governance system was the main

target to be transformed. A number of measures have been devised by the government and

the most important of them was the recruitment of outside directors, who were expected to

change the existing personalized governance system into a democratic one. Thus, a law

was put into force that, in a floated company, a number of directors should be invited from

outside.

Outside directors are usually professors, lawyers, former government officers and

professional managers of other companies. Indeed, they have increasingly played an

important role, but generally failed to transform the existing governance system. The

problem is that they are appointed, directly or indirectly, on the recommendation of the

representative owner, who still remains the ultimate controller and, in most or many cases,

acts as the group chairman.

And, a third feature regarding the composition of the board is that some of inside

directors are part-time; outside directors are all part-time. Part-time inside directors

appeared more frequently in the early years: they did in 11 of the 20 selected companies in

2000 and 2003, but only in five in 2005. Of the four chaebols, LG had more part-time

directors. This is mainly because of the interlocking directorship by the two founding

families (Koo and Huh). Each family directly controlled a number of companies, but one

family influenced the other’s companies by joining the boards as part-time directors. In

some companies, part-time members were equal to or more than full-time members; in one

(LG Telecom), they continued to be more.

24

Directors organized various standing committees, two of which are legally compulsory.

One is the committee recommending outside directors. In this committee, more than one-

third of members should be outside directors, but inside and outside directors are usually

equal in number, totaling two, four or six. Inside directors as members of this committee

are usually family members or higher professional managers (president, vice president,

chairman or vice-chairman), who are usually involved in ownership as members of the

representative owner’s intimate group. In some companies, the owner himself, as an inside

director, joined the committee; this was particularly true of the owner of Hyundai Motors

(Chung Mong-Koo). As long as the committee of this nature recommends outside directors,

they can never be free from the owner and, thus, independent and critical in the decision-

making process. This is why outside directors have failed to cure the exiting owner-

dominated governance system contrary to the government’s intention.

Another compulsory committee is the audit committee, which replaced independent

auditors as non-directors soon after the 1997 crisis. By law, this committee should consist

of all outside directors in order to allow them to examine accounts more reasonably and

objectively. However, they have not done, or can not do, such a job because, as explained

above, they have been influenced by the representative owner.

Most companies had only these two compulsory committees. In some, there were a

few other committees, the most common of which is the management committee

consisting of all inside directors. This committee appeared frequently in Samsung and, to a

lesser extent, SK. Samsung Life Insurance had four more committees, excluding the two

compulsory ones, in 2005 (management, compensation, risk management and internal

transaction); Samsung Electronics two more (management and internal transaction); SK

Corporation four more (strategy, personnel, system transformation and transparent

25

management); and, SK Telecom three more (compensation, investment and global).

Table 6. Board of directors in key companies in 4 largest chaebols:Number of directors (D), inside and outside directors (D1-D2),Full-time and part-time inside directors (F-P)

________________________________________________________________________Company 2000 2003 2005

------------------------ ------------------------ ------------------------ D D1-D2 F-P D D1-D2 F-P D D1-D2 F-P

________________________________________________________________________Samsung1 20 14-6 13 6-7 13 6-72 12 6-6 10 5-5 8 3-53 12 8-4 7-1 9 4-5 3-1 8 3-54 10 5-5 10 5-5 10 5-55 7 7-0 6-1 9 9-0 8-1 8 8-0________________________________________________________________________LG1 8 4-4 3-1 7 3-4 2-1 7 3-4 2-12 9 6-3 3-3 6 3-3 2-1 7 3-4 2-13 7 5-2 2-3 7 4-3 3-1 7 3-44 7 5-2 2-3 6 3-3 1-2 7 3-4 1-25 8 4-4 2-2 7 3-4________________________________________________________________________SK1 10 5-5 3-2 9 5-4 4-1 10 3-72 12 6-6 5-1 12 6-6 5-1 11 4-73 10 7-3 6-1 8 4-4 7 3-4 2-14 5 3-2 7 5-2 8 4-4 3-15 7 5-2 10 7-3 8 4-4________________________________________________________________________Hyundai Motors (2001)1 6 2-4 8 4-4 3-1 7 3-42 7 3-4 8 4-4 7 3-43 10 4-6 3-1 8 4-4 3-1 9 4-54 8 4-4 3-1 6 4-2 8 3-55 8 4-4 8 4-4 6 2-4________________________________________________________________________Notes: 1) Samsung 4, 5 - non-floated companies; outside directors are all part-time.

2) Names of companies: A. Samsung - 1 Samsung Electronics, 2 Samsung General Trading,

3 Samsung SDI, 4 Samsung Life Insurance, 5 Samsung Everland.B. LG -1 LG Electronics, 2 LG Chemical, 3 LG Wire, 4 LG Telecom, 5 LG Inc..

26

C. SK - 1 SK Corporation, 2 SK Telecom, 3 SK Networks, 4 SKC,5 SK Chemical.

D. Hyundai Motors - 1 Hyundai Motors, 2 Kia Motors, 3 INI Steel,4 Hyundai Mobis, 5 Hyundai Hisco.

7. Management or executive managers

Decisions of the board are implemented by executive managers. Full-time inside

directors sitting on the board also participated in executing their own decisions in almost

all cases in the selected 20, and presumably most other, companies (Table 7-1 and 7-2; see

also Table 5).

There were more than 100 managers each in five companies, four of which were, as

large industrial companies, among the five companies with more than 10,000 personnel.

Three companies had 100-200 managers: Samsung General Trading (101-127 managers vs.

4,300-4,900 employees), Hyundai Motors (132-161 vs. 48,000-55,000) and Kia Motors

(120-138 vs. 29,000-33,000). In one company (LG Electronics), there were 200-300

managers (208-252 vs. 27,000-34,000) and in one other (Samsung Electronics) more than

300 (349-678 vs. 44,000-71,000). The sharp increase in the last named company, the

leader of Korean companies of world class, is remarkable: managers and total personnel

alike nearly doubled between 2000 and 2005. Of the remaining 15 companies, five had 50-

90 managers, six had 20-50, and four had 10-20. In LG Inc., the holding company of LG,

managers numbered 13 of 75 persons.

Managers can be grouped into two - higher and lower managers. Higher managers are

the chief executive officer (CEO) and its equivalents: president, vice-president, chairman

and vice-chairman. The chairman acted as CEO in most companies, while, in some, one of

the other three posts did so. The majority of higher managers were vice-chairmen,

followed by chairmen and presidents/vice-presidents. Lower managers included managing

27

directors, small in number, and lower managers, whose positions and titles depended on

companies. Among lower managers in large industrial companies were a number, often

large, of persons involved in research.

There were more than 10 higher managers each in seven of the 20 companies. In two

electronics manufacturing companies (Samsung Electronics 30-57, LG Electronics 30-41),

there were more than 30 higher managers; in one car manufacturing company (Hyundai

Motors), managers numbered 18 in 2000 and increased to 31 by 2005; and, in four, there

were 10-13 managers. Of 13 companies with less than 10 higher managers, four had two

managers: Samsung Everland (in 2000), SK Networks (2003-2005), SKC (2000) and SK

Chemical (2000-2003).

In Samsung Electronics with the largest number of higher managers, there were more

than 10 chairmen and more than 30 vice-chairmen in 2003 (11 and 35) and 2005 (16 and

36). In Samsung General Trading (5 in 2000), LG Electronics (5 in 2000 and 8 in 2005)

and Hyundai Motors (7 in 2005), there were more than 5 chairmen, who were supported

by many vice-chairmen. Except these cases, one or two chairmen and a small number of

vice-chairmen constituted the core of higher management. As far as president and vice-

president are concerned, they were usually one or two, both positions did not necessarily

go together, and they did not necessarily appear in all the companies.

28

Table 7-1. Management in key companies in 4 largest chaebols:Number of managers (M), higher and lower managers (M1-M2)

______________________________________________________________________Company 2000 2003 2005

---------------------- ---------------------- ----------------------- M M1-M2 M M1-M2 M M1-M2

______________________________________________________________________Samsung1 349 30-319 578 51-527 678 57-6212 101 12-89 118 13-105 127 13-1143 63 82 5-77 87 9-784 61 4-57 64 7-57 63 10-535 14 2-12______________________________________________________________________LG1 208 30-178 231 32-199 252 41-2112 66 12-543 25 24 414 30 5-25 25 4-21 31 3-285 13______________________________________________________________________SK1 32 6-26 68 4-64 97 6-912 47 69 753 59 7-52 33 2-31 41 2-394 17 2-15 32 4-28 29 3-265 16 2-14 16 2-14 22 3-19______________________________________________________________________Hyundai Motors (2001)1 132 18-114 161 21-140 159 31-1282 120 10-110 133 13-120 138 13-1253 30 6-24 38 4-34 49 6-434 38 5-33 39 4-35 43 7-365 13 4-9 12 4-8 15 4-11______________________________________________________________________Notes: 1) Samsung 4, 5 - non-floated companies. 2) Higher managers - president, vice-president, chairman, vice-chairman;

lower managers - managers other than the four positions.3) Names of companies:

A. Samsung - 1 Samsung Electronics, 2 Samsung General Trading,3 Samsung SDI, 4 Samsung Life Insurance, 5 Samsung Everland.

29

B. LG -1 LG Electronics, 2 LG Chemical, 3 LG Wire, 4 LG Telecom, 5 LG Inc.. C. SK - 1 SK Corporation, 2 SK Telecom, 3 SK Networks, 4 SKC,

5 SK Chemical. D. Hyundai Motors - 1 Hyundai Motors, 2 Kia Motors, 3 INI Steel,

4 Hyundai Mobis, 5 Hyundai Hisco.

Table 7-2. Higher managers in key companies in 4 largest chaebols:Number of higher managers (M1), president and vice-president (V-VP),chairman and vice-chairman (C-VC)

______________________________________________________________________Company 2000 2003 2005

------------------------- ------------------------- ------------------------- M1 P-VP C-VC M1 P-VP C-VC M1 P-VP C-VC

______________________________________________________________________Samsung1 30 2-1 4-23 51 2-3 11-35 57 2-3 16-362 12 2-0 5-5 13 2-0 3-8 13 1-0 2-103 5 1-4 9 1-84 4 1-0 2-1 7 1-0 2-4 10 1-0 1-85 2 1-1______________________________________________________________________LG1 30 1-2 5-22 32 0-2 4-26 41 0-1 8-322 12 3-94 5 1-0 1-3 4 1-3 3 1-2______________________________________________________________________SK1 6 1-3 1-1 4 1-1 2-0 6 1-0 1-43 7 0-1 1-5 2 1-1 2 1-14 2 1-0 1-0 4 1-0 2-1 3 1-0 1-15 2 1-1 2 1-1 3 0-1 1-1______________________________________________________________________Hyundai Motors (2001)1 18 1-1 1-15 21 1-1 4-15 31 1-3 7-202 10 1-0 1-8 13 1-0 1-11 13 1-0 2-103 6 1-0 1-4 4 1-0 1-2 6 0-1 1-44 5 2-0 1-2 4 2-0 1-1 7 1-1 2-35 4 1-0 1-2 4 0-1 1-2 4 1-1 1-1______________________________________________________________________Note: Samsung 4, 5 - non-floated companies.

30

8. Family members involved in management

The family influence in management remained evident in all the four chaebols and

their member companies, although its degree and extent were different from each other.

Family members involved in management are comparatively small in number and core

members usually consist of the owner and his sons or other male descendants; by

comparison, family members are more widely involved in ownership (Table 8).

(1) Samsung

A total of nine family members have joined management: one from the first generation

- the founder; three from the second generation - the present representative owner and two

others; and, five from the third generation - the owner’s only son, his two daughters and

their husbands.

The owner (Lee Kun-Hee) is now involved, as the president and a representative

director, in only one of 59 member companies (Samsung Electronics), floated and most

profitable, in which he is also the largest shareholder with some 2% interest. He had long

joined another floated company (Samsung General Trading) as the president and a full-

time board member, but does not at present; also, he had maintained a part-time

directorship in a number of floated and not-floated companies, but does not at present.

His only son (Lee Jae-Yong), aged 38 as of 2006, is a member of lower management in

Samsung Electronics. He is widely recognized as the next representative owner of

Samsung chaebol; he is the largest shareholder, with more than 25% interest, in Samsung

Everland, a small, non-floated company, which, together with another non-floated

company (Samsung Life Insurance), acts a quasi-holding company controlling most other

member companies. The owner’s two daughters and two sons-in-law, all in their 30s, have

31

recently joined the lower management of three companies: the second daughter and his

husband work for the same company. Two other family members from the owner’s

generation were or are involved in management: the owner’s elder sister’s husband was

once the president of an insurance company; and, the owner’s wife’s younger brother is a

vice-chairman in an electronics company (Samsung SDI).

As mentioned in section 3, the Lee families have owned and controlled four other

satellite chaebols besides Samsung. The founder of Samsung (Lee Byoung-Chul) had

three sons and five daughters. While handing the main businesses over to his youngest son

(Lee Kun-Hee), the founder encouraged two other sons and two daughters to have their

respective chaebols, of which two are large enough to be included in the 30 largest

chaebols in 2006: Shinsegye, the department store group (17th largest); and, CJ, the sugar

and food manufacturing group (18th largest). In the management of these four chaebols are

involved a large number of family members from the second (Lee Kun-Hee’s) and third

(his son’s) generations.

(2) LG

A large number of family members, 23 in total, have been involved in management:

four from the first generation - the founder and his three brothers; 12 from the second

generation - the first inheritor, his two brothers, and his nine relatives; and, seven from the

third generation - the second inheritor (present representative owner) and his five relatives.

As two satellite chaebols appeared in 2003 and 2004, the number of family members

involved in management has decreased accordingly.

The owner (Koo Bon-Moo) is now the president and a representative director of the

holding company (LG Inc.) and, thereby, controls 30 member companies (in 2006). Before

32

the formation of this company, he was the president and a representative director of two

main companies (LG Chemical and LG Electronics) and their respective, interim holding

companies (LGCI Inc. and LGEI Inc.); also, he has sat on the boards of some other

companies as a part-time director. The owner has two young daughters (aged 28 and 10).

The owner has three brothers and two sisters, and, of them, only one brother is

involved in the management of LG, while the others have carried out their own businesses.

Instead, the owner’s five relatives, all from the Huh family, have widely joined

management. LG chaebol originated from a small trading business founded in 1931 by a

member of the Koo family (Koo In-Hoe), who was married to the Huh family. A member

of the Huh family soon joined the business, which, thereafter, became a joint venture run

by the two families. In late 2004, the Huh family eventually established its own

independent chaebol, called GS, which was based on a number of the Huh family-

controlled member companies of LG.

The owner’s father (the first inheritor, Koo Ja-Kyoung), his two brothers and nine

relatives, including one from the Huh family, have once been or still are involved in

management. The founder had five younger brothers; he and two are dead, while the

remaining three brothers, aged 80 or so, are still involved in management, though

indirectly as honorary presidents. This branch of the Koo family has been in charge of a

specific group of member companies of LG, and, in late 2003, finally developed them into

a separate chaebol, called LS.

(3) SK

A total of 11 family members were involved in management: four from the first

generation - the founder and his three brothers; and, seven from the second generation -

33

the present representative owner, his brother and five relatives.

The owner (Choi Tae-Won) is now the president and a representative director of SK

Corporation, the key member company acting as a quasi-holding company: the largest

shareholder of this company is a non-floated company, called SKC&C, where, in turn, the

largest shareholder is the owner. Previously, he sat on the boards of a few other companies

mainly as a part-time director, but does not at present.

The founder of SK (Choi Jong-Kun) is the present owner’s father’s elder brother. He

carried out his businesses for some 20 years and handed them over to his younger brother

(Choi Jong-Hyun) when he died at the age of 48 in 1973. The inheritor had successfully

diversified into new businesses, transforming SK into one of major chaebols; he was the

second, new founder of this chaebol. His two younger brothers had once joined the

management of member companies.

When the new founder died in 1998, the representative ownership was naturally

inherited by his elder son, the present owner, not by a descendant of the original founder.

At that time, the owner was 38 years old, so it was decided that the group chairmanship

should be taken by a professional manager. It was only in 2004 that the chairmanship was

handed over to the owner aged 44. The owner has one brother and one sister, and the

brother has been involved in management. Five more members from the owner’s

generation had once joined or still join management: one is the owner’s father’s elder

sister’s son; and, three are the original founder’s sons and one is the founder’s son-in-law.

The owner is now 46 years old, and his one son and two daughters are still in their 10s.

(4) Hyundai Motors

A relatively small number of family members, six in total, has been involved in

34

management: one from the second generation - the owner; and five from the third

generation - the owner’s only son, the owner’s two sons-in-law, and two sons of the

owner’s younger brother’s.

Hyundai Motors was previously a member company of Hyundai, which was founded

by the present owner’s father (Chung Joo-Young) and long remained the largest chaebol.

Soon after the founder’s death in 2000, the company and several other member companies

of Hyundai became independent to constitute a satellite chaebol, called Hyundai Motors,

which was owned and controlled by the present owner (Chung Mong-Koo).

Unlike the other chaebols’ owners, the owner of Hyundai Motors has been widely and

actively involved in the management of key companies: he is the president and a

representative director in three companies (Hyundai Motors, Kia Motors and Hyundai

Mobis), the president in one (Hyundai Hisco), and a full-time board member in another

(INI Steel). Moreover, in two of these five (Hyundai Motors and Kia Motors), he is a

member of the committee recommending outside directors.

His only son, aged 36, is the chairman and a representative director in one company

(Kia Motors), the chairman in another (Hyundai Motors), and, in a third (Hyundai Mobis),

the chairman, a board member, and a member of the committee recommending outside

directors. Also, the owner’s two sons-in-law and two sons of the owner’s younger

brother’s joined management.

Before and after the founder of Hyundai died in 2000, the Chung families established

five more satellite chaebols in addition to Hyundai Motors: Halla, Hyundai Department

Store, Hyundai Heavy Industrial Corporation, Hyundai Industrial Development, and KCC.

In these are involved a very large number of members from the first, second and third

generations.

35

Table 8. Family members involved in management in 4 largest chaebols______________________________________________________________________________________ 1st Generation 2nd Generation 3rd Generation______________________________________________________________________________________Samsung 9 1 3 5

Father (brother 3, sister 5)(founder) LEE Kun Hee (son 1, daughter 3)

Son 1 Daughter 2 ----------------------------------------------------------------------------------------------------------

Sister’s husband 1 Son-in-laws 2 Wife’s brother 1______________________________________________________________________________________LG 23 4 12 7

Grandfather Father (brother 4, sister 2) (founder) Father’s brother 2 KOO Bon-Moo

Brother 1-----------------------------------------------------------------------------------------------------------

G-father’s brother 3 G-father’s brother(IV)’s IV’s daughter’s son 5(I, II, III) daughter’s husband 1

IV’s son 2 I’s son 2 II’s son 3 III’s son 1______________________________________________________________________________________SK 11 4 7

Father (brother 2, sister 1)CHOI Tae-Won

Brother 1-----------------------------------------------------------------------------------------------------------

Father’s brother Founder’s son 3 (founder) Founder’s son-in-law 1 Father’s brother 2 Father’s sister’s son 1______________________________________________________________________________________Hyundai 6 1 5Motors

(Father) (brother 8, sister 1)CHUNG Mong-Koo (son 1, daughter 3)

Son 1-----------------------------------------------------------------------------------------------------------

Son-in-laws 2 Brother’s son 2______________________________________________________________________________________Notes: 1) Some members of earlier generations are dead or are not involved in management at present. 2) Koo’s (daughter 2) and Choi ‘s (son 1, daughter 2) children are too young to join management. 3) LG includes its satellite chaebols, LS and GS, which became independent in 2003 and 2005,

respectively. 4) Chung’s father is the founder of Hyundai, from which Hyundai Motors became independent in

2001.

36

9. Management organization resembling M-form

There exist the paucity and irregularity of information on organization in the annual

business report, on which this paper is mainly based, so it is not easy to create a true

picture of management organization in the chaebol and to see its changes over time. But,

the source contains useful and, often ample, information and, from this, it is possible to get

a rough and reasonable idea on the subject.

The 20 selected companies - and other member companies of the four chaebols - have

their own management organization. The specific structure and nature of organization

depends on companies and years, but, in many companies, a well-organized managerial

hierarchy has been gradually developed and its resultant structure, it appears, tends to

resemble the most advanced M-form.

Four companies (Samsung Electronics, LG Electronics, SK Corporation and Hyundai

Motors), one each from each chaebol, were selected and their managerial hierarchies were

examined with regard to the recent year of 2005. These companies are key, representative

companies in respective chaebols; they are industrial in nature (electronics, petroleum and

vehicles) and large in size in terms of personnel.

The large number of employees itself hints at a managerial hierarchy of advanced and

sophisticated nature (Table 9 (1)). There were more than 70,000 persons in Samsung

Electronics, and they should and must be properly grouped, guided and directed if they

could produce a variety of electrical goods efficiently and profitably. Thus, there were an

extremely large number of managers (678 persons), of which chairmen, acting as chief

executive officers, numbered 16 persons and vice-chairmen 36. A similar story applies

also to LG Electronics (more than 33,000 persons guided by 252 managers with 8

chairmen and 32 vice-chairmen) and Hyundai Motors (more than 54,000 persons guided

37

by 159 managers with 7 chairmen and 20 vice-chairmen). In SK Corporation of a smaller

size (more than 5,000 persons), there was only one chairman, who was supported by four

vice-chairmen.

What management organization really looks like? The managerial hierarchy can be

divided into three categories of units - upper, middle and lower - though with some

difficulties because of irregular information. In each category, one or more of four

functions are related - planning/supporting, production, R&D and marketing (Table 9 (2) –

(6)). Along these categories and functions, higher and lower managers, staff and workers

are distributed. This structure of managerial hierarchy can apply to the four - and other -

companies, and the overall picture looks complex and sophisticated and, presumably, is

close to the M-form structure.

1) In Samsung Electronics, management organization had seven upper, 14 middle and

more than 47 lower units. Of the seven upper units, five were involved in production -

digital media, telecommunication, digital home appliance, semiconductor and LCD. Each

of four of these five units were divided into 1-4 middle units, in each of which, in turn, 4-

10 lower units (research centers), were included.

2) In LG Electronics, there were 11 upper units, of which three were related to

planning/supporting (budget, HR and customer service), four to production (digital

appliance, digital display, digital media and telecommunication), one to R&D (CTO), and

three to marketing (domestic, North America and Europe).

3) In SK Corporation, which was of smaller size and on which more detailed

information is available, five upper units contained a total of 45 middle units, the majority

of which were connected with production and/or marketing. Each of four upper units

(chemical, production, resources/international and energy/marketing) had 7-10 middle

38

units, each of which, in turn, may presumably have a number of lower units.

4) In Hyundai Motors, there were nine upper, 15 middle and 48 lower units of

organization. The majority of them were involved in marketing: three upper units

(domestic sale, commercial vehicle and overseas sale) were divided into 10 middle units

(strategy, supporting and sale; sale; export planning, export I, II, III, export supporting and

overseas service), which were again divided into 36 lower units.

Table 9. Main organizational units in four selected companies in 2005

(1) Personnel______________________________________________________________________________ T M - W M1 - M2 P - VP / C - VC______________________________________________________________________________Samsung Electronics 70,228 678 - 69,550 57 - 621 2 - 3 / 16 - 36LG Electronics 33,197 252 - 32,945 41 - 211 0 - 1 / 8 - 32SK Corporation 5,098 97 - 5,001 6 - 91 1 - 0 / 1 - 4Hyundai Motors: 54,488 159 - 54,329 31 - 128 1 - 3 / 7 - 20______________________________________________________________________________Note: Total number of personnel (T); managers (M), staff/workers (W); higher managers (M1),

lower managers (M2); president (P), vice-president (VP), chairman (C), vice-chairman(VC).

(2) The number of units: Upper (U) and Middle (M) / Lower (L)______________________________________________________________________________Company Samsung LG SK Hyundai

------------------ ------------------ ------------------ ------------------ U M L U M L U M L U M L______________________________________________________________________________Total 7 14 47+ 11 7 14 5 45 12 9 15 48---------------------------------------------------------------------------------------------------------------------Planning/Supporting 1 4 3 1 9 2 3Production 5 10 32 4 4 33 3R&D 1 2 11 1 2 14 3 12 1 2 12Marketing 2 + 3 5 3 10 36______________________________________________________________________________

39

(3) Samsung Electronics___________________________________________________________________________________Unit Upper Middle / Lower -------------------------------------------------------------------------------------------------------- 7 14 47+___________________________________________________________________________________Planning (1) (4)/Supporting Management Support Center 4-----------------------------------------------------------------------------------------------------------------------------Production (5) (10) (32)

Digital Media Computer System Research Center 10 Digital Video Digital Printing Picture Display

Telecommunication Wireless Research Center 6 Network Digital Home Appliance System Home Appliance Research Center 4

Semiconductor Memory Research Center 9 System LSI Storage LCD Research Center 3-----------------------------------------------------------------------------------------------------------------------------R&D (1) (2) (11)

Technology CTO Strategy Research Center 5 Technology Institute Research Center 6-----------------------------------------------------------------------------------------------------------------------------Marketing (2) (+)

Domestic Marketing Branches, Outlets 2,753 Global Marketing (Foreign Subsidiaries 45)___________________________________________________________________________________

(4) LG Electronics___________________________________________________________________________________Unit Upper Middle / Lower ------------------------------------------------------------------------------------------------------ 11 7 14___________________________________________________________________________________Planning (3)/Supporting Budget

HR Customer Service-----------------------------------------------------------------------------------------------------------------------------Production (4)

Digital Appliance Digital Display Digital Media Telecommunication-----------------------------------------------------------------------------------------------------------------------------

40

R&D (1) (2) (14)CTO Technology Institute 2

Research Center Domestic 14 (Overseas 14)-----------------------------------------------------------------------------------------------------------------------------Marketing (3) (5)

Domestic (In charge of) North America / Europe (In charge of)

South-West Asia /Central Asia / CIS

Brazil / Central-South America___________________________________________________________________________________

(5) SK Corporation___________________________________________________________________________________Unit Upper Middle / Lower ------------------------------------------------------------------------------------------------------- 5 45 12___________________________________________________________________________________Planning (1) (9)/Supporting Chairman Secretariat

Ethical Management Investment

Management Supporting Strategy / Maintenance Budget / Personnel IT/KM / CR Strategy-----------------------------------------------------------------------------------------------------------------------------Production (4) (33)/Marketing Chemical Optimal Performance

Planning / Development Business I, II, III, IV, V

Production Technology Safety/Environment/Health Production / Facilities Supporting / Labor Relation Business I

Resources/International Strategy / China Business I, II, III, IV, V, VI

Energy/Marketing CRM / Strategy Petroleum / Retailing Company Marketing Transportation Business I, II, III, IV-----------------------------------------------------------------------------------------------------------------------------

41

R&D (3) (12)Technology Institute Team 2

/ Department 1 / Research Center 3 CMS Bio-Pharm Team 4

/ Research Center 2___________________________________________________________________________________

(6) Hyundai Motors___________________________________________________________________________________Unit Upper Middle / Lower

_____________________________________________________________________ 9 15 48___________________________________________________________________________________Planning (2) (3)/Supporting Management Supporting

Budget Planning PR Management Innovation-----------------------------------------------------------------------------------------------------------------------------Production (3)

Factory I, II, III-----------------------------------------------------------------------------------------------------------------------------R&D (1) (2) (12)

R&D Supporting Overseas Design Department 3 Research Center 9-----------------------------------------------------------------------------------------------------------------------------Marketing (3) (10) (36)

Domestic Sale Strategy Supporting Department 2 Sale Department 2 Branches 25 Commercial Vehicle Sale Department 3 / Branches 4 Overseas Sale Export Planning Export I, II, III Export Supporting Overseas Service___________________________________________________________________________________

10. Summary and conclusion (To be concluded)

42

Select BibligraphyAmsden, A.H., ‘South Korea: Enterprising Groups and Entrepreneurial Government’ in

A.D. Chandler Jr. et al (eds.), Big Business and the Wealth of Nations (Cambridge:Cambridge University Press, 1997).

Bae, K.H., J.K. Kang and J.M. Kim, ‘Tunneling or Value Added? Evidence from Mergersby Korean Business Groups’, Journal of Finance 57-6 (2002).

Chang, J.J. and H.H. Shin, ‘Governance System Effectiveness Following the Crisis: thecase of Korean business group headquarters’, Corporate Governance: AnInternational Review 14-2 (2006)

Choi, J.P. and T.G. Cowing, ‘Diversification, Concentration and Economic Performance:Korean Business Groups’, Review of Industrial Organization 21-3 (2002).

Doh, T. and K. Ryu, ‘Analysis of Loan Guarantees among the Korean Chaebol Affiliates’,International Economic Journal 18-2 (2004).

Feenstra, R.C. et al, ‘Chaebol and Catastrophe: A New View of the Korean BusinessGroups and Their Role in the Financial Crisis’, Asian Economic Papers 1-2 (2002).

Ferris, S.P., K.A. Kim and P. Kitsabunnarat, ‘The Cost (and Benefits?) of DiversifiedBusiness Groups: The Case of Korean Chaebols’, Journal of Banking & Finance 27(2003).

Gul, F.A. and B.T. Kealey, ‘Chaebol, Investment Opportunity Set and Corporate Debt andDividend Policies of Korean Companies’, Review of Quantitative Finance andAccounting 13-4 (1999).

Hahm, J.H. and F.S. Mishkin, ‘The Korean Financial Crisis: An Asymmetric InformationPerspective’, Emerging Markets Review 1 (2000).

Jang, H. and J. Kim, ‘Nascent Stages of Corporate Governance in an Emerging Market:Regulatory Change, Shareholder Activism and Samsung Electronics’, CorporateGovernance: An International Review 10-2 (2002).

Jones, L.P., Big Business Groups in South Korea: Causation, Growth and Policies’ in L.J.Cho and Y.H. Kim (eds.), Korea’s Political Economy: An Institutional Perspective(Oxford: Westview Press, 1994).

Jung, K. and S.Y. Kwon, ‘Ownership Structure and Earnings Informativeness: Evidencefrom Korea’, International Journal of Accounting 37-3 (2002).

Kim, D.W., ‘Interlocking Ownership in the Korean Chaebol’, Corporate Governance: AnInternational Review 11-2 (2003).

Kim, J.K., ‘An Estimation of the Productive Efficiency of Chaebols of Korea and TheirReform’, International Journal of Social Economics 29-3 (2002).

Kim, Y.M, ‘Board Network Characteristics and Firm Performance in Korea’, Corporate

43

Governance: An International Review 13-6 (2005).Koo, J. and S. Shin, ‘Financial Liberalization and Corporate Investments: Evidence from

Korean Firm Data’, Asian Economic Journal 18-3 (2004).Lee, C.H., K. Lee and K. Lee, ‘Chaebols, Financial Liberalization and Economic Crisis:

Transformation of Quasi-Internal Organization in Korea’, Asian Economic Journal 16-1 (2002).

Lee, C.K., ‘Overcoming the Crisis: Korean Corporate Restructuring Law in the Context ofChaebol Reform’, International and Comparative Corporate Law Journal 3-4 (2001).

Lee, J.W., Y.S. Lee and B.S. Lee, ‘The Determination of Corporate Debt in Korea’, AsianEconomic Journal 14-4 (2000).

Oh, I. and H.J. Park, ‘Shooting at a Moving Target: Four Theoretical Problems inExplaining the Dynamics of the Chaebol’, Asia Pacific Business Review 7-4 (2001).

Park, H.J., ‘The Chaebol and Economic Growth in Korea’, PhD thesis (University ofLondon, 1999).

Puri, T.N., C. Kuan and K. Maskooki, ‘An Analysis of Currency Crisis in South Korea’,Global Finance Journal 13 (2002).

Shin, H.H. and Y.S. Park, ‘Financial Constraints and Internal Capital Markets: Evidencefrom Korean Chaebols’, Journal of Corporate Finance 5-2 (1999).

Solomon, J. et al, ‘A Conceptual Framework for Corporate Governance Reform in SouthKorea’, Corporate Governance: An International Review 10-1 (2002).

Solomon, J. et al, ‘The Evolving Role of Institutional Investors in South Korean CorporateGovernance: Some Empirical Evidence’, Corporate Governance: An InternationalReview 10-3 (2002).

Steers, R.M., Made In Korea: Chung Ju Yung and the Rise of Hyundai (London:Routledge, 1998).

*****