hgcy]daewoopresentation

7/27/2019 HGCY]DaewooPresentation

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Anatomy of an Asian Conglomerate:Anatomy of an Asian Conglomerate:

The Rise and Fall of Daewoo and the Formation ofThe Rise and Fall of Daewoo and the Formation ofModern Corporate GovernanceModern Corporate Governance

Joongi Kim

!ec"tive Director#ills Governance Center at $onseiDecem%er &' ())*

+a"nching Ceremony of the

#ills Center on Governance at Tsingh"a ,niversity


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-ntrod"ction-ntrod"ction

Asian Conglomerates . KoreanAsian Conglomerates . KoreanConglomeratesConglomerates

Concentrated Decision/Ma0ing and theConcentrated Decision/Ma0ing and theFail"re of 1versightFail"re of 1versight

Concl"sionConcl"sion

AG2DAAG2DA


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3"siness and Government Relations3"siness and Government Relations

1wnership 4tr"ct"re1wnership 4tr"ct"re

Related/5arty Transactions and 4elf/DealingRelated/5arty Transactions and 4elf/Dealing

Acco"nting Fra"d and +oan Fra"dAcco"nting Fra"d and +oan Fra"d

Financial 4tr"ct"reFinancial 4tr"ct"re

Asian Conglomerates . Korean ConglomeratesAsian Conglomerates . Korean Conglomerates

ConglomeratesConglomerates


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Fo"nded in 678&' %ecame the largestFo"nded in 678&' %ecame the largesttransnational company among developingtransnational company among developingco"ntries in less than three decadesco"ntries in less than three decades

Ac9"ired distressed companies from theAc9"ired distressed companies from thegovernment' restr"ct"red . t"rned them aro"ndgovernment' restr"ct"red . t"rned them aro"nd

3enefited from personal ties %etween Chairman3enefited from personal ties %etween ChairmanKim oo/Choong and 5resident 5ar0 Ch"ng/#eeKim oo/Choong and 5resident 5ar0 Ch"ng/#ee

4tate/oriented corporate governance thro"gh4tate/oriented corporate governance thro"gh

ind"strial policyind"strial policy

5olicyma0ers g"ided %"siness decisions5olicyma0ers g"ided %"siness decisions Reg"latory landscapeReg"latory landscape

3"siness and Government Relations ; The Rise of Daewoo3"siness and Government Relations ; The Rise of Daewoo



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DaewooDaewoo


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5otential -ncentives5otential -ncentives 5referential policy financing . credit5referential policy financing . credit 4"%sidies4"%sidies Ta! %enefitsTa! %enefits TariffTariff protectionprotection 3ailo"ts3ailo"ts

2egative -ncentives2egative -ncentives Fail"re to o%tain l"crative licenses and permitsFail"re to o%tain l"crative licenses and permits Administrative sanctions or finesAdministrative sanctions or fines Ta! a"ditsTa! a"dits Criminal investigations . prosec"tionCriminal investigations . prosec"tion

3"siness and Government Relations ; The Rise of Daewoo3"siness and Government Relations ; The Rise of Daewoo



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Government ties created enormo"s windfallsGovernment ties created enormo"s windfalls

and phenomenal compressed growth' %"t alsoand phenomenal compressed growth' %"t also clientelismclientelism cronyismcronyism corr"ptioncorr"ption

First crisis in 67


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1wnership str"ct"res in Asia generally %ased1wnership str"ct"res in Asia generally %asedon family/controlon family/control

Control sec"red thro"gh interloc0ing' cross/Control sec"red thro"gh interloc0ing' cross/

shareownership %etween affiliatesshareownership %etween affiliates

Divergence of cash flow rights and controlDivergence of cash flow rights and controlrightsrights

4trong state infl"ence4trong state infl"ence




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For listing on the stoc0 e!change'For listing on the stoc0 e!change'legal and reg"latory system protectedlegal and reg"latory system protectedcontrolling interestscontrolling interests

Institutional investors had to shadow vote sharesInstitutional investors had to shadow vote shares Unfriendly mergers and acquisitions were curbedUnfriendly mergers and acquisitions were curbed Disclosure standards remained minimalDisclosure standards remained minimal Minority shareholder rights faced high ownershipMinority shareholder rights faced high ownership

requirementsrequirements Accounting audits and internal controls were ineffectiveAccounting audits and internal controls were ineffective

1wnership dispersion policy led to1wnership dispersion policy led tomisalignment %etween controlling andmisalignment %etween controlling andminority shareholdersminority shareholders




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Daewoo in 677&Daewoo in 677&

6>7

DD

CorpCorp

DD

lectronicslectronics

KimKim

FamilyFamily

D MotorD Motor

DD

Develop>Develop>

DDlect> Comlect> Com

DD

#eavy#eavy

DD

-nd"stries-nd"stries

DD

A"to 4alesA"to 4ales

Keang 2amKeang 2am

nt>nt>

DD4ec"rities4ec"rities

DD

FinanceFinance

1rion1rion

lect>lect>

DD5recision5recision

DD

4hip%"ilding4hip%"ilding

(7>6&

7

*

*>

(>6

DDTelecom>Telecom>

@>&

*

66>6

@>6

(@>&

67>6

@*

(*

>8

8>&*

&>8

8>7

)

8>6

(>67>(

6>&

6>**

6>@6

,nit: B,nit: B ccompanies larger than 6 %illion wonompanies larger than 6 %illion won


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Chae%ols trace their corporate history toChae%ols trace their corporate history tos"%sidi=ation thro"gh related/partys"%sidi=ation thro"gh related/partytransactionstransactions

ith scarce credit and financing'ith scarce credit and financing'

government promoted these transactionsgovernment promoted these transactionsamong affiliatesamong affiliates

-nterloc0ing de%t g"arantees-nterloc0ing de%t g"arantees In Dec. 199! Daewoo"s cross#guarantees amountedIn Dec. 199! Daewoo"s cross#guarantees amounted

to $.% trillion wonto $.% trillion won &ea'er affiliate"s default could start a chain reaction&ea'er affiliate"s default could start a chain reaction

of payment demands and a collapseof payment demands and a collapse ()acerbated()acerbated*too#big#to#fail+ mentality and moral*too#big#to#fail+ mentality and moral

ha,ardha,ard

Related/5arty Transactions . 4elf/DealingRelated/5arty Transactions . 4elf/Dealing



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ntered into ris0y a"tomo%ile ind"stryntered into ris0y a"tomo%ile ind"stry -oint venture with M/ later bought M sta'e-oint venture with M/ later bought M sta'e

Acquired numerous other domestic and foreignAcquired numerous other domestic and foreignautomobile ma'ers! e.g.! 0sangyong Motorautomobile ma'ers! e.g.! 0sangyong Motor

(mployees were pressured to buy cars(mployees were pressured to buy cars Affiliates assumed most of the burdenAffiliates assumed most of the burden

Daewoo Motor' 4sangyong Motor' DaewooDaewoo Motor' 4sangyong Motor' Daewoo

Corp> and Daewoo #eavy -nd"striesCorp> and Daewoo #eavy -nd"striesacco"nted for close to


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Moral ha=ardMoral ha=ardled to ris0ier vent"res andled to ris0ier vent"res andmore improper actsmore improper acts 4elf/dealing for personal %enefits4elf/dealing for personal %enefits Appointing "n9"alifiedAppointing "n9"alifiedrelatives as e!ec"tivesrelatives as e!ec"tives ario"s forms of earnings managementario"s forms of earnings management

Kim and senior managers allegedly did notKim and senior managers allegedly did notengage in direct self/dealingengage in direct self/dealing decisions were apparently carried o"t on %ehalf ofdecisions were apparently carried o"t on %ehalf of

the company' not for their own personal gainsthe company' not for their own personal gains "nacco"nted 3FC f"nds"nacco"nted 3FC f"nds

,ltimately' acco"nting fra"d and loan fra"d,ltimately' acco"nting fra"d and loan fra"drepresented another form of self/dealingrepresented another form of self/dealing

Related/5arty Transactions . 4elf/DealingRelated/5arty Transactions . 4elf/Dealing



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,nit: 2o> of' 6)) million won,nit: 2o> of' 6)) million won

Source: FTCSource: FTC

Gro"p 5rovider

companies

4"pported

companies

Amt of

transactions

Amo"nt of

s"pport 4"%charge

Daewoo 8 & @'((7 / (

Daewoo & 6) *@')6 * & 6&'(*& @6)>* 68@>7 trillion won in acco"ntingfra"dfra"d

Government tacitly condoned acco"nting opacityGovernment tacitly condoned acco"nting opacity

To attract foreign capital' inflation of financial fig"resTo attract foreign capital' inflation of financial fig"reswere deemed necessarywere deemed necessary

4tate/controlled %an0s foc"sed on the si=e of4tate/controlled %an0s foc"sed on the si=e ofreven"es' sales vol"me and assets' rather thanreven"es' sales vol"me and assets' rather thanprofits and cash flowprofits and cash flow

Daewoo chose to overcome its financial diffic"ltiesDaewoo chose to overcome its financial diffic"ltiesthro"gh e!pansion' and with it' more deceitthro"gh e!pansion' and with it' more deceit ith the financial crisis' the company co"ld no longerith the financial crisis' the company co"ld no longer

s"stain acco"nting and loan fra"ds"stain acco"nting and loan fra"d




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Source: Government Final Report, Sept. 1, !"""Source: Government Final Report, Sept. 1, !"""

,nit: trillion on,nit: trillion on

Company Fig"res D"e Diligence

Daewoo Corp> (>8 /6&>@ () 6@>8

Daewoo Motor *>6 /8>6 66>( >(

Daewoo #eavy >6 6 (>6 (>6Daewoo

lectron> )>& / >& (

Daewoo

Telecom )> /)>7 6>( )>8

4"%total 66>< /(8>@ ( ((>*

& 1ther DaewooAffiliates

(>* /(>( @>& )>@

Total 6@> /(8 @(>7 ((>7

Companies

Capital E77>


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,sed affiliates and overseas 3FC acco"nts to,sed affiliates and overseas 3FC acco"nts tored"ce de%ts and manip"late e!port ret"rnsred"ce de%ts and manip"late e!port ret"rns

3FC "sed for related paper companies to o%tain3FC "sed for related paper companies to o%tainfra"d"lent commercial invoices' %ills of lading'fra"d"lent commercial invoices' %ills of lading'and pac0ing listsand pac0ing lists

Asset swaps %etween sister companies atAsset swaps %etween sister companies atdisco"nted or inflated val"esdisco"nted or inflated val"es

6* trillion won in off/%alance sheet lia%ilities6* trillion won in off/%alance sheet lia%ilities

@ trillion won in non/performing loans@ trillion won in non/performing loans

trillion won in false inventories trillion won in false inventories

6 trillion won in false research and development6 trillion won in false research and developmente!pensese!penses




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operated "nder state/s"pported de%toperated "nder state/s"pported de%tfinancing as part of the -nd"strial policyfinancing as part of the -nd"strial policy

top fo"r chae%ols de%t/to/e9"ity ratiostop fo"r chae%ols de%t/to/e9"ity ratiose!ceeded @*)B at the time of thee!ceeded @*)B at the time of the

financial crisis in Decem%er 677&financial crisis in Decem%er 677&

DaewooHs financial str"ct"re had severalDaewooHs financial str"ct"re had severaldistinctive feat"resdistinctive feat"res 1ver/relied on de%t gearing1ver/relied on de%t gearing -ncreased de%t/to/e9"ity ratio' not decreased-ncreased de%t/to/e9"ity ratio' not decreased Daewoo Corp> was not the main profit centerDaewoo Corp> was not the main profit center

and co"ld not provide financial s"pport toand co"ld not provide financial s"pport tos"stain wea0er affiliatess"stain wea0er affiliates




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De%tI9"ity Ratio of Top Fo"r Chae%olsDe%tI9"ity Ratio of Top Fo"r Chae%ols

0

100

200

300

400

500

600

700

Dec

95

Dec

96

Dec

97

Dec

98

Jun

99

Dec

99

1yundai

Daewoo

0amsung

2.


"nit: B


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D"e to the financial crisis' Daewoo Gro"pD"e to the financial crisis' Daewoo Gro"pco"ld no longer maintain financialco"ld no longer maintain financial%alancing act%alancing act Foreign de%t "mped fromForeign de%t "mped from

(8> trillion won to @7 trillion won(8> trillion won to @7 trillion won

*>6 %illion in foreign c"rrency loansL*>6 %illion in foreign c"rrency loansL6>7 %illion in foreign c"rrency loans6>7 %illion in foreign c"rrency loans

to converti%le %ond ownersto converti%le %ond owners

4"dden increase in interest rates4"dden increase in interest rates

led to financing costs "mpingled to financing costs "mping

from trillion wonfrom trillion won

to 8 trillion wonto 8 trillion won



l


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Daewoo Gro"ps Domestic 3orrowingsDaewoo Gro"ps Domestic 3orrowings

"nit: %illion won

Source: #orea Financial Supervisory CommisionSource: #orea Financial Supervisory Commision

0

5,000

10,000

15,000

20,000

25,000

Commercial

banks

Non-bank

financialinstitutions

Corporate

notes

Commercial

papers

Dec/7&

Dec/7 to theDonated personal holdings in Daewoo Corp> to theDaewoo Fo"ndationDaewoo Fo"ndation

4ceptics claim that they served "lterior p"rposes4ceptics claim that they served "lterior p"rposes preempt political crac0downpreempt political crac0down fo"ndation acted as a shelter to minimisefo"ndation acted as a shelter to minimise

personal inheritances ta!espersonal inheritances ta!es de facto holding company to help maintainde facto holding company to help maintain

controlcontrol

Concentrated Decision/Ma0ingConcentrated Decision/Ma0ing

C d i i 0iC t t d D i i M 0i


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Financial crisis e!posed theFinancial crisis e!posed the

wea0nesses of concentratedwea0nesses of concentratedgovernance str"ct"regovernance str"ct"re

4tr"ct"re played a critical role in4tr"ct"re played a critical role in

acco"nting and loan fra"d andacco"nting and loan fra"d and"ltimately collapse"ltimately collapse

Concentrated Decision/Ma0ingConcentrated Decision/Ma0ing

F il f 1 i htF il f 1 i ht


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insufficient chec' and balance andinsufficient chec' and balance andineffective internal control mechanismsineffective internal control mechanisms

failed as institutions to counterbalancefailed as institutions to counterbalancecontrolling shareholders/ instead succumbedcontrolling shareholders/ instead succumbed

to their dictatesto their dictates did not provide oversight and act asdid not provide oversight and act as

independent! front#line monitorsindependent! front#line monitors disregarded their roles as fiduciariesdisregarded their roles as fiduciaries

directors and officers not legallydirectors and officers not legallydistinguished/ internal 3 e)ternal auditorsdistinguished/ internal 3 e)ternal auditors

Fail"re of 1versightFail"re of 1versight

Directors and A"ditorsDirectors and A"ditors

F il f 1 i htF il f 1 i ht


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no non/e!ec"tive o"tside directorsno non/e!ec"tive o"tside directors"ntil 677


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only held acco"nta%le to controllingonly held acco"nta%le to controlling

shareholder . conglomerateshareholder . conglomerate

no la%o"r mar0et fle!i%ilityno la%o"r mar0et fle!i%ility

remained captive to their conglomeratesremained captive to their conglomerates

ins"fficient o"tside scr"tinyins"fficient o"tside scr"tiny

for a"ditors only maor clientfor a"ditors only maor client

only after the collapse did they face civilonly after the collapse did they face civiland criminal lia%ilityL Ch"ng"n . 4andongand criminal lia%ilityL Ch"ng"n . 4andong


Directors and A"ditorsDirectors and A"ditors

F il f 1 i htFail e of 1 e sight


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$ear Total 2o>

of 5olicies

6778 6

677& *

677< 6)*

6777 A()

())) 6)6

())6 (8@

())( AF *))

Total 2o> of 5olicies

0

100

200

300

400

500

600

1996 1998 2000 2002 2004(e s t.)


Directors and 1fficer +ia%ility -ns"ranceDirectors and 1fficer +ia%ility -ns"rance

F il f 1 i htFail"re of 1versight


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passive in monitoring managementpassive in monitoring management did not question or challengedid not question or challenge

did not see' informationdid not see' information

did not attempt to get representationdid not attempt to get representationon the boardon the board

did not attend AM or votedid not attend AM or vote

failed to ta'e any action! no matterfailed to ta'e any action! no matterhow dire the casehow dire the case


4hareholders and 4ta0eholders4hareholders and 4ta0eholders

F il e of 1 e i htFail"re of 1versight


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wea0 shareholder rightsL lac0 ofwea0 shareholder rightsL lac0 ofawarenessawareness

investment on a short/term %asisinvestment on a short/term %asis

diffic"lt to o%tain information d"e todiffic"lt to o%tain information d"e to

wea0 disclos"re standardswea0 disclos"re standards a%sence of a class action vehiclea%sence of a class action vehicle

and o%stacles to litigationand o%stacles to litigation

confined instit"tional investors toconfined instit"tional investors toshadow votingshadow voting ineffective pro!y r"lesineffective pro!y r"les





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4ta0eholders s"ch as creditors'4ta0eholders s"ch as creditors'employees' la%or and cons"mersemployees' la%or and cons"mersfailed to serve as chec0s and %alancesfailed to serve as chec0s and %alances

mployment stoc0 ownership plansmployment stoc0 ownership plansE415 did not serve as monitoringE415 did not serve as monitoringforcesforces

voting rights rarely e!ercisedvoting rights rarely e!ercised

limited ownershiplimited ownership

complicated pro!y proced"rescomplicated pro!y proced"res





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4trong sense of gro"p loyalty .4trong sense of gro"p loyalty .strong corporate c"lt"re againststrong corporate c"lt"re againstwhistle%lowerswhistle%lowers

+ac0 of access to information and+ac0 of access to information andlittle incentive to 9"estion thelittle incentive to 9"estion thedecision/ma0ing of e!ec"tivesdecision/ma0ing of e!ec"tives

Rarely challenged 9"estiona%leRarely challenged 9"estiona%ledecision/ma0ing or contemplatedecision/ma0ing or contemplatee!posing wrongdoingse!posing wrongdoings





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3"siness/3"siness/

GovernmentGovernment

RelationsRelations1wnership1wnership

4tr"ct"re4tr"ct"re

Related/5artyRelated/5artyTransactionsTransactions

FinancialFinancial4tr"ct"re4tr"ct"re

-neffective-neffective

nforcementnforcement

ConcentratedConcentrated

DecisionDecision

Ma0ingMa0ing

+ac0 of+ac0 of1versight1versight

4hareholders4hareholders

..

4ta0eholders4ta0eholders

DaewoosDaewoos

FallFall



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