1、Anatomy of an Asian Conglomerate: The Rise and Fall of Daewoo and the Formation of Modern Corporate Governance,Joongi Kim Executive Director Hills Governance Center at Yonsei December 7, 2005,Launching Ceremony of the Hills Center on Governance at Tsinghua University,2,IntroductionAsian Conglomerate
2、s & Korean ConglomeratesConcentrated Decision-Making and the Failure of OversightConclusion,AGENDA,3,Business and Government RelationsOwnership StructureRelated-Party Transactions and Self-DealingAccounting Fraud and Loan FraudFinancial Structure,Asian Conglomerates & Korean Conglomerates,Conglomera
3、tes,4,Founded in 1967, became the largest transnational company among developing countries in less than three decadesAcquired distressed companies from the government, restructured & turned them around Benefited from personal ties between Chairman Kim Woo-Choong and President Park Chung-HeeState-ori
4、ented corporate governance through industrial policyPolicymakers guided business decisions Regulatory landscape,Business and Government Relations The Rise of Daewoo,Conglomerates,5,Daewoo,大 宇,6,Potential Incentives Preferential policy financing & credit Subsidies Tax benefits Tariff protection Bailo
5、uts Negative Incentives Failure to obtain lucrative licenses and permits Administrative sanctions or fines Tax audits Criminal investigations & prosecution,Business and Government Relations The Rise of Daewoo,Conglomerates,7,Government ties created enormous windfalls and phenomenal compressed growth
6、, but also clientelism cronyism corruptionFirst crisis in 1988 due to severe liquidity problems bailed out through government rescue plan failure to deal decisively fueled dependence created moral hazardParadigm change financial crisis & decline of state influence privatization of financial institut
7、ions expansion of equity markets,Business and Government Relations The Rise of Daewoo,Conglomerates,8,Ownership structures in Asia generally based on family-controlControl secured through interlocking, cross- shareownership between affiliatesDivergence of cash flow rights and control rightsStrong st
8、ate influence,Ownership Structure,Conglomerates,9,For listing on the stock exchange, legal and regulatory system protected controlling interests Institutional investors had to shadow vote shares Unfriendly mergers and acquisitions were curbed Disclosure standards remained minimal Minority shareholde
9、r rights faced high ownership requirements Accounting audits and internal controls were ineffective Ownership dispersion policy led to misalignment between controlling and minority shareholders,Conglomerates,Ownership Structure,10,Daewoo,Source: Chaebol Information Center, Inha University,11,Daewoo
10、in 1997,1.39,DW Corp,DW Electronics,Kim Family,DW Motor,DW Develop.,DW Elect. Com,DW Heavy,DW Industries,DW Auto Sales,Keang Nam Ent.,DW Securities,DW Finance,Orion Elect.,DW Precision,DW Shipbuilding,29.1,37,39,8.5,5.3,23,3.1,DW Telecom.,4.7,8.5,11.1,4.1,24.7,19.1,45,25,3.6,6.87,1,11.75,7.6,6.9,30,
11、6.1,2.3,19.2,1.7,1.55,1.8,0.41,Unit: % companies larger than 1 billion won,12,Chaebols trace their corporate history to subsidization through related-party transactionsWith scarce credit and financing, government promoted these transactions among affiliatesInterlocking debt guarantees In Dec. 1997,
12、Daewoos cross-guarantees amounted to 8.5 trillion won Weaker affiliates default could start a chain reaction of payment demands and a collapse Exacerbated “too-big-to-fail” mentality and moral hazard,Related-Party Transactions & Self-Dealing,Conglomerates,13,Entered into risky automobile industry Jo
13、int venture with GM; later bought GM stake Acquired numerous other domestic and foreign automobile makers, e.g., Ssangyong Motor Employees were pressured to buy cars Affiliates assumed most of the burdenDaewoo Motor, Ssangyong Motor, Daewoo Corp. and Daewoo Heavy Industries accounted for close to 83
14、% of the entire net debt of the conglomerate,DW Related-Party Transactions & Self-Dealing,Conglomerates,14,Moral hazard led to riskier ventures and more improper acts Self-dealing for personal benefits Appointing unqualified relatives as executives Various forms of earnings managementKim and senior
15、managers allegedly did not engage in direct self-dealing decisions were apparently carried out on behalf of the company, not for their own personal gains unaccounted BFC fundsUltimately, accounting fraud and loan fraud represented another form of self-dealing,Related-Party Transactions & Self-Dealin
16、g,Conglomerates,15,Unit: No. of, 100 million won,Source: FTC,Conglomerates: Daewoo,Improper Internal Trading,16,Internal and external corporate governance failed to detect or prevent 22.9 trillion won in accounting fraudGovernment tacitly condoned accounting opacityTo attract foreign capital, inflat
17、ion of financial figures were deemed necessaryState-controlled banks focused on the size of revenues, sales volume and assets, rather than profits and cash flowDaewoo chose to overcome its financial difficulties through expansion, and with it, more deceit With the financial crisis, the company could
18、 no longer sustain accounting and loan fraud,Accounting Fraud and Loan Fraud,Conglomerates,17,Source: Government Final Report, Sept. 15, 2000,Unit: trillion Won,Accounting Fraud,Conglomerates,18,Used affiliates and overseas BFC accounts to reduce debts and manipulate export returns BFC used for rela
19、ted paper companies to obtain fraudulent commercial invoices, bills of lading, and packing lists Asset swaps between sister companies at discounted or inflated values 15 trillion won in off-balance sheet liabilities 4 trillion won in non-performing loans 3 trillion won in false inventories 1 trillio
20、n won in false research and development expenses,Accounting Fraud and Loan Fraud,Conglomerates,19,operated under state-supported debt financing as part of the Industrial policytop four chaebols debt-to-equity ratios exceeded 450% at the time of the financial crisis in December 1997Daewoos financial
21、structure had several distinctive features Over-relied on debt gearing Increased debt-to-equity ratio, not decreased Daewoo Corp. was not the main profit center and could not provide financial support to sustain weaker affiliates,Financial Structure,Conglomerates,20,Debt/Equity Ratio of Top Four Cha
22、ebols,Conglomerates,unit: %,21,Due to the financial crisis, Daewoo Group could no longer maintain financial balancing act Foreign debt jumped from 26.3 trillion won to 49 trillion won $5.1 billion in foreign currency loans; $1.9 billion in foreign currency loans to convertible bond owners Sudden inc
23、rease in interest rates led to financing costs jumping from 3 trillion won to 6 trillion won,Financial Structure,Conglomerates,22,Daewoo Groups Domestic Borrowings,unit: billion won,Source: Korea Financial Supervisory Commision,Conglomerates,23,Concentrated Decision Making Failure of Oversight by re
24、presentative directors, boards of directors and statutory auditorsShareholders & Stakeholders,Concentrated Decision Making & Failure of Oversight,Daewoo,24,Common attributes of large Asian conglomerates Management styles Business cultures Business modelsDaewoos success and fate is linked with its fo
25、under, Kim Woo-ChoongAs chairman and controlling shareholder of the conglomerate, he maintained total control,Concentrated Decision-Making,25,Dominated all major decision-making International and domestic financing Appointment of all CEOs and board members for all companies Business strategies Inter
26、-company relations Overseas operations control,Concentrated Decision-Making,26,Decisive, vertical, efficient and speedy decision-makingDespite corporate governance breakdown, Kim made examplary decisions Management succession no relatives Donated personal holdings in Daewoo Corp. to the Daewoo Found
27、ation Sceptics claim that they served ulterior purposes preempt political crackdown foundation acted as a shelter to minimise personal inheritances taxes de facto holding company to help maintain control,Concentrated Decision-Making,27,Financial crisis exposed the weaknesses of concentrated governan
28、ce structureStructure played a critical role in accounting and loan fraud and ultimately collapse,Concentrated Decision-Making,28,insufficient check and balance and ineffective internal control mechanisms failed as institutions to counterbalance controlling shareholders; instead succumbed to their d
29、ictates did not provide oversight and act as independent, front-line monitors disregarded their roles as fiduciaries directors and officers not legally distinguished; internal & external auditors,Failure of Oversight,Directors and Auditors,29,no non-executive outside directors until 1998; no audit c
30、ommittees 25% outside directors did not change matterscolleagues of Kims generation Could advise and monitor decision-making replaced by new executives who were unable to effectively counsel and confrontfailed to persuade chairman to pursue a contraction-oriented policy and prevent fraud,Failure of
31、Oversight,Directors and Auditors,30,only held accountable to controlling shareholder Chungun & Sandong,Failure of Oversight,Directors and Auditors,31,Failure of Oversight,Directors and Officer Liability Insurance,32,passive in monitoring management did not question or challenge did not seek informat
32、ion did not attempt to get representation on the board did not attend AGM or vote failed to take any action, no matter how dire the case,Failure of Oversight,Shareholders and Stakeholders,33,weak shareholder rights; lack of awareness investment on a short-term basis difficult to obtain information d
33、ue to weak disclosure standards absence of a class action vehicle and obstacles to litigation confined institutional investors to shadow voting ineffective proxy rules,Failure of Oversight,Shareholders and Stakeholders,34,Stakeholders such as creditors, employees, labor and consumers failed to serve
34、 as checks and balancesEmployment stock ownership plans (ESOP) did not serve as monitoring forces voting rights rarely exercised limited ownership complicated proxy procedures,Failure of Oversight,Shareholders and Stakeholders,35,Strong sense of group loyalty & strong corporate culture against whist
35、leblowers Lack of access to information and little incentive to question the decision-making of executivesRarely challenged questionable decision-making or contemplate exposing wrongdoings,Failure of Oversight,Shareholders and Stakeholders,36,Business- Government Relations,Ownership Structure,Related-Party Transactions,Financial Structure,Ineffective Enforcement,Concentrated Decision Making,Lack of Oversight,Shareholders & Stakeholders,Daewoos Fall,Conclusion,37,
