The Patrimony

In politics, everything is relatives

Tag: corporations

Chaebol nobility

by fpman

Korean Air is the latest South Korean chaebol (large family-run conglomerate) hit by a scandal related to family matters. Cho Hyun-ah, company chairman Cho Yang-ho’s daughter, recently made a flight she was on turn back so one of the stewards could be kicked off at the gate. The reason: she was served macadamia nuts in an unopened bag which she, as the person actually in charge of the airline’s in-flight services, thought was not the proper way. According to common descriptions of the story she basically transformed into a dragon in response. She clearly went way too far, and by now she has ended up stripped of all of her company titles and was forced to publicly apologize for her actions.

ChoHyun_ahCho Hyun-ah (centre) with father Cho Yang-ho, apologizing (photo: Song Eun-seok)

The NYT doesn’t fail to add that the incident

“is likely to stoke already seething anger at the country’s family owned conglomerates — or chaebol — whose leaders have a reputation for imperious behavior and treating their employees like feudal subjects.”

It is worth remembering at this point Chonghaejin Marine Company’s case. It was their ship, the MW Sewol ferry which sank in April of this year. Over 300 drowned in that incident caused to a great extent by human errors. On its last journey the ferry was carrying over three times the amount of cargo it was supposed to carry, and the extra load was not properly secured. After a relatively sharp turn by the vessel at one point the cargo shifted and caused the boat to capsize.

Yoo Byung-eun was the head of the family whose business empire extended to control of Chonghaejin, run by Yoo Byung-eun’s sons at the time. In the wake of the ferry disaster, the public mood turned against father Yoo, and South Korean authorities issued an arrest warrant against him related to charges of embezzlement, negligence and tax evasion. His children fled the country, and in the meantime he went into hiding, presumably with the support of the 100,000-strong Evangelical Baptist Church which he co-founded.

Eventually police found a badly decomposed body in the middle of a field in the middle of nowhere, south of the capital Seoul, and based on DNA evidence it was proclaimed that it was Yoo Byung-eun. He was thus pronounced dead. Police is still after Yoo Som-na, a daugther of his who is also accused of embezzlement and is held in prison in France awaiting decision on her extradition. Her defenders argue she would not get a fair trial in South Korea at this point.

The NYT is also referring to a story where a “ruling-family” member at the telecom and petrochemical conglomerate SK group beat up a union activist with an aluminum bat. This exaplains the context where many papers are now calling on government and judicial authorities to set examples with some chaebol princes and princesses to put an end to what they describe as “imperial abuse.”

Would you read an article about the “Lucky Sperm Club?”

by fpman

We sure would. In fact, there is one recent article like that in the Economist, and so we were happy to.

It is about family-run mega-firms in Fortune’s Global 500 where you can, in Warren Buffett’s expression, be born into fortune by being the lucky “sperm” (though based on our high school studies we think an egg may also be necessary to get lucky).

In the decade from 2005 to 2014 the share of family-managed large firms in the 500 has grown from 15% to 19%. The ratio has actually decreased somewhat over this period for Western firms, but in the emerging economies, and in fact in the developing world in general, being family-run, or at least being owned dominantly by one family, is apparently more the rule than the exception. Think of examples from Tata Corporation (of the Indian Tata family) to the Saudi Binladin Group (of the bin Laden family). Given all the “emergence” there is these days, those firms are now better represented among the 500.

Fortune500The 500 visualized (honestly, I didn’t count them)

Here’s the regional breakdown on firms with over one-billion dollars in annual revenue:

“Around 85% of $1 billion-plus businesses in South-East Asia are family-run, around 75% in Latin America, 67% in India and around 65% in the Middle East. China (where the proportion is about 40%) and Sub-Saharan Africa (35%) stand out for their relatively low share of family firms, because in both cases many large firms are state-owned.”

The whole article makes for very interesting read, and is highly recommended. Given the concentration of enormous power in the 500 firms in question they surely merit attention on the agenda of this blog.

Of most interest to us, however, is actually this observation in the article (following upon the discussion of research findings from various sources pointing in this direction):

“The families that do best are those which understand that their interests and those of their business can diverge, and put in place processes to manage the consequences of these differences.”

It may not be a popular idea but patrimonialism – let’s add a very important caveat: in its legal forms – in fact should not be inherently disadvantageous (or in other words “non-Pareto-optimal,” or a “public bad”), either in politics or economics. Patrimonialism is rather what people and circumstances make of it. It can resolve issues of trust and reduce transaction costs in both the political and the economic realm, and it can be practiced in an enlightened manner – with a view to the public good in the case of politics, and with a view to the good of the corporation in the case of a company.

It just doesn’t always happen that way.