Navigating Conglomerate Governance: Through the Lens of the Korean Chaebol
At a cursory glance, South Korean stocks have rarely appeared such compelling value. However, family-controlled conglomerates are common in Korea, and present significant challenges at the corporate governance level. Often the more complex a conglomerate’s corporate structure, the greater will be the potential misalignment between controlling family interests and those of other shareholders. Knowing how to identify a subsidiary’s rank within the conglomerate hierarchy, and its value to the controlling shareholder, is key to fundamental value investing in Korea’s family-controlled companies.
Korea: The Ultimate Value Play?
South Korea is a globalized, open economy with a stock market capitalization of US$1.3 trillion, and more than 2,000 listed companies.1 It has a major presence in global industries such as autos, electronics and shipbuilding. However, the Korean corporate sector is still dominated by large, family-controlled conglomerates known as Chaebol. While investors often seize on the sprawling conglomerate structure as a possible store of untapped value, governance in Korea has long been a bugbear of shareholders. The chaebol, which literally means “wealth clan”, are characterised by a complex web of cross-holdings between companies under the control of one family. Stock markets do not tend to reward such complexity.