Accurate as many points made by Libertine made are, I can?€™t help but think that Libertine is still looking at chaebol with past data. Overall many experts (Korean and foreign) has exclaimed that chaebols have come a long way.

Experts have said many times that companies have come a long way because these companies are slowly doing away with the chaebol structure. Not that chaebols have improved.

You bring up Enron and at Arthur Anderson. Yes, of course - accounting fraud is possible under any system, But this is not a defense of the chaebol structure. It’s also possible that a brand new BMW 5-series would break down a week after you bought it - but this is no argument in favor of buying a 1975 Pony instead.

So you started off by saying you wanted to defend the chaebol structure. Then you agreed with the points I made against it.

More than once you go on to say that chaebols are evolving and making improvements. Yet I can’t find a single example throughout your entire post to backs up your claims. Can you provide any specific examples? Examples that effectively weaken ties amongst affiliates do not count - this signals a company becoming less involved with the chaebol rather than an actual improvement or evolution of the chaebol structure itself.

Finally you say that cross-shareholdings are not necessary, and that ethical practices will help SEC. But once cross-shareholdings are gone, how does a company continue to be a chaebol company, exactly?

Rather than defending the chaebol structure, it seems you’re championing companies that are transitioning AWAY from being chaebol affiliates. If I am misunderstanding you, let me know, otherwise it doesn’t sound at all that you can name any merits to the chaebol structure.

As for hanging on to your SEC stake - I’m 100% behind you on that one, not arguing with that. And good work owning for over a decade… don’t know if there have been splits but even without that’s at least a 6x return.

I still disagree with your praise of cash reserves. It’s the use of cash, not the presence of cash, that affects valuations. SEC would seem to agree with me - they’ve reduced cash equivalents by 40% in the past 4 quarters. Dividends are ok but I wouldn?€™t call them lovely. LG Electronics paid out 22% of free cash flow last year. SK Corp paid out 32%. SEC paid out 13% - disappointing even amongst peers not known for payouts.

When I say that SEC needs to prove its ability to innovate, you say

What you say is absolutely right but not really enlightening. It is a clich??. Innovate; innovate before the competitor catches up. That?€™s what the Korean newspapers sing every time.

Good to see the newspapers are getting something right. If the clich?? bores you, remember: the right answer isn?€™t always the most novel.

Two questions:

1) You suggested I take a look at PE ratios for the chaebol companies. Why? What does this prove? Do you mean I should take a look at the trend of historical PEs as evidence that they?€™ve improved, or what?

2) How can you argue that the Korean market is relatively unfamiliar to foreign investors? I don?€™t understand how you could possibly argue this given that 40% of the Korean market is foreign-held ?€“ one of the highest percentages of any market in the world and on par with Japan (where valuations are far above those for similar Korean companies).

How fitting that the first response I get is from someone who reads my post, but rather than discussing, sums everything up as “HE THINKS KOREANS ARE BAD. HE’S MEAN. THE END.”

Hilarious - but I’m not sure whether I should be thanking him for an inspired and well-placed bit of irony, or thanking him for proving my point.

this is what’s wrong with you koreans…

(more/less)

do you know what’s wrong with you? why don’t you tell us. snr my ass.

Fast forward to today. Not only do Daewoo spinoffs lead Korea in corporate governance and transparency but also THE STOCKS HAVE RE-RATED. Everyone wins - Korea, the economy, and shareholders domestic and foreign.

Meanwhile valuations on the chaebol companies suck. SK Corp trades at lower valuations than any other refinery in the region. The company points to the recent earnings turnaround as if their genius management was to thank for global oil price trends. LG affiliates trade low thanks to the LG Card bailout, Hyundai affiliates trade low thanks to Hynix, ad infinitum.

One area of honest self-criticism in which Koreans excel is that of physical appearances. Many consider Korean women to be the prettiest women in Asia. 30% of women polled in Korea were satisfied with their physical appearance - vs 74% in Thailand, 62% in Malaysia, and 40-50% in China Singapore and Japan. This makes perfect sense: the inherent beauty of Korean women aside, those who are most critical of themselves, and who feel they have a deficit on which to improve will work harder to improve than those who are content and constantly patting themselves on the back. (I’m not condoning plastic surgery - I’m just trying to illustrate a point)

Riddle me this Mizar5 (and anyone else trying to raise the signal to noise ratio). Do you think it’s possible for Korea to get past the unbending navel-gazing, the fatuous and permissive ??¼?¡±??? ????¡´??? cheerleading, the face-saving, and the inferiority and persecution complexes? What has to happen if Korean culture is ever to make room for and benefit from constructive criticism?

Criticism is good, we all need good doses of it?€? But when you go overboard, it?€™s just pessimism?€?

But the (apparently) elusive key point is that in Korea, all criticism is considered pessimism. All critics and dissenting opinions are villified. This does not benefit the country nor the political system nor the economy.

Great post. I just learned a heck of a lot more than I ever knew about chaebols post-1997. If there’s more that you’d like to share with us, I for one would like to read it. (Just don’t post too much: somebody might take all your stuff and write a book out of it!)

“and that accounting consuting firm (forgot the name, I?€™m getting tired)”: Arthur Anderson.

“will be chugging along the economic railroads of the future”: cute metaphor.

Okay to make things clear, I did indeed defend the chaebol system but not the zaibatsu system. I merely mentioned the zaibatsu system because the chaebol system was originally modeled after the zaibatsu system. Since zaibatsu in its original form does not exist in Japan anymore (it exists in the altered form of keiretsu) and I’ve done no research on keiretsus, I will leave them alone.
Also by defending the chaebol system, I was trying to show that it has its merits despite many shortfallings. By no means am I implying that it is the perfect business system or a model corporate governance structure to strive after.
I also agree with all your criticism on the chaebol (specifically on Samsung), I myself pointed some out in my post above. Yet I still wish to defend the chaebol system further (including Samsung) and will do so here to the best of my abilities (which is not much )
The basis for my argument in defending the chaebol is in that it is evolving and will continue to do so. The chaebol of now is unlike the chaebol of 5years ago (it really no longer resembles the zaibatsu much either)and I hope that 5 years down the road they will have evolved again. It still has a long way to go of course, but in my opinion they are striving to become better.

Okay the two main problem of the chaebol corporate governance structure:
1. Affiliates (?³???´???) diversified beyond rational business decision making, sharing of capital between affiliates and unethical (unfair) internal transactions. All of these lead to affiliates (or specifically individual business projects) that have no independence from the holding company (?§€??¼??Œ???).
2. Weak governance structure that has no effective checks and balances against the owner or the major shareholder.
There are many more problems, but most of them are in some way related to the two above problems.

Government and chaebol shared the same bed in a rather intimate way throughout the ?€?70s, ?€?80s, and the early ?€?90s. Many argue that this major government involvement with chaebols (quite unethical by today?€™s business practice standards) was beneficial. Whether it was or not is not the important issue. I myself am more inclined to the open market with minimum government involvement but there are many papers out there that support the benefits of the government involvement in the early stages of the economy of developing countries. (One good one: Stiglitz?€™s ?€œGlobalization and its Discontents)
Anyway by the ?€?90s, experts mostly agree that the Korean corporate system (namely the chaebol) that worked for the Korean economy before was no longer a healthy option. Many Korean and foreign experts started to warn Korea that the government should minimize its involvement with micromanagement (with chaebol) and start opening the market more. Also they raised the need for a better business practice regulations in order for a fair playing ground. They warned the chaebols also on their dependence on the government, and their corporate governance structure (for the above two main reasons). Lo and behold the Asian Financial Crisis hit Korea during the late ?€?90s (Koreans call it the IMF Crisis). Most experts shouted ?€œAha! I told you so!?€? Of course there are some experts who disagree that the Korean government or the chaebol were the main reasons (or should we say the initiators) of the crisis. Whoever started it or was the most responsible, majority of the experts agree that the crisis was aggravated because of the outdated, faulty process of the K. government and the chaebol system.

The chaebol system with the help of the government and thanks to some of its merits (yes they do exist) was able to tow the Korean economy with surprising speed, but times change, and the playing field changes along with it. The Asian Financial Crisis was the watershed. It was a harsh wakeup call for the K. government and the chaebol that things weren?€™t as rosy as they once thought. They realized they had to change and the changing process has been going on at a rapid pace since. Still a long ways to go in order to reach global standards but they have come far. Also please remember that there is NO perfect corporate governance structure. They are relative in strength to each other in different aspects, and all try to become better. Remember ENRON, Worldcom? Unethical person in charge will mess up a company whatever the checks and balances (though it may be more difficult to do so compared to chaebols).

Okay now Libertine said:
?€œWhat did this chaebol system offer to Samsung Electronics shareholders in 1Q05? A tasty 700bn equity method loss on Samsung Card that reduced net earnings by 8%.?€?

Absolutely true! And since I?€™ve been a Samsung Electronics shareholder since 1992, I was also quite displeased. Not only that, just last year Korean news was full of stories of how the chaebols evade having to pay inheritance tax? The owner families of Samsung and SK were on the news quite often, also to my displeasure. But I am still holding on to Samsung Elec. and will continue to do so, because I believe that there are more positive points then negative points.
#1. Small shareholders are gathering clout. Many new regulations are actually beginning to help minor shareholders to be heard. (Yes it does still go back and forth. Especially in that no good ??­??Œ of Yeoido. But it has been going forward more often then backward.)
#2. Midsize and large shareholders are no longer as silent as they once were. Governments are no longer the ones that tell ?€?em to lend someone money and stay quite about it even if the loan/investment goes bad and ends up as NPL. They are becoming more involved with the business they are investing in, even if they are chaebol. I?€™m not talking about the affiliate being a shareholder here, more on that later.
#3. Foreign investment in chaebols has risen to the point that they now have to be heard. Of course there are still some regulations that impede foreigners but overall the situation has much improved. SK had big trouble with Sovereign. They somehow managed to hold on to the management, but believe me Sovereign will strike again.
Side note: There was a new regulations introduced a few months ago. The FT was really critical about it stating that Korea was closing up the market again. Let me clear it up for you. Hello FT, the US and Japan and many other developed nations with ?€œopen markets?€? have the same regulation and it is a lot stricter! For goodness sakes, please do your research before writing such articles. (BTW I heard that the reporter heard about this ?€œoutrageous?€? regulation from some foreign investors in Korea. i.e. more like speculators.) Yes, though still difficult foreign investors do indeed have more clout now, and the clout will only increase as time goes by. As I said that regulation is in place to protect the market against speculators, and all smart nations have ?€?em (yes the US!).
#4. ?€œScrewing shareholders?€? as Libertine puts it is succinct descriptions of what chaebols often do as the above case Libertine shows.
Anyway, so does every other corporate governance structure when they are managed by unethical or untalented management. Of course, overall chaebols are more likely to commit this booboo because (read main prob 1 2). Korea has introduced many regulations to restrict this from getting out of hand. Also many chaebols are learning (the hard way, its always the hard way ??Œ ) that they have to lookout for shareholder value. Yes some are learning a tad bit too slow, and some are still making mistakes even after learning it. But let?€™s look at Samsung. Lovely dividends, (I would love it if it was higher) they are also buying back (retiring) shares and thereby increasing shareholder value in a major way. Also Libertine points out that ?€œyou can?€™t argue that cash reserve is a reason to like the company.?€? It shouldn?€™t be the only reason but it may be one of the many important reasons. Yes they have misallocated a lot of funds in Samsung Card, etc. etc. but overall the past records show that SEC has reinvested much of the cash reserve in to a positive NPV projects. Expecting misallocations to decrease (due to improving checks and balances, ethics, minimal required regulation) is not wishful thinking

Libertine wanted me to prove him wrong that the chaebol structure?€™s ultimate effect is sustained misallocation of capital. I?€™m not going to deny that this may happen again (and quite often for that matter) in the future. But chaebol = misallocation of capital is not set in stone. Many regulations and business practices are continuously improving. They may not have reached the minimal threshold that Libertine wants, but nevertheless they are improving and hopefully one day is able to change some negative (but accurate) perspective of Libertine?€™s.

Accurate as many points made by Libertine made are, I can?€™t help but think that Libertine is still looking at chaebol with past data. Overall many experts (Korean and foreign) has exclaimed that chaebols have come a long way. As for the accounting shenanigans Libertine talked about, yes they were true, and still are, but to a lot lesser extent. Many types of corporate decision making and accounting ambiguity are being improved both by the government and chaebol.

For further readings on SPECIFIC efforts made by the Korean government to improve the regulation for a fair playing ground (including chaebols) visit http://www.kdi.re.kr
There is too much data for me to summarize here. (and I?€™m getting tired writing all this)

Libertine said:
?€œYou then go on to blame the country discount for Samsung?€™s depressed share price. What, in your opinion, causes the country discount? Do you think foreign shareholders are more worried that Kim Jong Il will drop a nuke on Seoul? Or do you think they?€™re worried that ongoing chaebol hi-jinks and creative accounting will drop their share prices 50% and drop a nuke on the KOSPI? Both are factors, but the latter is a more likely risk that is a DIRECT RESULT of the chaebol structure.?€?
You are mistake here. 1. Foreign shareholders are indeed worried about N.K. to a large extent. No they aren?€™t necessarily worried about the nuke, but they are worried about the negative impact that N.K. has on S.K. Also there are other discount factors such as, the Korean market is still relatively unfamiliar to foreign investors. (Yes lack of brand value). Also despite many improvements made during the last few years it takes a lot of time for the results to be visible so investors can recognize them. The chaebol hi-jinks and creative accounting you mentioned still do exist but it is increasingly becoming a minor issue. If you keep up with the financial news, you will realize that many such practices have decreased thanks to better regulations and changing perspectives within the chaebol. Yes, booboos still happen, but they do also in other developed markets. As I said let?€™s not forget ENRON, Worldcom, and that accounting consuting firm (forgot the name, I?€™m getting tired). The chaebol structure may be responsible for some discount factor in the KSE, but that structure is also responsible for many premium factors in the KSE. As the discount part decreases the attractiveness goes up. Look at the average PER of the Korean chaebols. Look at the debt ratio! They have improved to amazing levels. Samsung barely has any debt if you take their cash reserve to account. That is indeed amazing. (This is the kind of company Warren Buffet would like ???)

Libertine stated:
?€œI agree with you that SEC is undervalued. But you can?€™t argue that cash reserves is a reason to like the company. What they do with it is more important. Do they really need to tie up a stake in Samsung Card? Do they really need a stake in Samsung Heavy, a shipbuilding company? No. Drop the investments and either use the cash to grow the business or return it to shareholders.?€?
Thank you! You agree that SEC is undervalued. It is a major part of my portfolio. Cash reserve I answered some part of it up there. Yes, cross stake holding is indeed not necessary. As I mentioned up there such business practice is frowned upon by the global investors. Korean government has been trying to make it difficult for affiliates hugging each other. Of course people find creative ways around the loop holes. But as I said up there as the shareholder?€™s collective voice gains clout, many of the business practices such as these will decrease. Also what you just stated up there is a cut and dried textbook answer from a corporate finance course. You probably realize that the real world is not as cut and dried as that ???

Libertine state:
?€œIt remains to be seen whether SEC can innovate. Once Chinese manufacturers catch up to Korean companies in terms of technology - let?€™s be conservative and say that?€™s a decade away - what?€™s Samsung?€™s place in the world? Korean manufacturers are great at delivering Japanese technology at prices 10-15% cheaper. But Korea has to get innovative before China eats its lunch.?€?
Let?€™s forget general chaebols here and focus on SEC. What you say is absolutely right but not really enlightening. It is a clich??. Innovate; innovate before the competitor catches up. That?€™s what the Korean newspapers sing every time. But hey, that is the name of the game. The way I see it, a truly great company will manage to survive and succeed. As long as there is a good infrastructure of regulations, laws and other necessities, with minimal government involvement, and the chaebols continue to evolve to keep the innovative fire alive, backed up with pro-social, environmental and ethical practices, I believe that maybe, just maybe, that tge chaebol (Samsung) will be chugging along the economic railroads of the future with much respect. (earned this time)