In a relay race, failure to exchange the baton means disqualification from the race. A company, too, must have a smooth leadership succession if it is to continue to survive as a 'going concern'. Modern corporate history and the professional management system still not fully established, the family line company leadership succession is often the case in Korea and has been an Achilles heel in the Chaebol system, gathering relentless criticism over the illicit conduct in the process.

What would be the reason that there have been continuous legal disputes over the corporate leadership succession process? Are enterprises ever immoral? Is the ethical management only an accessory for the Chaebol companies? We can blame the enterprises for everything, but that is not right. We could be stepping into a trap. It could be our sadistic mind in operation that causes us to lambaste Korea's globally competitive companies as unethical entities based on illicit activities. Instead, we need to examine if there have not been factors that structurally cornered the Chaebols into being illicitly conducting the succession process.

Psychology that tries to separate dominant share holders from Chaebol
We often talk about 'carrying on the family business'. The phrase connotes a long process of perfecting skills and trades through generations. Even in this case, the success of the former generation cannot guarantee that of the next. It is the market that has the final say. Then, what would be the difference between the Chaebol's company control succession and 'carrying on the family business'? One major difference would be the size of the wealth inherited. Although the size has nothing do to with the essence, we have attached special meanings to the 'bigger inheritance' such as excessive social responsibility, public ownership concept and ethics. We are not impartial about the size and this is a double standard.

Korea's anti-enterprise sentiment is in fact, an antipathy toward the 'entrepreneur'. For example, some say that the nation may live with Samsung or Hyundai but not with the chairmen of the groups. They say that those conglomerates are 'national companies' that have grown to be global movers as a result of the whole hearted support from the entire population. A national company has a meaning of 'nationally owned company'. But, those enterprises are no more than 'private properties' owned by shareholders. The popular psychology wishing to see the owner ousted from the company has formed adverse sentiments against 'big entities'. The leadership succession is also a target that this antipathy has been projected.

One of the most often disputed topics about the leadership succession is whether a leader by inheritance is equipped with the ability to run a company. It has been argued that the quality of a CEO can not be inherited as the title can. It is only a 'blind bestowment' to give the leadership position to an unverified offspring. However, it is a human instinct to protect their properties. This instinct is also at work when transferring them to their children. No one knows better than the inheritor him/herself about which of his/her children and whether the heir will be able to maintain the wealth passed on. As Hayek expounded, the person concerned has the best knowledge about what s/he does in his/her work scope. Thus, it is up to enterprises or entrepreneurs to make decision whether to recruit the CEO from outside the owner's family or train a family member through the succession program to be the executive officer. The masses, riding on the public opinion, have no right to interfere with this process which belongs to the private realm.

The government-forced 'professional management system'
Under the present inheritance tax law, company leadership take-over by the members of the company owner in a legally decent way is almost impossible. Many illegal attempts in the succession process partially derive from this fact. In the case of Hyundai Motor Group, if President Chung (the son) is to receive all of the shares owned by Chairman Chung (the father) so that he can succeed the company rein that the Chairman Chung harnesses now, President Chung will have to pay 1.3 trillion won (1.4 billion USD) in tax as of 2005. (Under the present tax law the windfall tax rate for 3 billion won worth of inheritance or over is 50 % and the value of the shares owned by Chairman Chung is estimated at 2.6 trillion won). Even President Chung opts to control only the listed core companies such as Hyundai Motors, Hyundai Mobis and Kia Motors in order to minimize the tax burden, he will still have to pay 800 billion won in tax. Calculated conservatively, he still has to have 800 billion won in reserve to pay the tax. Otherwise, he will have to use the inherited shares to pay the tax --- an unrealistic way as he will lose his control of the company afterwards. Considering the stock distribution and the company's total stock value, it is impossible under the present inheritance legal system for a globally owned company to realize a family succession of the company control. The four largest Chaebols in Korea face the same situation.

The 50% inheritance tax might not seem too harsh. It is only a tax on the inherited windfall. But it is different with 'inheritance of shares'. It is necessary to own certain amount of shares to exercise the right to the company control. But securing the company control is impossible if the inherited shares have to be sold to pay the tax. When it is not the size of the transferred 'wealth' but the size of the 'right' that is slashed into half, it is a matter of deprivation of opportunity. The present tax system limits the proprietor's management' to one generation and requires the next generation to give up the management position as an owner or become a professional manager. As government's policy forcing companies to adopt the professional management system universally is in a way limiting the private property rights as well as self-governing of private property. That is against the market economy and biased to the leftist ideology.

Another controversial way frequented with the illicit company leadership succession is accumulation of wealth by using unlisted companies. The owner family establishes an unlisted company which receives the best possible support from other subsidiaries so that enough cash can be made for the owner's family to acquire shares of the main subsidiaries. In the case of Hyundai group, Glovis Co. Ltd. is viewed as the one. A company which can secure stable profits, Glovis did not go through the public offering but private offering of stocks and was kept unlisted. This is viewed as an abuse of power by the dominant share holders who took the opportunity for the company instead of sharing with other shareholders.

If the business had not been separated but operated within the company, the profits made in the shipping operation would have benefited the shareholders of Hyundai Motors and Kia Motors. But whether or not a business department is converted into an independent company depends on the business decision, as is the decision to go public with the company. Also, if the business transaction with new company Glovis can minimize the costs and increase the service quality, the shareholders will benefit. However, the international shipping service charges by Golvis for Hyundai's cars have been unreasonably high and could cause problems as the benefits that Hyundai shareholders should have earned have gone to the shareholders of Glovis instead.

Epilogue
In some sense, the high inheritance tax rate has been preventing familial line succession of company control and provided a ground for illicit inheritance attempts --- it has been an equation that no entrepreneur can find a solution. The tax law has been amusing itself in this 'prohibition-equals-permission' irony. Ethics and morality cannot be independent from the economy. A proper inheritance process only can take place when the tax rate for properties larger than a certain level can be reduced. Or, a dual class share system should be considered if the tax rate is to remain the same. Sweden's Wallenberg family exercises 20 percent of voting rights while owning only 4.45% in unequal shares. Or, an alternative can be a stock trust fund which can act as a friendly financial power for the owner's group so that positive leadership succession can take place.

We do not live in an ideal world. Certain illicit activities can not be completely eliminated. We need to minimize factors that breed illicit activities. Frequent witch hunts do not necessarily bring a clean society. Our psychology is not free from the prejudice against 'big'. Family ownership of an enterprise cannot last forever. Nor there is any need to purge against family owned enterprises especially when they function positively in the market. They are only part of the entire business eco-system whose diversity we may not destroy. We need to apply a stern moral standard to larger companies as they do have 'social responsibility'. However businesses' responsibility for society needs to match with the society's consideration for the businesses. There is no balance between the two these days. Nor there seems to be any prospective for improvement of this situation as unscrupulous politicians are manipulating the anti-enterprise sentiments.

Cho Dong-Keun (Professor, Myongji University, President, Market Economy System Institute)

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