Dec. 28, 2001 – Seoul, Korea – In a landmark ruling earlier this week, a provincial court ordered 10 executives of Samsung Electronics Co. to pay the electronics manufacturer 97.8 billion won ($74.5 million) for mismanagement.
The ruling was the first court action to hold business executives legally responsible for mismanagement that caused serious financial losses to their company – and shareholders, according to Dow Jones.
The court’s decision was a victory for civic groups, which have waged a vigorous campaign to end widespread illegal business practices among family-controlled conglomerates, such as cross-funding and internal trading.
“The ruling is meaningful as the court cracked down on bad managerial practices of conglomerates,” said the People’s Solidarity for Participatory Democracy, a Seoul-based citizen’s group.
The group led 22 minor Samsung shareholders in 1998 to sue the electronic giant, accusing it of illegal internal trading. It demanded that the company’s chairman, Lee Kun-hee, as well as several other executives reimburse 351.1 billion won to the company.
Cases of mismanagement, cited by those minor shareholders, included cheap sales of Samsung-owned stocks to units — a measure commonly used by conglomerates to subsidize financially weaker units. Such internal trading is illegal under South Korean law but wasn’t strictly cracked down under past military-backed governments.
Conglomerates came under closer scrutiny as South Korea’s economy wobbled in the aftermath of the 1997-98 Asian financial crisis. A few dozen conglomerates collapsed, forcing South Korea to bail out its sinking economy with the help of the International Monetary Fund.
In Thursday’s ruling, the civil court in Suwon, south of Seoul, where Samsung’s head office is located, noted that the illegal business practice devalued the company’s stocks, thus causing financial losses to shareholders.
The court ordered the company’s chairman, Mr. Lee, to pay back $5.5 million he had used in 1988-92 to bribe then President Roh Tae-woo to win government contracts. Mr. Lee had pleaded guilty to the charges in a separate trial.
The Suwon court also told nine other Samsung executives to pay back a total of $68 million, holding them responsible for various cases of mismanagement, including a 1997 decision to acquire a near-bankrupt firm without closely checking that firm’s financial health. The company was later liquidated.
“Internal trading is a cancer for the development of capitalism, blocking fair competition,” Judge Kim Chang-suk said in issuing the ruling.
Over the decades, South Korea’s conglomerates expanded recklessly with massive bank borrowings until the early 1990s with the perception of “too big to fail.” A typical conglomerate used to have 40 to 50 units, making everything from computer chips to cars and clothes.
That notion faded as South Korea went through the Asian economic crisis. Today, the government monitors conglomerates more closely to check for any illegal business practices.
South Korea’s economy has rebounded from the regional crisis, growing 10.7% in 1999 and 8.8% in 2000. But many analysts believe the country’s corporate restructuring has a long way to go to achieve sustained growth.