Corporate Restructuring Key to Republic of Korea's Recovery, Seminar Told

Yoon Je Cho

JEJU, REPUBLIC OF KOREA (13 May 2004) - Corporate restructuring has played a major role in enabling the Republic of Korea to recover so quickly and strongly in the wake of the Asian crisis.

But limiting the role of government to the establishment of favorable conditions, including in the areas of bankruptcy law, taxation, and accounting, would allow the private sector to carry out more efficient corporate restructuring.

That was the message at a seminar in Jeju today on "Corporate Restructuring in Asia," held ahead of Saturday's opening of ADB's 37th Annual Meeting of the Board of Governors on the Korean island. Organized in cooperation with Woori Bank and given by Yoon Je Cho, standing economic policy advisor to the President of the Republic of Korea, the seminar examined the country's experiences of corporate restructuring in the wake of the Asian economic crisis of 1997. Government officials and financial experts from 39 countries attended the seminar.

Among the triggers of the crisis were structural problems, he said, including the corporate sector's high indebtedness, low profitability and poor governance, inadequate financial supervision, and a significant misalignment of the exchange rate.

"The combination of an external shock or contagion with these internal structural weaknesses produced severe corporate distress and drove the economy into near-paralysis," Mr. Yoon said.

"More fundamentally, Korea's corporate distress stemmed from a lack of rational business decision making and a lack of the market's ability to discipline such behavior."

Korean companies had been run by only a handful of controlling families. These chaebol focused more on expansion and increasing market share in a wide range of activities than on profitability and a core set of activities. The heart of the corporate reform agenda therefore lay in chaebol reform, Mr. Yoon added.

"Under the glare of transparency and accountability, companies would have to aggressively pursue profitability, while strengthening their financial structure," he said. "They would have to make a clear break from past practices of focusing on business enlargement and market share. The management style at Korea's large corporations had to change fundamentally in the new regime."

He said in the past six years, there has been remarkable progress on improving corporate governance. Chaebol owners are more accountable for their actions, institutional investors have started exercising their voting rights, and the market for mergers and acquisitions has become fully established and open to foreigners. Also, it is now mandatory for one quarter of all the directors to be appointed from outside the company, while minority shareholders have greater rights.

But a more difficult task facing the country is corporate rehabilitation. With a credit crunch hitting so many companies and banks, the courts were in no position to carry out corporate rehabilitation on the required wide scale in so a short a period of time.

This led to a Corporate Workouts Program, which was in essence a semi-formal bankruptcy resolution method targeting the sixth to 64th largest conglomerates in asset size. Since the start of the program in July 1998, 96 companies have been able to reach workout agreements, he said. At the end of 2003, 42 companies had already graduated from the Workouts Program and 14 companies are conducting self-restructuring.

"I am certain that Korea's successful corporate restructuring effort played a major role in enabling Korea to recover so quickly and strongly in the wake of the Asian crisis," Mr. Yoon said.

"But more than that, I am certain that these reforms have significantly improved the Korean corporate and financial sectors' transparency, efficiency and financial soundness as well."

He cited as examples

• A dramatic increase in the financial sector's balance sheets, with capital adequacy ratios of most commercial banks standing far above 10% and the average nonperforming loan ratio at 2.6% compared with 8.3% in 1999.
• Korean corporations have also dramatically improved their balance sheets. From 340% in 1998, the debt-equity ratio of listed companies in the Korean Stock Exchanges has now fallen to 118%.
• Average debt service capacity of Korean companies has improved to 4.42 in terms of the ratio of operating profits to interest expenses, compared to 1.25 in 1998.

"Besides these quantifiable improvements, there have been added benefits, such as Korean financial institutions picking up a valuable skill in the process, how to value distressed assets," he said. "Before the financial crisis, Korean financial firms did not have transparent accounting standards for normal operations, let alone troubled companies."

But he stressed that the private sector should be allowed to carry the corporate restructuring rather than government. "Government's main role should be to establish a legal and regulatory environment, where distressed assets and companies can be dealt with on the basis of market principles," he added.

"Corporate restructuring is a continuous process and, while we have achieved much, we must continue with the effort as well," he concluded.

"I can assure you that the Korean Government is fully aware of the importance of uninterrupted reforms and that the Government remains firmly committed to continuing with the reform effort.