Catalog

Road to Recovery
ADB Review [ July - August 2004 ]

Limiting government’s role to establishing favorable conditions could make private sector more efficient

JEJU, REPUBLIC OF KOREA

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 financial 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 on “Corporate Restructuring in Asia,” held ahead of the 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 on corporate restructuring in the wake of the Asian financial crisis of 1997. Government officials and financial experts from 39 countries attended the seminar.

Among the factors that triggered the crisis were structural problems, he said, including the corporate sector’s high indebtedness, low profitability, poor gov-ernance, 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,” he said. 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, he added.

“Under the glare of transparency and accountability, companies would have to aggressively pursue profitability, while strengthening their financial structure,” Mr. Yoon 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 was 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.

This led to a Corporate Workouts Program, which was in essence a semi-formal bankruptcy resolution method targeting the 6th 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.

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