Corporate governance stalls at Hyundai over land purchase

When Hyundai Motor Co’s board convened in September to discuss a planned land purchase in Seoul, its five independent directors sought details.

Executives replied that Hyundai needed to house about 30 of its affiliates under one roof to improve efficiency. The conglomerate also would build an automobile theme park at the new location to enhance its brand image, they said. However, the price was neither mentioned nor discussed.

The US$10 billion cost, three times the land’s valuation, was disclosed only after the nine-member board unanimously endorsed the plan. Over three quarters of the company’s workers walked out to protest the decision and their own stalled wage talks.

The deal was but the latest example of how South Korea’s conglomerates, known as chaebols, are upsetting shareholder activists seeking to change the opaque decision making in large corporations.

Investors have long complained about a lack of transparency and outside oversight at many chaebols, which generally are controlled by founding families through complex cross-shareholdings. Top managers typically take major corporate decisions unchallenged, despite having only small shareholdings. Hyundai Chairman Chung Mong-koo, 76, and son of the founder, has a 5.2% stake in the company.

After Hyundai’s purchase was announced, angry investors who thought the deal was a waste of money dumped the company’s stock. Shares of Hyundai and the two affiliates that joined the purchase, KIA Motors Corp. and Hyundai Mobis Co. each fell more than 10%. The declines reduced their combined market value by more than the amount paid for the land.

“This is a classic example of Korea’s weak corporate governance and poor oversight by outside directors. Hyundai wanted the land and directors rubber-stamped it,” said Kim Sang-jo, a professor at Hansung University and the executive director of Solidarity for Economic Reform, a group that advocates improved corporate governance.
According to the minutes, Chairman Chung did not attend the meeting. Mr. Chung had privately pushed for the land purchase but never brought the matter to the board for discussion. According to some directors, it is common for Mr. Chung to skip board meetings.

When asked by media organisations, Hyundai declined to comment on any aspect of the decision making process, or Mr. Chung’s role.

Independent directors, usually academics, lawyers, and former government officials, tend to go along with what chaebol managers want to do because the directors are chosen by committees composed of the businesses’ family members and company executives.