"Principal-Principal Problems and Social Governance: Korean Firms, Chaebols and ‘Social Tunneling’"

Abstract

We extend the emerging literature on ‘environmental’ - or more broadly ‘social’ - governance by analyzing principal-principal governance issues in the context of Corporate Social Performance. Analyzing Korean family controlled stand-alone businesses and Chaebol type business groups, we derive the logic of ‘social tunneling’ in analogy to the established concept of ‘tunneling’ that describes the financial expropriation of minority owners by controlling shareholders. We argue that controlling family owners’ mix of economic and non-economic goals leads to higher social performance, which comes against the interests of other shareholders pursuing primarily financial goals. Yet, increases in regular governance mechanisms such as board monitoring that balance priorities among shareholder groups lead again to lower social performance. These results illustrate that corporate governance mechanisms first and foremost serve the interests of the principals, including securing a balance between divergent interests of ...