Transformation of Corporate Governance in Korea

Abstract

The financial crisis in late 1997, which spread rapidly from Thailand, is a watershed in the history of corporate governance in Korea. In the wake of escalating defaults on corporate loans, foreign lenders withdrew credit lines and refused to renew loans as they matured. The evaporation of foreign credit placed considerable pressure on the Korean currency, which declined 50 per cent against the US dollar in a single week in November 1997, pushing the economy to the verge of a financial meltdown. As Korea suffered its worst economic crisis, many family-controlled, diversified business groups (chaebol) - once viewed as the drivers behind the unprecedented success of the Korean economy - went into bankruptcy, with the national economy itself on the verge of bankruptcy. To rescue the national economy, the Korean government had no choice but to seek a record emergency rescue fund from international organizations, such as the International Monetary Fund (IMF),1 and foreign governments. Such a crucial bailout was offered on the condition that the government adopted draconian measures, including corporate governance and chaebol reforms, to fun-damentally restructure the financial and corporate sectors. To obtain rescue loans, the government indeed initiated and pushed for these reforms. In addition, ‘family capitalism,’ embraced by family-controlled business groups, and ‘state capitalism,’ endorsed by the entrepreneurial yet rather autocratic government, were often accused of being major contributors to the failure of monitoring and checking the absolute power of controlling families, which eventually led to the financial crisis.