Following upon the previous chapter, this chapter looks at the uses of equity in chaebols. It focuses particularly on how families wholly control chaebols despite owning only a small portion of their affiliates' shares. In this context, this chapter will examine the ownership and governance structure of affiliates, which make such control possible. It also addresses the agency problems of chaebols, which stem from the lack of proper corporate governance systems in Korea.

CHARACTERISTICS OF THE OWNERSHIP STRUCTURE OF CHAEBOL

Trends of Family Ownership and Cross-shareholding

Figure 6.1 details the ownership structure of chaebols since 1983. It divides equity stakes into two components: those owned by chairmen and their families, and those held by affiliates. Equity holdings by chairmen and their family have declined steadily since 1983 because these individuals cannot maintain large stakes in all affiliates as the number and volume of these affiliates grow. In contrast, the equity stakes held by other affiliates remains stable; ownership in chaebols has increasingly relied on cross-shareholding among affiliates. The aggregated sum of cross-shareholdings of chaebols decreased from 40% in 1987 to 32% in 1989 because the Fair Trade Act restricted the cross-shareholding of each individual affiliate to 40% of its net assets. Chaebols incurred penalties when they exceeded this limit. The Fair Trade Act was revised in 1994, further reducing the ceiling to 25% of the net assets of individual affiliates. The penalties imposed by the Fair Trade Commission were not high enough to encourage chaebols to comply with the law.