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2015-08-18 10:32:29
A fraternal feud over inheritance fires up South Koreans and regulators
Aug 15th 2015 | SEOUL
THE recent performance of the Lotte Giants, one of a dozen baseball teams
belonging to South Korea s chaebol, its family-owned conglomerates, has been
uninspiring. But when the team s chief executive resigned this week, it was to
distance himself from the disgrace of another turf war: a jostle for
succession at the team s parent group between his two cousins, the sons of the
Lotte chaebol s nonagenarian founder and chairman, Shin Kyuk-ho.
His business empire has operations in South Korea (where it is the
fifth-biggest conglomerate) and Japan, and combined assets of $96 billion and
it is the last of the chaebol to be managed by its founder. Mr Shin began Lotte
as a chewing-gum business in post-war Japan. In 1967 he took the business home,
where Park Chung-hee, South Korea s then dictator, was offering tax breaks and
perks for foreign investors. From its base in Seoul, Lotte Korea moved into
fast food, hotels, amusement parks, department stores and cinemas.
The group s controlling companies, however, remained in Japan, and for years Mr
Shin s sons have shared the spoils geographically: Shin Dong-joo, the eldest,
managing its unit in Japan; and Shin Dong-bin, the youngest, overseeing Lotte
Korea s 74 affiliates (which account for four-fifths of the group s business)
and the group s operations in other countries.
Each is now vying for the other s patch. Rivalries over inheritance are common
enough at South Korea s family-run firms: Chaebul.com, which tracks them, says
that roughly half of the 40 biggest have been embroiled in disputes over
founders succession plans. The difference this time, says Chung Sun-sup, its
chief analyst, is that a son has appointed himself heir.
In January the board of directors at Lotte Holdings, which in effect controls
the group from Japan, dismissed Shin Dong-joo, then its vice-chairman, from all
executive posts. It looked like their father was paving the way for Shin
Dong-bin to succeed him; and last month the younger brother was made chairman
of Lotte Holdings. But on July 27th the founder, elder son at his side, said he
was firing all the firm s board members, including his younger son. The next
day Shin Dong-bin gathered Lotte directors to mount a counter-coup, demoting
his father to an honorary position at Lotte Holdings.
Accusations have flown. Shin Dong-bin says his older brother was preying on
their father s frailty, forcing his hand. Shin Dong-joo produced a letter and
an audio recording of a conversation with his father suggesting he was the
rightful heir. He also claims his brother hid from his father large losses at
Lotte s Chinese unit. Both have appeared on television to stake their claim. On
August 11th Shin Dong-bin made his second public apology for the squabbling
this month. In a live television address (pictured) he pledged to improve
transparency at the group and assured viewers that Lotte belongs to Korea .
An unmanaged scandal of this scale is unusual, says Jun Sung-in of Hongik
University in Seoul, even by the standards of fractious chaebol families. It is
intense because the stakes are high and the arena is small : securing the
chairmanship of Lotte Holdings at a forthcoming shareholder meeting. That firm
is thought to have a near-absolute stake in Hotel Lotte, the de facto holding
company of Lotte Korea.
South Koreans goodwill towards the chaebol has been tested recently.
Misbehaviour by prominent scions of business dynasties has caused outrage, as
have internal restructurings that appear to benefit the founding families but
disadvantage outsiders. Lotte has a particularly woolly structure. The country
s Fair Trade Commission says its 416 circular shareholdings account for over
90% of all those at South Korean firms. According to Chaebul.com, Shin Kyuk-ho
uses these to control the Lotte group through a minuscule 0.05% stake (Lee
Kun-hee, the ailing chairman of Samsung, has 2.24% of his group).
At this week s press conference Shin Dong-bin vowed to eliminate at least
four-fifths of these cross-shareholdings; to push for a listing of Hotel Lotte;
and to switch Lotte Korea to a holding-company structure. The finance minister,
Choi Kyung-hwan, had given warning that state agencies would scrutinise Lotte s
opaque ownership structure and cashflow if necessary; the Fair Trade
Commission and the Financial Supervisory Service have already begun
investigations. The Federation of Small Business Owners, a 7m-strong lobby, has
launched a boycott of Lotte products; some shopkeepers say they may refuse to
accept Lotte credit cards.
This is in part because all the talk of ownership structures has ignited
nationalist sentiment. The Shins use Japanese names and speak halting, accented
Korean. Many South Koreans have learned that Lotte is, in effect, controlled
from Japan just at the moment when they are celebrating 70 years of being freed
from Japanese occupation. In a show of patriotism for the anniversary, Lotte
made much of a huge South Korean flag that it displayed (at a cost of $100,000)
on the unfinished Lotte World Tower in Seoul. The skyscraper, soon to be the
tallest in the country, has been beset by safety issues. South Koreans have
grumbled that Lotte is trying to conceal its problems with their national flag.