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.