Abstract In 1999, the Daewoo Group, one of the biggest transnational conglomerates, collapsed, committing a staggering $15.

3 billion in accounting fraud in the process, the largest in world history. In !!", its chairman was sentenced to eight years in prison and a disgorgement penalty of $ .# billion. Daewoo$s problems, howe%er, did not remain a case isolated to &orea and their mighty, family'controlled conglomerates called (chaebol.) Daewoo$s demise foreshadowed corporate scandals that more recently ra%aged confidence in financial mar*ets around the world. +eading financial institutions, in%estment ban*s, securities analysts, accounting firms and credit agencies from around the world failed to address its problems. Despite its warnings, policy discussion focusing on the importance of reputational intermediaries and gate*eepers in particular has only recently emerged. ,his forensic study analy-es the history of Daewoo, a ma.or chaebol, focusing on the implications of its %ast corporate go%ernance meltdown. It sur%eys Daewoo$s internal corporate go%ernance, particularly its controlling shareholder, boards of directors, officers, employees and ban*s. /urthermore, the e0ternal corporate go%ernance landscape and the failure of reputational intermediaries, gate*eepers and public institutions are e0plored. 1y analy-ing an 2sian conglomerate from a leading emerging mar*et, this study also contributes to the comparati%e corporate go%ernance literature regarding the importance of formal law and enforcement and the trends toward con%ergence. ,his study highlights the emergence of functional substitutes to traditional remedies under formal corporate law for the implementation of legal enforcement and creation of corporate go%ernance discipline. It also traces how &orean companies ha%e con%erged toward a more shareholder'oriented corporate go%ernance model from a state'oriented model. /inally, the ineffecti%e corporate go%ernance system in place at the time of the 2sian financial crisis pro%ides a bac*drop for the reforms that followed.

2 /orensic 3tudy of Daewoo$s 4orporate Go%ernance5 Does 6esponsibility for its 7eltdown +ie 3olely with the Chaebol and &orea8 999999 9991
I.INTRODUCTION.................................................................................................................................2 II.THE CHAEBOL AND THE FINANCIAL CRISIS..........................................................................7 2.,:; 72&I<G =/ ,:; G6;2, ><I?;63;.............................................................................................# 1.,62GI4 :;6=5 4:2I672< @== 4:==<G &I7...............................................................................13 4.4:2;1=+ 1>3I<;33 A624,I4; 2<D 4>+,>6;.................................................................................1" D./2,2+ D;4I3I=<3 D>6I<G ,:; 23I2< /I<2<4I2+ 4=<,2GI=<....................................................... ;.244=><,I<G /62>D 2<D ,:; 16I,I3: /I<2<4; 4=6A=62,I=<.................................................... 9 III.INEFFECTUAL INTERNAL CORPORATE GOVERNANCE..................................................35 2.4=<,6=++I<G 3:26;:=+D;6$3 I7A;6I2+ 4=<,6=+......................................................................3" 1.4;6;7=<I2+ 6;A6;3;<,2,I?; DI6;4,=63, DI6;4,=63 2<D 3,2,>,=6B 2>DI,=63...................C5 4.I<?;3,=6 A233I?I,B........................................................................................................................5! D.4=7A+I2<, 4=77;64I2+ 12<&3 2<D 3I+;<, D;1,':=+D;63....................................................55 ;.+21=6 +I7I,2,I=<3........................................................................................................................."3 IV.WHERE WERE THE GATEKEEPERS AND PUBLIC GUARDIANS?...................................66 2.244=><,I<G =?;63IG:,5 4:=<G'>< 2<D 32< ,=<G.................................................................."D 1.I<?;3,7;<, 12<&3, 3;4>6I,I;3 2<2+B3,3 2<D 46;DI, 62,I<G 2G;<4I;3...............................#C 4./I<2<4I2+ 3>A;6?I3=6B 3;6?I4;, /2I6 ,62D; 4=77I33I=< 2<D &DI4....................................D D.A6=3;4>,=63, 4=>6,3 2<D =,:;6 A>1+I4 G>26DI2<3...............................................................93 V.CONCLUSIONS...............................................................................................................................103

Associate Professor of Law and Executive Director, Hills Governance Center, Graduate onsei !niversit"# $his article was %ade &ossible b" financial

School of International Studies, su&&ort fro%

onsei !niversit"'s Center for Global Studies ())* +esearch ,und# $he author

would li-e to than- Hee.un/ 0i%, 1eon/hoon Seo, 2atthew Huh, Su"oune Lee, 1oo"oun/ 0i%, 1unhee 0i%, 1isoo Lee, 3#4# I%, +obin Chun/ and, in &articular, 2ihwa Par- for their dedicated assistance in &re&arin/ this article# An earlier version of this &a&er a&&eared in a %ono/ra&h titled 5Anato%" of an Asian Con/lo%erate,6 Asian Cor&orate Governance Case Studies Series, Hills Governance Center at onsei !niversit" 7())89#

I. Introduction

2t the end of 1999, one of the largest conglomerates in the world, the Daewoo Group, collapsed in spectacular fashion. During its pea*, Daewoo was a sprawling enterprise with o%er 3 !,!!! employees in 5!! domestic and foreign companies that operated in o%er 11! countries.( Its management recei%ed widespread praise and academic recognition for its success.: Bet, when the financial crisis hit, it managed to commit .9 trillion won E$15.3 billionF in deception that was termed the

(biggest accounting fraud in history, surpassing @orld4om and ;nron.)* Bears later,

Louis 0raar, 4anted, ,;+$!<E, ,eb# :, ()):, at 1):# 1ohn A# =uelch > Chanhi Par-, Daewoo's Globali?ation@ !?ADaewoo Auto Pro.ect, <;# CA8CDA)E8 72ar# (:, 1CCD9F David !&ton >

HA+BA+D 3!SI<ESS SCH;;L CASE S$!D

3owon 0i%, Daewoo Shi&buildin/ and Heav" 2achiner", HA+BA+D 3!SI<ESS SCH;;L CASE S$!D <;# CAEC8A))1 7;ct# 1, 1CC*9F Bideota&e@ Daewoo Grou&@ Chair%an 0i% 7,rancis 1#

A/uilar, Harvard 3usiness School Case Stud" CADD8A81), A&r# 1), 1CD89F ,rancis 1# A/uilar > Don/ Sun/ Cho, Daewoo Grou&, HA+BA+D 3!SI<ESS SCH;;L CASE S$!D 71ul" (:, 1CD*9# See also 2ICHAEL 1# E<+IGH$
E$ AL#,

<;# CA:D8A)1* 0;+EA< CHAE3;L

DAE4;;

A<D $HE

7!niversit" of Hon/ 0on/, H0!1*:, Au/# 18, ())19F Donald Sull et al#, Sa%sun/ and

Daewoo@ $wo $ales of ;ne Cit", HA+BA+D 3!SI<ESS SCH;;L CASE S$!D
71une (, ())*9#
*

<;# CAD)*A)88

,i/ures on the exact a%ount of accountin/ fraud have ran/ed as hi/h as ei/ht" trillion won

7G8:#: billion9 and 4orldCo%'s accountin/ fraud onl" a%ounted to G 11 billion# 0raar,

su&ra note Error@ +eference source not found, at 1):F Andrew 4ard, 0i% $ries to 2end Da%a/ed +e&utation, ,I<# $I2ES, 1an# (:, ()):, at (H 75world's bi//est accountin/
fraud69F South 0orea Du%&s the Past, at Last, EC;<;2IS$, <ov# C, ())) 75world's

inner'wor*ings of the conglomerate are finally coming to light. 2fter hiding as a fugiti%e o%erseas for o%er si0 years, Daewoo$s chairman, @oo 4hoong &im, returned to &orea in Gune !!5 to face criminal charges. In !!", he was sentenced to eight and a half years in prison and disgorgement of a staggering 1#.9 trillion won E$ 1#.9 billionF.5 ,his .uncture ser%es as an opportune time to assess the ramifications of the Daewoo debacle. 2round the world, corporate go%ernance has emerged as a focal point in the reform of companies. In 2sia, a consensus e0ists that failure of corporate go%ernance played a pi%otal role in precipitating the financial crisis. " 4ontagion spread largely as
lar/est cor&orate failure69# 2uch debate exists as to the exact a%ount of the accountin/ fraud and how to calculate it# $he exchan/e rate conversions &rovided for the reader's convenience a&&l" the followin/ rates for the 0orean won &er !#S# dollar@ C)) won before 1CCH, 18)) won in 1CCH, 1*)) won in 1CCD, 1()) won fro% 1CCC until ()): and 1))) won in ())* and thereafter#
8

1ud/%ent of <ov# :, ())E, Seoul Hi/h Court, ())E <o 11(H, aff'/ but %odif"in/,

1ud/%ent of 2a" :), ())E, Seoul District Court, ())8 Gohab 8DD, ())8 Gohab HC*, ())8, Gohab :E* 7ori/inal sentence was 1) "ears i%&rison%ent and (1#* trillion won dis/or/e%ent9# Si%ilarl", in A&ril ())8, the Su&re%e Court u&held &rison sentences and dis/or/e%ent ran/in/ as hi/h (:#)H trillion won 7G1C#( billion9 a/ainst the %ost senior Daewoo executives# 1ud/%ent of A&r# (C, ())8, Su&re%e Court, ())( Do H(E(# Leadin/ cases will be reviewed in sections III and IB of this article# 2eanwhile, do?ens of civil cases re%ain &endin/#
E

Eric ,ried%an, Si%on 1ohnson > $odd 2itton, Cor&orate Governance and Cor&orate Debt
A<D

in Asian Crisis Countries, in 0;+EA< C+ISIS

+EC;BE+

7David $# Coe > SeA1i- 0i%

eds#, Int'l 2onetar" ,und and 0orea Inst# for Int'l Econ# Polic" ())(9F Si%on 1ohnson et al#, Cor&orate Governance in the Asian ,inancial Crisis, 8D 1# ,I<# EC;<# 1*1 7()))9F ;+G#
,;+

EC;<# C;A;PE+A$I;<

A<D

DEB#, 4HI$E PAPE+

;<

C;+P;+A$E G;BE+<A<CE

I<

ASIA 8

7()):9 Ihereinafter ;ECD 4HI$E PAPE+J#

a result of inherent wea*nesses of conglomerates and ban*sH for &orea, for instance, problems with family'dominated chaebol pro%o*ed its collapse.# ,he trials and tribulations of a ma.or 2sian conglomerate such as Daewoo offer an understanding of the ramifications of poor corporate go%ernance in an emerging mar*et. ,he tale of Daewoo, in particular, ser%es as one of the earliest warning signs of the corporate go%ernance brea*downs that later plagued leading companies around the world. It predated ;nron, @orld4om, ,yco, ?i%endi, 2hold and Aarmalat, scandals that de%astated confidence in global mar*ets. Daewoo, howe%er, did not remain a case isolated to &orea. @orld'renowned, international financial institutions, in%estment ban*s, money managers, financial analysts, accounting firms and credit rating agencies, all failed to react to the situation. Daewoo$s meltdown was categori-ed as a remote problem in a faraway region. ,he wa%e of policy discussion on the imperati%es of ha%ing effecti%e reputational intermediaries and gate*eepers, for instance, came later.D 2 case study of Daewoo within the conte0t of comparati%e corporate go%ernance also sheds light on the efficacy of formal law, the importance of
H

Chaebol %eans con/lo%erate or literall" 5financial cliKue6 or 5%one" cliKue6 in

Chinese characters and ste%s fro% the ter% ?aibatsu in 1a&anese# See /enerall" ;-A+ial Son/,

$he Le/ac" of Controllin/ 2inorit" Structure@ A 0aleidosco&e of Cor&orate Governance +efor% in 0orean Chaebol, :* LA4 > P;LL
I<$LL 3!S# 1D: n#1 7())(9# 1ohn ;# Hale",

Chinese AntiA2ono&ol" Law@ Co%&etition Polic" ,or East Asia, : 4ASH# !# GL;3AL S$!D#
L# +EB# (HH n#H 7())*9# 0orean words have been ro%ani?ed accordin/ to the 2inistr" of Culture and $ouris%'s ro%ani?ation s"ste%, exce&t for &ro&er na%es of &ublic fi/ures, &ublications that have their own &references or co%%onl" used ter%s such as chaebol#
D

1ohn C# Coffee, Gate-ee&er ,ailure And +efor%@ $he Challen/e ;f ,ashionin/ +elevant

+efor%s, D* 3#!# L# +EB# :)1 7())*9#

enforcement and the potential for con%ergence among go%ernance systems. 9 It will show how corporate go%ernance mechanisms ha%e been acti%ated not only through statutory reforms but also through alternati%e ways for establishing legal compliance. 7ost notably, &orea has de%eloped a uniIue means of enforcement discipline outside traditional remedies based upon corporate or securities law. /inally, this study shows how a transplant country from a mi0ed ci%il law tradition has con%erged toward a more shareholder'oriented corporate go%ernance model from a state'oriented model.1! :ow much corporate go%ernance problems relati%e to ill'ad%ised business decisions and e0ternal factors played a role in the collapse of companies such as Daewoo remains a difficult Iuestion. 2pplying (modern) concepts of corporate go%ernance might be inappropriate gi%en &orea$s le%el of economic de%elopment at the time. ,he term (corporate go%ernance,) for e0ample, did not e0ist in the &orean business %ernacular.11 3ome insist Daewoo was a %ictim of e0ternal shoc*s or a
C

Ste&hen Choi, Law, ,inance and Path De&endence@ Develo&in/ Stron/ Securities 2ar-ets, D)

$EM# L# +# 1E8H 7())(9#

1)

1ohn C# Coffee, $he ,uture As Histor"@ $he Pros&ects for Global Conver/ence in

Cor&orate Governance and its I%&lications, C: <4# !# L# +ev# E*1, EHCAD( 71CCC9F Henr"
Hans%ann > +einier 0raa-%an, $he End of Histor" for Cor&orate Law, DC GE;# L#1# *:C, **EA*H, *81 7())19F +onald 1# Gilson, Globali?in/ Cor&orate Governance@ Conver/ence of

,or% or ,unction, *C A2# 1# C;2P# L# :(C 7())19#

11

Bariations of the conce&t cor&orate /overnance first a&&eared in 1CD1 and were ex&lored

after 1CC: b" nu%erous scholars# A %ore unified definition onl" e%er/ed in 1CC8# Deu-A1oon u, GiAeo&Aui .aAbonAsoA"uA/uA.oAwa .iAbaeA/uA.oAe /wanAhan "eonA/u IA Stud" on Ca&ital

and Governance Structure of PublicAHeld Cor&orations J, in 0;+EA SEC!+I$IES ACADE2 ,

S
2P;SI!2

1 71CD19F

oun/A1o 0i%, SoA"uAwa /"eon/A"eon/Aui bunAriAe /wanAhan biA&anA

.eo- nonAui IA Critical Biew of the Se&aration of ;wnershi& and 2ana/e%ent J, (C I<D!S$+
A<D

2G2$# 71CC(9F 4;;<GAGI I2

E$ AL#,

I<S$I$!$E

;,

EAS$

A<D

4ES$ S$!DIES

;,

scapegoat of political intrigue.1 ,hey cite how Daewoo affiliates ha%e rebounded to profitability.13 @ith benefit of hindsight, forensic studies can e0aggerate faults and causes that might appear self'e0planatory. ,hese challenges will be addressed. ,his article begins with a comprehensi%e re%iew of the history of Daewoo, particularly relati%e to other chaebol conglomerates. 3econd, the article will pro%ide a sur%ey of the internal corporate go%ernance of Daewoo, particularly through its board of directors, officers, shareholders and ban*s. ,hird, the e0ternal corporate go%ernance landscape will be described through the failure of reputational intermediaries, gate*eepers and public institutions. ,his article will argue that while primary responsibility lies with Daewoo$s own internal problems and &orea$s underde%eloped corporate go%ernance framewor*, other mar*et players, particularly leading international ones, cannot escape deri%ati%e responsibility. 4orporate go%ernance policy in emerging mar*ets must be reformulated to reach a more balanced and comprehensi%e perspecti%e.

;<SEI G!

!<IBE+SI$ , G;<GAGIAE;PA!I
A<D

2I<A E;<GAH4AA4A GIAE;PAG!A1;AE G4A<AHA< ;,

E;<A

IP+IBA$INA$I;<

C;+P;+A$E S$+!C$!+E

P!3LIC E<$E+P+ISES

I<

0;+EAJ 71CC:9F

0;+EA SEC# S!PE+BIS;+

SE+BICE, SEC!+I$IES > EC;<;2IC I<,;+2A$I;< 7Se&t#A;ct# 1CC:9F

;,

04A<GAS!< CH!<G, 0;+EA I<S$# 71CC*9.

1(

,I<#, C;+P;+A$E C;2PE$I$IBE<ESS

A<D

G;BE+<A<CE

Daewoo .aAsalAinA/a taAsalAinA/a I4as Daewoo a Suicide or 2urderJ, HA<AG!0AG

())( Ihereinafter Daewoo SuicideJ#

E;<GA1EA

SI<A2!<,
1:

et, this onl" &roves the i%&ortance of cor&orate /overnance because these co%&anies onl"

beca%e viable after the" beca%e inde&endent fro% the con/lo%erate# 1on/ASei Par- > oun/A1in 0i%, GeuAru&AhaeAche 8 n"eonODaewooA/a salAaAitAda I,ive

ears after Grou&

Dis%antle%entODaewoo Lives ;nJ, CH;S!< IL3;, <ov# :), ())*, at 1, :#

II. ,he 4haebol and the /inancial 4risis

$his

chapter pro%ides the bac*ground of Daewoo from its beginning to its

demise in the aftermath of the financial crisis. It e0plains how it became a leading conglomerate under &orea$s state'oriented corporate go%ernance system. @oo 4hoong &im$s role as founder, chairman and controlling shareholder of the Daewoo Group is then profiled. ,he chapter describes the characteristics of the chaebol, family'controlled conglomerates that dominated the economy. 2n analysis of the impact of the financial contagion sets the stage for an e0amination into the historic accounting fraud and corporate go%ernance failures that brought down the conglomerate.

2. ,he 7a*ing of the Great >ni%erse

In 19"#, 31'year'old @oo 4hoong &im founded Daewoo Industrial, a te0tile e0porter, with .ust fi%e employees and $1!,!!!. ,he two 4hinese characters for Daewoo meant (Great >ni%erse,) true to the ambitions of the young entrepreneur. /rom its humble beginnings, business e0panded rapidly and, by 19# , it became the second largest e0porter in &orea. Daewoo played a ma.or role in &orea$s economic success when the country achie%ed the (7iracle of the :an 6i%er) and transformed itself from an underde%eloped bac*water into a de%eloped nation in the span of forty years. >nder &im$s guidance, by 199", Daewoo became the world$s largest transnational entity among de%eloping countries, surpassing such companies as Jero0, 2moco, ?ol%o, /u.itsu and Gla0o @ellcome.1*
1*

Calculated based u&on forei/n assets. !<C$AD 4orld Invest%ent +e&ort 1CCH@

$ransnational Cor&orations, 2ar-et Structure and Co%&etition Polic", !nited <ations, at xvii

Daewoo e0celled at acIuiring distressed companies, mostly from the go%ernment and then turning them around. In 19#", for instance, Daewoo assumed control o%er :an*oo* 7achinery +td., a manufacturer of industrial machinery, rolling stoc* and diesel engines that had not shown a profit for thirty'eight years. 3enior e0ecuti%es had opposed the acIuisition, but @oo 4hoong &im$s pre%ailed upon them.15 2fter changing its name to Daewoo :ea%y Industries, the company started generating profits in its first year. In another fabled e0ample, in 19#D, Daewoo acIuired =*po 3hipping 4ompany, a company teetering on ban*ruptcy. 1" 7erged into Daewoo :ea%y Industries, &im guided the shipyard to positi%e returns by 19D3. Daewoo$s mode of acIuisition, turn around and e0pansion became a trademar* of the conglomerate. 7oreo%er, ma.or companies were not established by Daewoo but obtained through mergers or acIuisitions. 2nother cornerstone of Daewoo$s business strategy was its orientation toward e0ports. >nli*e other chaebol, Daewoo championed an international focus from its beginning. ,he group prided itself on its ability to spearhead the opening of new mar*ets o%erseas. 1y 19#9, it became the largest e0porter in &orea, following the go%ernment$s economic de%elopment plans of e0port'led growth.1H Daewoo launched a Global 7anagement 3trategy in 1993 to further e0pand its operations across the
> E*#
18

A/uilar > Cho, su&ra note Error@ +eference source not found, at :. Daewoo received a host of incentives for ta-in/ over ;-&o# Don/ Gull Lee, $he
I<

1E

+estructurin/ of Daewoo, in EC;<;2IC C+ISIS A<D C;+P;+A$E +ES$+!C$!+I<G

18: 7Ste&hen Ha//ard et al# eds#, Ca%brid/e !niversit" Press ()):9#
1H

0;+EA

D;<GASE CHA > 04A<GASE;0 0I2, 0;+EA DEB# I<S$#, HA<AG!0AG (1

SEAGI 3IA1E;<

E;<GA1E 3A<ASEAGI@

E;0ASAA1E;0AP E;<GAGAA4A

I0;+EA< EC;<;2

;,

HAL,

CE<$!+ @

HIS$;+IC EBAL!A$I;<

A<D $HE

(1S$ CE<$!+

BISI;<J 71CC89#

world.1D 1y 199D, they established o%er 5!! subsidiaries.19 =%er 3 !,!!! employees wor*ed worldwide in 11! countries, from 3outh 2merica to 2frica and ;astern ;urope.() Despite security ris*s, Daewoo was e%en among the first to try to de%elop business with <orth &orea.(1 4ritics claimed that Daewoo succeeded because of its ability to e0tract support from the go%ernment through rent'see*ing while le%eraging itself that it had become too important to be allowed to falter. In 19DD, for e0ample, they faced disaster when Daewoo 3hipbuilding and :ea%y 7achinery %erged on collapse due to a crushing 1. trillion won E$1.D billionF in debt following deteriorating mar*et

conditions. 2mid criticism that the company should ha%e undergone insol%ency proceedings according to mar*et principles, the go%ernment bailed it out with a C!! billion won E$"!! millionF restructuring pac*age in 19D9. ,he generous rescue

1D

Don/A1ae 0i%, GeulAroAbeolAdeuAri%Aeul silAh"eonAhaAneun sinA/"eon/A"eon/A.eonAn"aEAGA E;LA+I<ADA

I<ew 3usiness 2ana/e%ent Strate/" to ,ulfill a Global Drea% J, in SEAG

2IA+AEAGA 3;AI<ADA

I$HE 4;+LD

IS

;PE<I<G

A<D

;!

CA< SEE

$HE

,!$!+EJ 71aeA

2"eon/ Seo ed#, HaeA<ae% 1CCD9#

1C

4onA1on/ 0oh, $he Chaebol +estructurin/ +ace 3e/ins, <;2!+A, 1une 8, 1CCD, at D

75the ris- involved 7in this t"&e of ex&ansion9 should not be understated69#
()

0raar, su&ra note Error@ +eference source not found, at 1):F E<+IGH$

E$ AL#,

su&ra note

Error@ +eference source not found, at 11.

(1

0i% beca%e the first business leader to visit <orth 0orea and Daewoo beca%e the first

0orean business entit" to invest there# 2ar- Clifford, $he Daewoo Co%rade@ South 0orean

,ir% 3la?es <orthern $rail, ,A+ E# EC;<# +EB#, ,eb# (), 1CC(, at *H#
((

2ar- Clifford, 3rea-in/ !& is Hard to Do, ,A+ E# EC;<# +EB#, 2a" 11, 1CDC, at E:F

Seoul 4ill Aid Shi&builders, <# # $I2ES, Au/# (C, 1CDC, at D1DF !&ton > 0i%, su&ra note
Error@ +eference source not found#

pac*age reasserted Daewoo$s lobbying ability while confirming the go%ernment$s inability to ta*e decisi%e action. ,his fueled the myth that Daewoo and other chaebol had become too big to fail. 4haebol engaged in increasingly ris*ier beha%ior in the belief that they could rely upon go%ernment inter%ention when in .eopardy. In 19#D, Daewoo embar*ed on its tragic foray into the automobile industry through a 5! percent acIuisition of 3aehan 7otor in a .oint %enture with G7 &orea. @hat later became Daewoo 7otor met both the strategy of turning around distressed companies and e0panding through e0ports. ,he company sought growth and mar*et share instead of focusing on profitability and research and de%elopment. 2fter first buying out G7$s remaining 5! percent sta*e in 1991, a series of entries into foreign automobile mar*ets followed.
3

In 199C, they acIuired the 1ritish International

2utomoti%e Design E@orthing ,echnical 4entreF and entered into an automobile .oint %enture with 6odae in 6omania for $3!! million. In 199", they entered the Aolish automobile mar*et with the $1.1 billion acIuisition of /3=.(* ,hey bought a southern Aoland truc* factory for $#!! million, 4-ech 6epublic$s 2%ia truc* manufacturer for $ !! million, >-be*istan$s >- car plant and teamed up with other carma*ers from

(:

Daewoo was not the onl" exa%&le of a 0orean co%&an" %a-in/ a fora" into the

auto%obile industr" that later &roved devastatin/# Shinhan 2otor, 0ia 2otor, Ssan/"on/ 2otor and even Sa%sun/ 2otors all are exa%&les of critical failures in 0orean cor&orate histor"# ,ord later su//ested that the" dro&&ed their bid for Daewoo 2otor later on because of the &oor business &ros&ects of turnin/ it around not because of hu/e debts# South 0orea

Du%&s the Past, at Last, su&ra note Error@ +eference source not found#
(*

1ane Perle?, Euro&ean 3eachhead ,or 0orean A%bition, <# # $I2ES, 1ul" (*, 1CCE, at D1

75How Daewoo, a debtAladen co%&an", &lans to finance the ra&id ex&ansion is not exactl" clear69#

1)

>*raine and India.(8 ,he acIuisition spree led to 1C new %ehicle plants in 13 countries that culminated with the purchase of a 51.9DK sta*e in 3sangyong 7otor in Ganuary 199D at the height of the financial crisis.(E 6ec*less e0pansion into the automobile business o%erwhelmed the conglomerate.(H 7eanwhile, Daewoo$s financial structure precariously relied upon debt. @hile debt'to'eIuity ratios for chaebol e0ceeded C!! percent, Daewoo surpassed e%eryone in its o%er'reliance on debt. 2s early as 19DD, with o%er $11. billion in borrowings, Daewoo stood as &orea$s most indebted conglomerate #(D Its debt gearing allegedly reached as high as ,!!! percent. (C In fact, for foreign in%estment pro.ects, Daewoo followed a (one'hundredth strategy.) ,hey boasted that they only reIuired one percent of the total capital needed for a pro.ect because they could finance the rest through preferential loans from foreign country$s ban*s, inter'subsidiary debt payment guarantees, .oint in%estment from local in%estors and other sources.:) 2nother notable feature was that the de facto holding company, the Daewoo 4orp., was not the profit center of the conglomerate. :1 Daewoo 4orp. primarily acted
(8

1an/A eol Chun/, SeA/"eA/"eon/A"eon/Aui daeAdoAba- I$he Global 3usiness Strate/"'s CH;S!<, Dec# 8, 1CCE, at *EA*H#

Ga%bleJ, 4EE0L
(E

Don/AHan Lee, DaewooA/euAru&Aui haeAche .un/AsanAseo IAn Accountin/ of the CH;S!<, Dec# 1CCC# See Section II#D#

Dis%antle%ent of DaewooJ, 2;<$HL

(H

Daewoo had also atte%&ted to enter the oil refiner" business b" acKuirin/ Hanwha Ener/"

and al%ost acKuired ,rance's $ho%&son 2edia in return of assu%in/ its crushin/ debt of *#D billion ,rancs.
(D

2ar- Clifford, !nderAPowered Perfor%er, ,A+ E# EC;<# +EB#, Dec# D# 1CDD, at 8(# Lee, su&ra note Error@ +eference source not found, at 18C#

(C

:)

Id# at 18:#
Lee, su&ra note Error@ +eference source not found, at 188A18E#

:1

11

as a trading and financial company for products and ser%ices. In difficult times, therefore, it did not ha%e capacity to pro%ide financial support to wea*er affiliates. Instead, it later ser%ed as the group$s ner%e center that directed the use of offshore entities as conduits for the accounting fraud. >nsurprisingly, Daewoo recei%ed the lowest mar*et %aluations and had to pay the highest interest rates among the chaebol. 4apital mar*ets long discounted Daewoo companies. 2s of 2pril 199#, for e0ample, Daewoo had a 1.1 price'to'boo* ratio, the lowest among leading conglomerates, which a%eraged more than two.3 Daewoo$s actual interest rates were ." percent higher than the a%erage among the top'fi%e chaebol in 199#.33 ,he spread between Daewoo bonds and other chaebol was already one percent in 199D, but increased to two to three percent by early 1999. 3C ,he discounts and spreads reflected the mar*et$s uncertainty o%er Daewoo$s earnings prospects relati%e to its ris*s. =f course, e%en these discounts were far too generous, considering what was concealed through the accounting and loan fraud. <e%ertheless, the %aluations reflect the degree of *nowledge that mar*et participants, particularly sophisticated domestic and foreign ones, held of the ris* in dealing with the conglomerate. <otwithstanding, the sustainability of the Daewoo brand name is e%ident in the fact that its brand image and brand recognition still remain strong in the
:(

Id# at 18H#
4on.on/ 0oh, Alar% 3ells are +in/in/, <;2!+A, ;ct# 1CCD, at :#

::

:*

Daewoo Suicide, su&ra note Error@ +eference source not found, at H(. Its co%%ercial &a&er

rates were also three to five &ercent hi/her than other /rou&s b" late 1CCD . DaewooA/euAru&

weoA-euAaAut chuA.inAh"eonAhwan/ %it h"an/AhuA/"eAhwe- IDaewoo Grou& 4or-out Current Status and ,uture PlansJ, 2I<IS$+
C;22ISSI;< > 3A<0
;, ;,

,I<A<CE

A<D

EC;<;2 , ,I<A<CIAL S!PE+BIS;+

0;+EA, <ov# *, 1CCC Ihereinafter 1CCC Govern%ent +e&ortJ, at (#

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international mar*etplace.35 2fter the conglomerate$s collapse nearly a do-en companies continue to operate under the Daewoo brand name. 3" +eading Daewoo companies e%en retain the same senior management. 3# Bet, the success of the companies in many ways demonstrates the importance of corporate go%ernanceH they ha%e only managed to become competiti%e enterprises after they unshac*led themsel%es from the collecti%e burdens of the conglomerate.3D 2s independent companies, they can now operate for their own benefit without regard for the welfare of other affiliates.

1. ,ragic :ero5 4hairman @oo 4hoong &im

Daewoo cannot be separated from its legendary founder, @oo 4hoong &im. :e not only established it, but determined its course, dominated decision'ma*ing and handpic*ed e0ecuti%es. In terms of business strategy, he maintained the same management perspecti%e until the end5 sei-e mar*et share first, Iuash competition and
:8

Accordin/ to the consultanc", Interbrand, in its ())* +eaders' Choice Awards, Daewoo

still ran-ed ECth in the world for the brand for the %ost /lobal i%&act# Global +an-in/s,

available at Phtt&@QQwww#brandchannel#co%Qbot"RresultsQ/lobalRlist#as&S 7last visited 2ar# H,

())H9#
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1on/AHo 0i%, DaewooAneun salAaAitAdaT IDaewoo Still LivesTJ, 2;<$HL

CH;S!<, 1an#

())*#
:H

Lo"alists still wait for the co%ebac- of their charis%atic leader 4oo Choon/ 0i% . See

Phtt&@QQwww#hidaewoo#co%S and Phtt&@QQwww#daewoolove#co%S for websites o&erated b" lo"al Daewoo su&&orters#7last visited 2ar# H, ())H9# :D Par- > 0i%, su&ra note Error@ +eference source not found, at 1, :# ;ne of Daewoo's crown .ewels, Daewoo Heav" Industries and 2achiner" has finall" been &ut u& for sale b" 0A2C; and 0D3# ,rancesco Guerrera, Doosan Lto 4in Daewoo,L ,I<# $I2ES, ;ct# 1*, ())*# 1:

see* collection later.39 ,oward this end, he ma0imi-ed his e0pertise in corporate turn' arounds and rent'see*ing. :is global perspecti%e on the need for &orean companies to de%elop o%erseas mar*ets was %isionary, particularly gi%en reclusi%e tendencies of &oreans. :e tra%eled around the world o%er "! days out of the year see*ing business opportunities.C! :is indomitable spirit, tireless energy and grand dreams for &orea attracted a legion of professionals. In the end, he deser%es the most credit for the conglomerates$ success but remains primarily responsible for its meltdown. &im built the Great >ni%erse of Daewoo into a multinational conglomerate in less than two decades. 6ecogni-ed as one of the world$s most successful businessmen, he was profiled in leading business maga-ines e%erywhere. In 19DC, he recei%ed the International 4hamber of 4ommerce$s co%eted International 1usiness 2ward that was conferred by 3weden$s &ing 4arl Gustaf J?I. :e wrote a bestselling autobiographical boo*, (;%ery 3treet is Aa%ed with Gold,) that sold o%er two million copies.C1 Aublished in 1 languages, it propounded his corporate philosophy on the need to e0pand internationally. In /ebruary 1999, he became captain of &orean

:C

Accordin/ to one anecdote, 0i% sold news&a&ers when he was "oun/# Co%&etition was

fierce in warAtorn 0orea and he was one of the fastest deliver" bo"s in the nei/hborhood# He then devised a strate/" that solidified his &osition as the %ost &rofitable deliver" bo" in the re/ion# He discovered that he lost si/nificant ti%e a/ainst his co%&etitors in the &a"%ent collection &rocess so he decided to first deliver as %an" news&a&ers as he could and then collect &a"%ent afterwards# He calculated that he would be far %ore &rofitable even if he

did not receive &a"%ent for so%e news&a&ers# He soundl" beat out his co%&etitors#
*)

1aeAHoon Shi%, Head of the !niverse, ,A+ E# EC;<# +EB#, 2a" 1, 1CCH, at *EF Lax%i

<a-ar%i, Globali?ation@ Good Intentions, ASIA4EE0, ,eb 1D, ())), at 1#

*1

4;; CH;;<G 0I2, EBE+

S$+EE$

IS

PABED

4I$H

G;LD 74illia% 2orrow > Co%&an"

1CC*9# 0raar, su&ra note Error@ +eference source not found, at 1):#

1*

industry when he was elected president of the influential /ederation of &orean Industries E/&IF, official organi-ation of &orea$s largest businesses.C Aolitically, Daewoo benefited from &im$s instincts and apparently his personal relationship with Aresident 4hung :ee Aar*, the contro%ersial autocrat who ruled &orea from 19"1 until 19#9.C3 2lthough a latecomer compared to other established conglomerates, Daewoo blossomed under Aar*$s industrial policy during the 19"!s and 19#!s. &im managed to e0tract concessions from the go%ernment, especially when ta*ing o%er distressed companies. @hile the go%ernment would engage in predation of its own, time and time again, they would succumb to &im$s reIuests for support. 2fter Aar* died, Daewoo continued to rely on &im$s political acumen to steer them out of difficulties. During the financial crisis, &im$s political wherewithal and managerial .udgment faltered, leading Daewoo to catastrophe. 1y the summer of 1999, he departed the country in self'imposed e0ile.CC :e returned after si0 years of hiding on his %olition to recei%e an eight'year prison sentence in !!", with numerous ci%il trials still pending. In his own words, he claimed that (LmMy big mista*e was being too

*(

See /enerall" Phtt&@QQwww#f-i#or/#S7last visited 2ar# H, ())H9#

Par- re&ortedl" favored 0i% because 0i%'s father was a for%er hi/h school teacher of

*:

his who% he had res&ected# Don 0ir-, ,or DaewooLs ,ounder, Pride 3efore the ,all , <# # $I2ES, ,eb# (:, ())1, at 41#
**

His 0orean &ass&ort ex&ired in ())( and accordin/ to the 0orean <ational Polic" A/enc", eon/AEun 1an/, 0i%AwooAchoon/Assi DHAn"eon &euA

in 1CDH, he acKuired ,rench citi?enshi&#

ran/Aseu /u-A.eo-AchwiAdeu- I4oo Choon/ 0i% AcKuires ,rench Citi?enshi& in 1CDHJ,

;<HAP

<E4S, Dec# (H, ())(# $he District Court decision that sentenced hi% to ten "ears

i%&rison%ent confir%ed that he was a ,rench citi?en# ())8 Gohab 8DD, su&ra note Error@

18

ambitious, especially in autos. I tried to do too much too fast.)C5 /undamentally, &im failed to follow basic legal and managerial principles such as accounting, internal controls and financial discipline, placing too much emphasis upon generating sales and mar*eting. 4orporate go%ernance was unobser%ed. :e did not heed warnings to retract and instead chose to e0pand through unprecedented accounting and loan fraud.C" In the end, ultimate responsibility for the catastrophe lies with him.

4. 4haebol 1usiness Aractice and 4ulture

,he chaebol that dominated &orea$s economy shared many common features. <urtured under the go%ernment$s industrial policy, they followed the same financing methods, business models, ownership structures and operating practices. 2 state' oriented corporate go%ernance modus operandi pre%ailed as the country unified behind the chaebol according to the dictates of policy ma*ers.C# Interested parties such as shareholders, employees, consumers and managers recei%ed secondary priority gi%en the nation$s collecti%e focus on economic de%elopment and employment during the 19"!s and 19#!s. /irst and foremost, chaebol maintained a patriarchic, management style that re%ol%ed around controlling shareholder domination. ;0cessi%e concentration of power became the source of most corporate go%ernance problems. 4hairmen, ser%ing as both controlling shareholder and founder, reigned as moguls o%er empires of companies. ,he participation of directors, statutory auditors, e0ternal auditors and
*8

0raar, su&ra note Error@ +eference source not found, at 1):#

*E

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1H8.
Hans%ann > 0raa-%an, su&ra note Error@ +eference source not found, at *81#

*H

1E

non'controlling shareholders in the go%ernance process was subsumed under the command of chairmen. Defiant managers that dared to challenge imperial orders faced swift retribution, lea%ing controlling shareholders with uncontested authority. ,he state of predominance was compounded, particularly at senior le%el, because e0ecuti%es lac*ed alternati%e employment options due to poor labor mar*et fle0ibility. >nder a state'oriented corporate go%ernance system, go%ernment operated in an intertwined, symbiotic en%ironment with the chaebol. 4haebol operated according to go%ernment policy because by design they could recei%e (preferential policy loans, ta0 credits, subsidies, protection and e%en bailouts when LtheyM got into financial trouble.)*D Go%ernment pro%ided management'friendly labor laws, monopolies and oligopolies, special licenses and permits and trade and in%estment barriers from foreign competition. 4haebol recei%ed fa%orable treatment as long as they performed. /rom one perspecti%e, &orea$s economic success e%inces the merits of industrial policy based upon close industrial and go%ernment cooperation. 2t its worst, howe%er, collusion led to illegal rent'see*ing and predation. In the most egregious e0ample, for instance, a do-en leading chaebol chairmen, including @oo 4hoong &im, contributed o%er 51! billion won E$"3D millionF in bribes during the 19D!s and early 199!s to two Aresidents.*C 4hairmen claimed they could not defy the Aresidents$ solicitations for slush funds, yet the chaebol deri%ed significant benefits in return. Aolicyma*ers also protected the control of chaebol families. Initially, li*e
*D

Lee, su&ra note Error@ +eference source not found, at 18(A 18:# $he heads of all %a.or chaebol were %en# In 1CC8, 0orean courts held that 0i% &aid 1*)

*C

billion won 7G188 %illion9 in bribes to President +oh for a lucrative sub%arine contract a%on/ other ite%s# 1oon/i 0i% > 1on/ 3u% 0i%, Cultural Differences in the Crusade

A/ainst International 3riber"@ +iceACa-e Ex&enses in 0orea and the ,orei/n Corru&t Practices Act, E PAC# +I2 L# > P;L'
1# 8*C, 8EHAEC 71CCH9# See Section IB#D#

1H

other 2sian companies, families held large, concentrated ownership in their companies. In the 19#!s, howe%er, the go%ernment browbeat chaebol into listing ma.or companies on the stoc* e0change. 5! +isting ser%ed two purposes. 4ompelling chaebol families to disperse their ownership to the public would lead to sharing the benefits they deri%ed out of the special preferences that chaebol recei%ed. 51 3econd, rights offering ser%ed to pro%ide much'needed liIuidity to the fledgling stoc* mar*et. /amilies initially resisted listing their companies out of concerns that dispersion of their ownership could threaten their control. @ith generous indirect financing from ban*s, companies also had little need for eIuity financing. ,o con%ince them, the go%ernment decided to protect them from threats to ownership control by curbing shareholder and sta*eholder rights, the corporate control mar*et and challenges to the board =wnership dispersion coupled with wea*er, not stronger, minority shareholders protections sowed the seeds for corporate go%ernance problems. @ith control protected, entrenched families gradually allowed dilution of their cash flow rights with each rights offering. =%er time, families held only marginal ownership. ,hey meanwhile were allowed to secure control through a %ast web of crisscrossing share ownership between affiliates.5 ,he wider the discrepancy between cash'flow
8)

Co%&an" Listin/ Pro%otion Act, Law <o# (*() of 1CH( 7re&ealed b" Law <o# :C*E of

1CDH9#
81

E%&lo"ees were to benefit as well throu/h &ree%&tive ri/hts the" could acKuire throu/h

ES;P#
8(

2an" Asian co%&anies have si%ilar ownershi& structures . ;ECD 4HI$E PAPE+, su&ra note
E$ AL#,

Error@ +eference source not found, at 11F SE;<AG! 0I2 EC;<# +ES#, CH!LA1AACH;<GAAE0A1EAHA<A1EAD;A!I IAPP+;P+IA$E 4A
$; I2P+;BE $HE

SE;!L <A$'L !# I<S$#

3AA+A2A1I0AHA< GAEASE;<A3A<GAH A<G S$E2J

$;$AL I<BES$2E<$ LI2I$A$I;< S

1(A1: 7()):9#

1D

rights and control rights became, the more controlling shareholder$s interests di%erged with other shareholders and the greater inherent agency problems became. ,he anomalous situation of control without corresponding personal ownership and dispersed ownership without strong shareholder protections emerged as a fundamental issue. 4haebol became %ulnerable to empire'building and more serious ills such as misappropriation. During the de%elopmental state period, chaebol routinely engaged in related' party transactions among affiliates. In fact, intra'conglomerate assistance among affiliates without regard to the corporate go%ernance of indi%idual companies was common practice. <ot only was it not punished, go%ernmental administrati%e guidance often reIuired affiliate support for ris*y but strategically important companies as a condition for recei%ing ban* loans.53 3tronger companies helped start' ups and rescued troubled affiliates through eIuity infusions, debt guarantees and transfer pricing, on non'mar*et terms, according to the mandates of industrial policy. In the worst cases, howe%er, controlling families or senior managers used related' party deals to engage in self'dealing and to e0tract other pri%ate benefits of control. 4haebol adhered to a (too'big'to'fail Edae-ma-bul-saF) doctrine.5C ,hrough
8:

$he ,air $rade Co%%ission 7,$C9 onl" launched its first re/ulator" enforce%ent actions to

ste% chaebol fro% en/a/in/ in abusive subsidi?ation in 1CCD . ,AI+ $+ADE C;22ISSI;<, 3!A
DA<GAHA< 1IA4;<AHAE<GA4IA!I SI2ASAA1IACHI2

7<AEA3!A1IACHI29 II2P+;PE+ S!PP;+$I<G AC$S

EBAL!A$I;< G!IDE 7I<$E+<AL G!IDE9J 71CCH9 7S# 0orea9#

8*

Lee, su&ra note Error@ +eference source not found, at 18)F Edward Graha%, 3rea-in/

South 0orea's U$oo 3i/ to ,ail' Doctrine, ASIA< 4ALL S# 1#, A&r# 11, ())8, A11F
on/ASa% 0i% > Seun/AHo Son/, DaewooA/euAru&Aui %aA.iA%a- /uA.oA.oA.eon/AbonAbuA.an/

0i%AwooAilAui "an/Asi%AseonAeon I$he Conscience Declaration of 4ooAIl 0i%, Daewoo Grou&'s Last +estructurin/ ExecutiveJ, 2;<$HL
CH;S!<, <ov# ())1# $he ex&ression

dae-

1C

their networ* of companies they accounted for a predominant share of the country$s employment, production, income, and e0ports. ,heir impact on the economy was multiplied considering downstream and upstream industries, suppliers, outsourcers, transporters, retailers and distributors. 4on%entional belief held that bureaucrats did not ha%e the ner%e to endure the political costs and social dislocation generated by permitting the debacle of a chaebol, particularly one of the largest ones. 7ar*et participants therefore clung to this myth.55 3ophisticated in%estors, creditors and reputational intermediaries, domestic and foreign ali*e, downplayed the importance of corporate go%ernance because they belie%ed chaebol had a so%ereign guarantee from (&orea, Inc.) 7eanwhile, this nurtured a moral ha-ard that led chaebol to increase their si-e and assume undue ris* because they belie%ed that could rely upon the go%ernment$s safety net. /urthermore, chaebol companies and chairmen lin*ed fates through debt or payment guarantees.5" Guarantees were demanded as a condition for obtaining ban* loans or ma*ing bond offerings, although the collecti%e ris* was not properly gauged. ,he collapse of one affiliate could endanger others that had guaranteed it and start a chain reaction that could threaten a string of companies if not the entire conglomerate. ma-bul-sa derives fro% the /a%e of badu-, or /o in 1a&anese and literall" %eans 5lar/e
horses do not lose#6
88

;ne exa%&le of the s&ecial status for lar/er con/lo%erates occurred in A&ril 1CCD durin/

the financial crisis# $he ,inancial Su&ervisor" Co%%ission 7,SC9 announced that the to& five chaebol could lar/el" restructure on their own while s%aller chaebol would be &laced in stricter wor-out &ro/ra%s, underlinin/ the i%&ression that lar/er chaebol received differentiated treat%ent# Lee, su&ra note Error@ +eference source not found, at 1H1#
8E

<issho Iwai Euro&e PLC v# 0orea ,irst 3an-, HH: <#E#(d 1)1E 7<# # ())(9 7describin/ a

Daewoo Cor&# /uarantee for a G18) %illion loan to Daewoo Hon/ 0on/9#

()

1y con.oined fates of companies, guarantees e0acerbated the too'big'too'fail problem. 1an*s also routinely demanded that chaebol heads personally guarantee company debt as an additional form of security e%en though the si-e of guarantees was already beyond their capacity. @hen difficulties arose, nothing held bac* chairmen from assuming e0cessi%e ris* because they no longer could limit their e0posure to a manageable le%el. /rom an industrial organi-ation perspecti%e, many conglomerates followed a hori-ontal pac*age approach. ,hey pro%ided a di%ersified range of goods and ser%ices for a single large pro.ect.5# ;ntire operations of a chaebol could be enlisted, for e0ample, from construction to trading, to sales, mar*eting and financing. ,he construction company, for instance, would build a hotel, another company would obtain financing, another affiliate would pro%ide automobiles and buses, another would train staff and another would promote the property. ,he organi-ational structure ser%ed as a .ustification to support wea*er affiliates when in need# /inally, chaebol engaged in %arious forms of (earnings management.) /inancial figures were inflated partially due to historic reasons. /ollowing the Gapanese model, policy ma*ers granted chaebol e0clusi%e rights to establish general trading companies based upon the %olume of re%enues, assets, sales and stated capital.8D 3i-e, not profitability, was the *ey determinant. 1ureaucrats similarly
8H

Daewoo in &articular would en/a/e in countr" &ro.ects in which the entire con/lo%erate

would &artici&ate. Seon/ADon/ 0i% > 1eon/AHwan 3ae, 0i%AwooAchoon/Aui beo&An"ul daeAriA

in Seo-A.inA/an/, banA/"eo-AhaAda ICounterattac- b" 1inAGan/ Seo-, 4oo Choon/ 0i%'s Le/al +e&resentativeJ, 2;<$HL
8D

CH;S!<, A&r# ())1, at 1DA1C#

1;<GAHAPA2!A E;0ASA<GASA

D;<GAS!<G CH;, HA<AG!0A!I

I0;+EA'S GE<E+AL $+ADI<G

C;2PA<IESJ (1A((, (H( 71CD:9# 4hile vulnerable to &olitical rentAsee-in/, ban-s also followed sus&ect accountin/ &ractices the%selves#

(1

condoned window'dressing to recei%e licenses, permits and commercial lending, particularly when it was related to attracting precious foreign capital. @ith the emphasis on growth, companies were allowed to inflate records and manipulate balance sheets through related'party transactions to obtain e0tensions when maturity dates approached. 4onsolidated financial statements were not reIuired so that a single asset could be sold through a chain of companies, generating artificial sales for all companies in%ol%ed. 4haebol shared common characteristics, especially %ulnerabilities arising out of wea* corporate go%ernance. <urtured under a state'oriented corporate go%ernance system, they became o%er'protected from scrutiny and lac*ed proper internal controls. 2 wea* ownership structure, autocratic management styles and too'big'to'fail mentality left them predisposed to e0cesses and opacity, particularly while business thri%ed. 7ost significantly, these problems were common *nowledge, but little was done to address them. @hen the financial crisis hit, howe%er, e%eryone fled because of a sudden awa*ening that the chaebol lac*ed the necessary discipline to sustain them.

D. /atal Decisions during the 2sian /inancial 4ontagion

2s financial contagion swept across 2sia, Daewoo made gra%e mis.udgments, condoned by the go%ernment, which sealed its fate. /irst, it pursued a counterstrategy of e0pansion with particular focus on the automobile industry that pro%ed too ambitious. Daewoo then o%er'le%eraged itself with $ ! billion in debt to try to meet its financial burdens during the crisis. ,hey did not appreciate the seriousness of the situation, offering restructuring plans to resurrect the conglomerate when it was too late. In the end, o%er a two'year period, e%eryone stood'by as Daewoo transformed

((

into a financial blac* hole. In late 199#, the &orean won plummeted from 9!! won to 19"! won to the dollar in less than four months.59 ,he proud country, hailed for its economic miracle, capitulated to a bailout led by the International 7onetary /und EI7/F, @orld 1an* and 2sian De%elopment 1an*, consisting of o%er $5D billion. "! ,he I7/$s contro%ersial prescription raised interest rates to o%er 3! percent in an attempt to stem capital flight."1 &orea e0perienced negati%e ".# percent growth in 199D, the worst in modern history. ,he timing could not ha%e been worse for Daewoo. Daewoo might ha%e weathered the storm had it restructured from the onset in early 199D.E( 6e.ecting a contractionary approach, @oo 4hoong &im instincti%ely pursued aggressi%e growth, particularly in the automobile industry. :e declared that (Daewoo will o%ercome the crisis through e0pansionist measures Eli*e in the pastF,) because gi%en the opportunity (LwMe cannot embrace the future if we flinch at a time of recession.)E: 6eturning to his roots, he %iewed the crisis as a chance for Daewoo to acIuire distressed companies and turn them around. =ne commentator noted that (Daewoo$s response to the crisis came straight out of its old playboo*5 cooperate with

8C

Available at Phtt&@QQwww#federalreserve#/ovQreleasesQH1)QhistQdatCER-o#ht%#S7last visited

2ar# H, ())H9#
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,ried%an et al#, su&ra note Error@ +eference source not found, at (# ChaeAShic- Chun/ > SeA1i- 0i%, <ew Evidence on Hi/h Interest +ate Polic" Durin/ the
A<D

E1

0orean ,inancial Crisis, in 0;+EA< C+ISIS

source not found, 1:HA18E#
E(

+EC;BE+ , su&ra note Error@ +eference

Lee, su&ra note Error@ +eference source not found, at 1E8# 2ichael Schu%an > 1ane Lee, South 0orea, Ea/er to Shed its ;ld 4a"s, Allows a

E:

Cor&orate E%&ire's ;verhaul, ASIA< 4ALL S# 1#, Au/# 1H, 1CCC, at 1, :#

(:

the go%ernment, acIuire failed companies to e0pand and continue to borrow.)E* @hile others retracted, the Daewoo Group$s sales therefore increased by 5 percent in 199D, Daewoo 4orp.$s, by 5C percent. E8 ,he group spent 1! trillion won E$#.1C billionF in sales promotions during this critical period. EE 2utomobile'related e0pansion in particular o%erwhelmed the conglomerate.EH Daewoo 7otor acIuired 3sangyong 7otor in Ganuary 199D at the pea* of the crisis, assuming 3.C trillion won E$ .C3 billionF debt.ED +eading companies such as Daewoo 4orp. and Daewoo :ea%y Industries bore the burden.EC 2ll companies pressured employees to purchase Daewoo automobiles.H) ;0ecuti%es personally mar*eted cars with sales results lin*ed to their
E*

Lee, su&ra note Error@ +eference source not found, at 1E*#

E8

1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at 1#
Lee, su&ra note Error@ +eference source not found, at 1E8# Daewoo had also atte%&ted to enter the oil refiner" business b" acKuirin/ Hanwha Ener/"# Don/AHan Lee, DaewooA/euAru&Aui haeAche .eon/AsanAseo IAn Accountin/ of the CH;S!<, Dec# 1CCC# Daewoo also bou/ht an ex&ensive

EE

EH

ED

Dis%antle%ent of DaewooJ, 2;<$HL

new auto%obile factor" in Bietna%# Howard 4# ,rench, 4ith Daewoo, a $wili/ht ;f 0orean

Con/lo%eratesF Dis%antlin/ of
C1#
EC

esterda"Ls Econo%ic En/ines , <# # $I2ES, Se&t# :, 1CCC, at

Daewoo Suicide, su&ra note Error@ +eference source not found, at ()HAD#
;n Au/ust 1CCD, the 0orean ,$C fined Daewoo Cor&# 8#1 billion won 7G:#E %illion9 for

H)

&rovidin/ interest free loans to e%&lo"ees that &urchased Daewoo cars throu/h Daewoo 2otor Sales between A&ril 1CCH and 2a" 1CCD# See infra on 0,$C# A shareholder case a/ainst 4oo Choon/ 0i% for his role in this i%&ro&er su&&ort was dis%issed in <ove%ber ())* because he was not a re/istered director of Daewoo Cor&# at the ti%e# SunA4oon/ 0i%, $he

Li%itations of See-in/ Accountabilit" A/ainst De ,acto Directors as De%onstrated in the Shareholder Derivative Action A/ainst Daewoo Cor&#, CE<$E+
G;BE+<A<CE ISS!E +EP;+$, <ov# (:, ())*#
,;+

GL;3AL CHA<GE >

(*

performance e%aluations.H1 Daewoo$s financial balancing act foundered under the weight of the financial contagion.H( /irst, debt burden more than doubled due to the plummeting &orean won. 2t the time, the group had $5.1 billion in foreign currency loans and $1.9 billion in foreign currency debt to foreign bond owners.H: 3econd, the spi*e in interest rates further debilitated the conglomerate, its interest rate burden ballooning from three trillion won E$ .1C billionF to si0 trillion won E$C.3 billionF. H* /inally, Daewoo reportedly failed to collect payment on se%eral large'scale pro.ects such as $3 billion owed by +ibya and $1 billion owed by Aa*istan. H8 6elati%ely constant operating profits aside, the collecti%e financial burden o%erwhelmed them. ,o meet the demands, Daewoo issued a flurry of corporate bonds and commercial paper throughout 199D to co%er its maturing debt. Despite high le%erage,
H1

Daewoo Suicide, su&ra note Error@ +eference source not found, at :1C#
In an o%inous interview in 1CD8, 4oo Choon/ 0i% hi%self discussed how co%&anies that

H(

rel" u&on forei/n debt can be susce&tible to forei/n shoc-s# DaeA1un/ 0i%, GeunA/eoAeo&A

neun Daewoo haeAcheAseolAe siAdalAriAneun 0i%AwooAchoon/Aeun %alAhanAda IPla/ued with +u%ors of Daewoo's Dis%antle%ent 4ooAChoon/ 0i% S&ea-sJ, 2;<$HL
1CD8, at 1ED#
H:

CH;S!<, 2a"

1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at (, 1H# 4hen

the exchan/e rate colla&sed fro% H)) won to 1*)) won, Daewoo's attorne" clai%ed that Daewoo's forei/n debt ex&osure of G(D#8H billion .u%&ed fro% () trillion won to *) trillion won, althou/h this fi/ure see%s exa//erated# 0i% > 3ae, su&ra note Error@ +eference source not found, at 11#
H*

Id# at (#
Don/AHan Lee, ChoeAchoA/on/A/ae b"eoAran/Ae seon 0i%AwooAchoon/Aui /eo-A.eon/AtoAro

H8

I+evealed for the first ti%e@ Standin/ on the Ed/e 4ooAChoon/ 0i% +eveals His Concerns J, 2;<$HL CH;S!<, Se&t# 1CCC#

(8

they still managed to raise 19.# trillion won E$1C.1 billionF in debt issuances at interest rates that a%eraged 15 percent and reached as high as 5 percent.HE In the third Iuarter of 199D alone, Daewoo issued o%er 9. trillion won E$".5# billionF in bonds, raising its total debt by C! percent and accounting for # percent of total bond issues at the time.HH In%estment trusts and other institutions rec*lessly acIuired the debt instruments, apparently relying on the assumption that the go%ernment would de%ise a solution.HD In Guly 199D, after months of delay, the go%ernment finally acted to stem the hemorrhaging conglomerate. 6egulators restricted financial institutions from holding more than 5 percent of the commercial paper of a conglomerate. In =ctober, a similar restriction followed for corporate bonds when ban*s and insurance companies were set to a 5 percent limit per conglomerate while in%estment trusts, a 15 percent limit. ,hough they had been in discussion with regulators about their financing woes since Gune 199D, Daewoo did not N or could not '' prepare for the austerity measures.#9 ,he caps on debt se%ered the financing lifeline that had been sustaining the group. D) ,o aggra%ate matters, 4hairman &im was suddenly hospitali-ed in <o%ember 199D.D1 In December 199D, the go%ernment attempted to bro*er a contro%ersial (1ig Deal) between the 3amsung Group and Daewoo Group in which troubled 3amsung
HE

1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at (# In 1CCH,

the" had issued 1( trillion won 7GD billion9 worth# Id#

HH

0oh, su&ra note Error@ +eference source not found, at (# $he entire bond %ar-et later &aral"?ed when Daewoo went into default and while si?able,

HD

co%%ercial ban- ex&osure to Daewoo cor&orate bonds was not as si/nificant#

HC

Lee, su&ra note Error@ +eference source not found, at 1H1. 0oh, su&ra note Error@ +eference source not found, at (#

D)

D1

0i% 4ooAChoon/ +ecovers =uic-l" fro% Sur/er", 0;+EA $I2ES, <ov# 1H, 1CCD, at D#

(E

7otors would be swapped in e0change for Daewoo ;lectronics. D ,he go%ernment belie%ed they needed to inter%ene to help the ri%al conglomerates. 7erging Daewoo 7otor with 3amsung 7otors could re%i%e the ailing companies through synergy and economies of scale. Aolicyma*ers also belie%ed this could force Daewoo to focus its efforts on the automobile industry. Daewoo meanwhile hoped to e0tract ma.or concessions from the go%ernment to consummate the deal, but negotiations collapsed when 3amsung withdrew from tal*s.D3 ,wel%e months after the crisis erupted, Daewoo made its first serious attempt at restructuring in late December when they entered into a /inancial 3tructure Impro%ement 4o%enant with its creditor ban*s. ,hey agreed to downsi-e 51 companies into ten core entities that would focus on trade and construction, automobiles, hea%y industries and finance and ser%ices. ,hese efforts, howe%er, were inadeIuate and o%erdue and failed to yield substanti%e results. In /ebruary 1999, &im e%en became president of the /ederation of &orean Industries E/&IF, the powerful business organi-ation led by chaebol, yet /&I$s influence did little to help Daewoo$s reorgani-ation. In Guly 1999, &im then announced that he would relinIuish 1.3 trillion won E$1.!D billionF of his personal eIuity in Daewoo companies. :is final proposal to sal%age the conglomerate in%ol%ed a brea*up of the conglomerate and sell'off of its companies with only the automobile company remaining. In return, &im demanded
D(

$he conce&t 5bi/ deal6 was a&&arentl" first su//ested in an <ove%ber 1CCH o&Aed &iece#

Don/ASun/ Cho, SaAeo&A/"oAhwan 7bi-Adil9 i &ilA"oAhaAda IA 3usiness Exchan/e 73i/ Deal9

is <eededJ, CH;S!< IL3;, <ov# (E, 1CCH#

D:

$his &lan a&&arentl" failed after Sa%sun/ alle/edl" received docu%ents fro% a dis/runtled

for%er Daewoo Electronics %ana/er that detailed over four trillion won 7G(#DE billion9 in accountin/ fraud# Daewoo Suicide, su&ra note Error@ +eference source not found, at 1D1#

(H

o%er ten trillion won E$D.3 billionF in the form of stoc*, real estate and other assets to use as a last in.ection to reorgani-e the group. 2 year had already elapsed since the go%ernment curtailed its financing and began close super%ision of the group. Bet, the /inancial 3uper%isory 3er%ice E/33F appro%ed the rollo%er of si0 trillion won E$5 billionF of short'term commercial paper for si0 months and four trillion won E$3.3 billionF in additional funding.D* ,he go%ernment to no a%ail tried to sustain the beleaguered conglomerate.D8 @ee*s later in 2ugust, twel%e main companies proceeded into court recei%ership wor*out procedures. 6epresentati%e directors submitted their resignations on <o%ember 1 and shortly thereafter &im left &orea to begin life as a fugiti%e. @hen the financial crisis struc*, Daewoo mis.udged the situation and e0panded its way to a meltdown. In the process, they were allowed to issue o%er 19.# trillion won E$1C.1 billionF in bonds and commercial paper and permitted to e0tend an additional ten trillion won E$D.3 billionF in loans o%er a two'year period. 2ll of this proceeded under the shadows of accounting and loan fraud. ,he collecti%e response to the situation hence was grossly inadeIuate. ,he Daewoo ;mpire had become a financial nightmare.

;. 2ccounting /raud and the 1ritish /inance 4orporation

D*

Instead of bein/ in.ected into business activities and reor/ani?ation so%e of these funds

were alle/edl" used to co%&ensate un&aid e%&lo"ee wa/es# 0i% > Son/, su&ra note Error@ +eference source not found#
D8

et, this onl" dela"ed the co%&an"'s sale on &otentiall" %ore beneficial ter%s# Ste&hanie

Stro%, S-e&ticis% over 0orean +efor%F After Daewoo Intervention, Is $here the 4ill for

Austerit"V, <# # $I2ES, 1ul" :), 1CCC, at C1#

(D

@hile pursuing its e0pansion strategy through e0cessi%e borrowing, Daewoo chose to commit unprecedented fraud, particularly by manipulating its o%erseas accounts. 7any chaebol shared a legacy of accounting opacity, but what distinguished Daewoo was its scale, its manner and how it remained undetected. D" ,he si-e sealed their fates in the annals of corporate scandals. ;0ecuti%es %iolated disclosure laws, accounting laws and foreign e0change laws. ,he staggering fraud could be attributed corporate go%ernance brea*downs on multiple le%els. ,he (biggest accounting fraud in history) occurred as a result of Daewoo companies inflating assets by a total .9 trillion won E$19.1 billionF. D# Daewoo 4orp.,

Daewoo 7otor and Daewoo ;lectronics together accounted for 9! percent of the conglomerate$s impaired capital.DD In perpetrating the fraud, Daewoo 4orp., which was responsible for 1C." trillion won E$1 . billionF, used its trading and management
DE DH

,rench, su&ra note Error@ +eference source not found# 0raar, su&ra note Error@ +eference source not foundF 4ard, su&ra note Error@ +eference

source not foundF Press +elease, Securities and ,utures Co%%ission 7S,C9, DaewooA/"eA"eol

1(AsaAe daeAhan /a%AsaAboA/oAseo teu-Ab"eolA/a%AriA/"eolA/wa %it .oAchi IS&ecial Audit +esults of Audit +e&orts of 1( Daewoo Affiliates and ActionJ, : 7Se&t# 18, ()))9
Ihereinafter S,C ())) +e&ortJ# !nli-e the ,inancial Su&ervisor" Co%%ission 7,SC9's &reli%inar" audit of Daewoo, the final S,C Press +elease onl" contains a s-eletal account of the accountin/ fraud and does not contain infor%ation as to how assets were inflated or debt underre&orted# $he S,C's final fi/ures also did not include a&&roxi%atel" () trillion won 7G1E#H billion9 that was considered accountin/ fraud in the ,SC's 1CCC re&ort# $he S,C clai%ed the" excluded it because the 1CCC re&ort had a&&lied the Cor&orate Accountin/ Standards too strictl"#
DD

et, the si?e of the discre&anc" still re%ains &u??lin/#

Daewoo Cor&# had i%&aired ca&ital of 1*#8 trillion won 7G1( billion9 whereas Daewoo

2otor and Daewoo Electronics accounted for another D#* trillion 7GH billion9 . 1CCC

Govern%ent +e&ort, su&ra note Error@ +eference source not found, at E#

(C

departments and its accounts in +ondon. In 199#, for e0ample, they deflated assets by 1!.1 trillion won E$".# billionF and liabilities by o%er .9 trillion won E$15.3 billionF,

and inflated eIuity by o%er 1 .D trillion won E$D.53 billionF to conceal 1!.1 trillion E$".#3 billionF in impaired capital.D9 ,his transpired while net losses for the company climbed from 11.D trillion won E$#.D# billionF in 199# to 1 .1 trillion won E$D."C billionF in 199D.9! =n the domestic side, most of the fraud stemmed from reduction of debts, manipulation of e0port returns and utili-ation of affiliates. 3ome of the largest %iolations in%ol%ed fifteen trillion won E$1 .5 billionF in off'balance sheet liabilities. 91 6elated'party transactions were also used for (asset swaps among Daewoo subsidiaries at e0aggerated %alues.)C( 3tronger affiliates would prop up wea*er companies by purchasing o%er%alued assets abo%e mar*et prices. /urthermore, scam subsidiaries were used to s*irt accounting rules. /inancial companies such as 3eoul In%estment ,rust 7anagement E3I,7F played a *ey role in the transactions.93 ,o a greater degree, Daewoo mobili-ed its o%erseas financial networ*. ,he
DC

In 1CCD, the windowAdressin/ continued in a si%ilar %anner as assets were deflated b"

over )#HH trillion won 7G)#88 billion9, liabilities were deflated b" over 1:#* trillion won 7GC#E billion9 and eKuit" was inflated b" over 1*#( trillion won 7G1) billion9 to cover 1)#: trillion won 7GH#* billion9 in i%&aired ca&ital# 1ud/%ent of 1ul" (*, ())1, Seoul District Court, ())1 Gohab 1H1, at 1:.
C)

())1 Gohab 1H1, at 1:, 1C. Another four trillion won 7G:#:: billion9 involved nonA&erfor%in/ loans, false inventories of

C1

three trillion won 7G(#8 billion9 and false research and develo&%ent ex&enses of one trillion won 7G)#D: billion9# S,C ())) +e&ort, su&ra note Error@ +eference source not found, at *F

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1E)#
C(

Lee, su&ra note Error@ +eference source not found, at 1E1AE(#

:)

primary %ehicle for the o%erseas fraud in%ol%ed an entity called the 1ritish /inance 4orporation E1/4F.9C +ocated in +ondon, fi%e persons in the finance department of Daewoo 4orp. o%ersaw its secreti%e business. C8 ,he 1/4$s intricate accounts acted as the ner%e center for most of the conglomerate$s financial machinations. CE @hat began as a construction account was later commingled with trading accounts. CH ,he 1/4 later grew to an amalgamation of thirty'se%en foreign accounts. 1y 199", annual borrowings from the 1/4 accounts totaled between si0 and se%en billion dollars. 9D ,oward the end in 2ugust 1999, the accounts reportedly amounted to o%er $#.5 billion.99
C:

In 1CCD and 1CCC, SI$2, for exa%&le, used u& to :D &ercent of its funds to su&&ort other

affiliates and &urchased (#C trillion won 7G(#*( billion9 of bonds and co%%ercial &a&er issued b" various affiliates, &articularl" when the" were a%on/ the ris-iest# <ational Asse%bl"%en +eKuested Infor%ation, In/oo Lee, 1CCCF Lee, su&ra note Error@ +eference source not found, at 18*#
C*

Sur&risin/l", %ost of the financial records of the 3,C were intact when re/ulators later

found the% in stora/e# It re%ains unclear wh" this infor%ation was not destro"ed# Daewoo

Suicide, su&ra note Error@ +eference source not found, at 1E(AE:.

C8

Around a do?en accounts were established in the na%es of Daewoo and the 3,C in 1CD(#

$he na%e 3,C a&&arentl" ori/inated fro% the telex code of the finance tea% in the !nited 0in/do%# ())1 Gohab 1H1, at :.
CE

())1 <o ()E:, at 8DF ())1 Gohab 1H1, at

#.

CH

Initiall", the accounts received de&osits of &ro/ress &a"%ents for construction contracts in

Lib"a# ())1 <o ()E:, at *H

CD

())1 Gohab 1H1, at (:#

CC

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1E*# ;f this, Daewoo's

attorne" clai%ed G:#* billion was used for re&a"in/ debts and interest and G*#1 billion was used to su&&ort other subsidiaries# 0i% > 3ae, su&ra note Error@ +eference source not found,

:1

,he 1/4 and o%erseas affiliates were employed in a %ariety of ways. /oreign subsidiaries, for e0ample, transferred funds borrowed from foreign ban*s to the 1/4. ,his circum%ented foreign e0change laws and s*irted reporting reIuirements. 1)) In addition, companies with Iuestionable credit issued new stoc* that o%erseas financial institutions would acIuire technically as eIuity in%estments.1!1 ,he eIuities would then be secured through redemption agreements with other affiliates. 1! ,he affiliate would be obligated to repurchase the eIuity at a gi%en price plus interest, if it failed to reach a certain price le%el.1!3 In essence, the eIuity in%estment operated li*e a loan guaranteed by an affiliate. ,he scheme allowed Daewoo to a%oid prudential regulations that go%erned chaebol borrowing in foreign currency. /unds that should ha%e been recorded as debt were improperly recorded as eIuity. @hen o%erseas business operations declined and more pressing debts from o%erseas entities emerged, recei%ables from e0ports that should ha%e been credited to domestic affiliates were instead di%erted to 1/4 accounts. 1!C /oreign debts held priority o%er domestic obligations.1!5 During this critical period, o%erseas interest payments to foreign financial institutions alone amounted to $ .C9 billion in 1999. 1!" Aressure from the 1/4 e0acerbated the financial state of domestic companies. +ater when foreign debts could no longer be met 1/4'related paper companies were used to
at 1H#
1))

0i% > 3ae, su&ra note Error@ +eference source not found, at 1E# 1ud/%ent of <ov# (C, ())(, Seoul Hi/h Court, ())1 <o ()E:, at 8D# $he Hi/h Court

1)1

co%bined the a&&eals of the two lower district courts#

1)(

Id. Id# at 8C.

())1 <o ()E:, at *D. Id# at *CA8).

1):

1)* 1)8

1)E

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1E*#
:(

construct falsified bills of lading, commercial in%oices and pac*ing lists to defraud &orean ban*s.1!# Daewoo commingled real commercial documents with falsified ones to sustain the deception.1!D 1/4 personnel meanwhile wor*ed under utmost secrecy.1!9 Despite the 1/4$s meticulous records, the destination of appro0imately $#53 million remains un*nown.11! 3peculation abounds that money was used as corporate slush funds for political lobbying purposes. =thers belie%e that @oo 4hoong &im and senior managers siphoned off funds for personal enrichment. 111 In !!", a court in fact held that a special (&4E&ing of 4hairmanF) account established among the 1/4 accounts was used for personal e0penses of 4hairman &im and his family.11 =%erall, operation of the 1/4 accounts contra%ened se%eral *ey laws. /irst, e0ecuti%es %iolated accounting laws.113 Daewoo, for instance, did not record or

1)H

())1 <o ()E:, at *(# Given the extensive a%ount of bills of exchan/es discounted, ban- officers had difficult"

1)D

in detectin/ the fraud. Id# at *:#

1)C

$he court held this was incri%inatin/ behavior that shows the" -new the" were

co%%ittin/ i%&ro&er
11)

acts Id# at *HA*C#

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1E*#
2unASeon/ 0i%, 3uAsilA/iAeo&A/"eon/A"eon/A.in .aeAsanAeunAni- deun/ .eo-Abal
;<HAP

111

IDiscovered Concealed Pro&ert" of DelinKuent Co%&an" Executives J, ())1#

11( 11:

<E4S, 1ul" (),

See Section III#A. Act for External Audit of Stoc- Co%&anies# ())) Gaha& HDD8D, at 1C# Securities

Exchan/e Act, Law <o# (C() of 1CHE 7as a%ended Law <o# H11* of ())*9F Act for External Audit of Stoc- Co%&anies Law, Law <o# :(CH of 1CD) 7as a%ended Law <o# ECC1 of ()):9Ihereinafter External Audit ActJ# ())( Do H(E(, at *AE# Act on A//ravated Punish%ent for Certain Econo%ic Cri%es, Law <o# :EC: of 1CD: 7as a%ended Law <o#

::

consolidate appro0imately fi%e to eight trillion won E$C.1# to ".# billionF per year of off'balance sheet liabilities between 199" and 1999. 3econd, e0ecuti%es %iolated the law prohibiting (hiding of personal property o%erseas) without appropriate disclosure.11* ,hey asserted that the 1/4 accounts were not concealed for any illicit purpose but solely to repay company debts.118 ,hey repaid foreign loans, for instance, with funds obtained by selling debt locally.11E 4ourts re.ected the argument because disclosure laws applied irrespecti%e of an intention to repatriate missing funds later. 11H ,he law reIuired accurate reporting so that authorities had sufficient information to ma*e policy .udgments.11D /inally, the 1/4 accounts %iolated foreign currency laws. <one of the accounts recei%ed official 7inistry of /inance and ;conomy E7=/;F appro%al as reIuired under foreign e0change regulations.11C <ot only did they transfer funds out of the country to co%er 1/4$s debt without permission, but also they fabricated documents to conceal it.1()

H:11 of ())*9Ihereinafter A//ravated Punish%ent ActJ#

11*

A//ravated Punish%ent Act, art# *, W 1# See 1ud/%ent of 1ul" D, ())*, Su&re%e Court,

())( Do EE1#
118

())1 Gohab 1H1, at **.

11E

Daewoo Suicide, su&ra note Error@ +eference source not found, at H)AH1#
())1 Gohab 1H1, at *8F ())1 <o ()E:, at *D, *C# 1ud/%ent of 1une (1, 1CDD, Su&re%e

11H

Court, DD Do 881F 1ud/%ent of ,eb# 1*, 1CDC, Su&re%e Court, DD Do ((11#

11D

;n a&&eal, the Hi/h Court and Su&re%e Court both reaffir%ed the lower court .ud/%ent#

())1 <o ()E:, at *8F ())( Do H(E(, at 1)A11#

11C

,orei/n Currenc" 2ana/e%ent Act, Law <o# C:: of 1CE1 7re&ealed b" Law <o# 888) of

1CCDF re&laced b" ,orei/n Currenc" $ransaction Act, Law <o# 8881 of 1CCD9#
1()

I%&ort invoices were sent to &a&er co%&anies controlled b" Daewoo co%&anies# ())1

Gohab 1H1, at (:#

:*

@hen faced with a financial emergency in the midst of its managerial blunders, Daewoo chose to engage in purposeful deceit. ,hey opted to manipulate secreti%e o%erseas accounts to a%oid detection by authorities and accountants. ,he scheme %iolated accounting laws, disclosure laws and foreign e0change laws. ;%en e%idence of personal enrichment surfaced. =%erall, the staggering fraud transpired as the result of a brea*down in both internal and e0ternal corporate go%ernance.

III. Ineffectual Internal 4orporate Go%ernance

Daewoo$s mis.udgments and accounting troubles ser%e as a reminder of the catastrophic cost of neglecting corporate go%ernance. @ea* internal corporate go%ernance in particular was a common feature for many conglomerates leading up to the financial crisis. Internal corporate go%ernance structures established under corporate law did not function to chec* and balance controlling shareholder mismanagement. 6epresentati%e directors, boards, statutory auditors and shareholders ali*e did not act as effecti%e monitors. 3ubseIuently, internal corporate go%ernance has impro%ed significantly through legal reforms combined with an effecti%e enforcement regime.

2. 4ontrolling 3hareholder$s Imperial 4ontrol

2s with most chaebol heads, Daewoo$s founder and controlling shareholder, @oo 4hoong &im, reigned in imperial fashion.1(1 :e operated the conglomerate with total command, unchec*ed and unsuper%ised. :e pressed the campaign to e0pand
1(1

$his contrasts with !#S# co%&anies where entrenched inside %ana/ers tend to rei/n in

unrivalled fashion# Hans%ann > 0raa-%an, su&ra note Error@ +eference source not found#

:8

internationally, particularly, in the crucial period leading up to and during the financial crisis.1(( ,he crisis e0posed the wea*ness of the concentrated go%ernance structure when his .udgment faltered. 3ingle'handedly, he was able to dri%e the conglomerate to perpetrate the largest accounting fraud in world history. 2lthough Daewoo$s business was run with an international focus, &im$s dominance of internal corporate go%ernance fell far short of established global standards. &im held the formal title (Daewoo Group 4hairman.) 2s head of the conglomerate, he acted as de facto chairman of the board of all Daewoo companies. 1 3 :e conducted all ma.or decision'ma*ing of the conglomerate through the Group 4hairman$s =ffice that consisted of some 1!! personnel conscripted from each affiliate. 3er%ing as his personal secretariat, the 4hairman$s =ffice o%ersaw senior personnel decisions, financing decisions and business strategy.1 C 6epresentati%e directors and board members, for e0ample, were not nominated by boards or through
1((

1on/ASe Par-, Geu%A/a%AwiA/a bon Daewoo IDaewoo in the E"es of the ,inancial CH;S!<, A&r# 18, 1CCC, at :*#

Su&ervisor" Co%%issionJ, 4EE0L

1(:

Servin/ as de facto director also allowed chair%an to esca&e liabilit"# 1ud/%ent of <ov#

1C, ())*, Seoul District Court# 0i%, su&ra note Error@ +eference source not found# Le/all", at the ti%e of the crisis, he served as re/istered +e&resentative Director of Daewoo Cor&#, Daewoo Heav" Industries and Daewoo 2otor#
1(*

Accordin/ to one assess%ent, 5IhJe is al%ost co%&ulsivel" handsAon in runnin/ his

co%&an"#6 $i% Heal" > Lax%i <a-ar%i, 4ron/ 2an for the 1obV 0i% 4oo Choon/ Got

Daewoo into Its 2ess# <ow HeLs Su&&osed to $urn $hin/s Around , ASIA4EE0, Au/# 1:,
1CCC# at 1F Daewoo's Chair%an's ;ffice was far %ore decentrali?ed relative to other %a.or chaebol# SinAi&AsaAwonAbuAteo siA.a-Ahan sin/A-eu taen/A-eu@ DaewooA/euAru& hoeA.an/A

biAseoAsil iA--euAneun HAin IA $hin- $an- 4here $he" Started as Entr" Level E%&lo"ees@ H Persons that lead the Daewoo Grou&'s Chair%an's ;fficeJ, 4EE0L
1CCH, at E)AE1# CH;S!<, 2a" (D,

:E

annual general meetings, but through the 4hairman$s =ffice at the end of the year. ,his happened wee*s before annual shareholder meetings that rubber'stamped appro%al in any e%ent. &im wielded (absolute influence o%er the careers) of e0ecuti%es.1 5 3imilarly, the 4hairman$s =ffice maintained e0clusi%e control o%er operation of the 1/4. ,he concentration of power in the 4hairman$s =ffice therefore allowed &im to order e0ecuti%es to commit the accounting fraud.1 " Informal controls o%er the 4hairman$s =ffice had e0isted in the past but suffered due to a changing of the guard at the conglomerate$s senior le%els. 1 # =riginally, &im surrounded himself with a host of *ey ad%isors who had been with him from the early years in the 19"!s and 19#!s. ,hey had grown together with the conglomerate, many ha%ing been personally recruited from other companies by &im. 3imilar or e%en older in age, many were also alumni of the same schools. 1 D :ence, they could be blunt with him acting as an informal chec* and balance. In the early 199!s, howe%er, a generational change began when these original e0ecuti%es retired. ,he replacements, who rose through the rigid corporate hierarchy as career Daewoo men, could not as easily confront the legendary founder, especially when the crisis unfolded. 4hairman &im was able to control the conglomerate through a distorted yet
1(8

())1 Gohab 1H1, at 8*F ())1 <o ()E:, at D)F 1ud/%ent of 1an# 11, ())(, Hi/h Court,

())1 <o ()E(, at EF 1ud/%ent of Au/# :), ())1, Hi/h Court, ())1 <o# 1)((, at C#
1(E

())1 Gohab 1H1, at DF ())8 Gohab 8DD, ())1 <o# 1)((, at C 75Chair%an 0i%'s

difficult to disobe" order was the basis for cri%e69# 1(H GiACheon 0i%, DaewooA/euAru&, choeA/oA/"eon/A"eon/Acheun/ seAdaeA/"oAche IDaewoo

Grou&, Generational Chan/e in Senior 2ana/e%ent J, 4EE0L

CH;S!<, ,eb# 1D, 1CC:, at :)F

Heal" > <a-ar%i, su&ra note Error@ +eference source not foundF Clifford, su&ra note Error@ +eference source not found, at 8:# 1(D See Section III#3#

:H

tenuous ownership structure. In 2pril 199#, for e0ample, &im and his family members, as controlling shareholders, only owned on a%erage ".1K of the shares in the ma.or companies within the Daewoo Group.1 9 Daewoo companies apparently did not see* eIuity financing due to concerns that this might dilute &im$s wea* ownership position.13! &im maintained control through affiliated companies that on a%erage cross'owned 31. K of each other$s shares and treasury shares that accounted for an additional 1K. 4ombined with his family ownership, he then could control on a%erage 3D.3K of the shares.131 :ence, while labeled a concentrated ownership system, Daewoo and other chaebol, also e0hibited attributes more associated with dispersed ownership systems such as e0aggerated accounting. ,he low stoc* price of Daewoo
1(C

0i% in fact too- &ride in his %ea/er sta-e because he considered hi%self a &rofessional

%ana/er instead of an owner# 2oonASoon 0i%, 1aeAbeolAui inA/anAha-@ DaewooA/euAru& Gi%A

uA.un/AhoeA.an/, IAnthro&olo/" of a Chaebol@ Daewoo Grou& Chair%an 4ooAChoon/ 0i%J,

4EE0L CH;S!<, <ov# :, 1CD8, at 1:A1*F DaeA1un/ 0i%, GeunA/eoAeo&Aneun Daewoo haeA

cheAseolAe siAdalAriAneun Gi%AuA.un/Aeun %alAhanAda IPla/ued with +u%ors of Daewoo's Dis%antle%ent, 4ooAChoon/ 0i% S&ea-sJ, 2;<$HL
1:)

CH;S!<, 2a" 1CD8, at 1EE#

EKuit" financin/ %i/ht not have been a viable o&tion /iven the lac- of attractiveness of

Daewoo shares# Lee, su&ra note Error@ +eference source not found, at 1HE#
1:1

;ther controllin/ fa%ilies a%on/ the to& :) chaebol also retained control throu/h affiliated

co%&anies, but on avera/e the" controlled a co%bined sta-e of *:X# 0i%'s co%bined controllin/ sta-e of :D#:X was a%on/ the s%allest of the to& :) chaebol . SE!<GA<; CH;I, CE<$E+
,;+

,+EE E<$E+P+ISE, HA<AG!0A!I

DAEAG !A2;AGIAE;PA1IPADA<

I0;+EA'S LA+GE

C;<GL;2E+A$E G+;!PSJ 71CCH9# $he ,$C be/an re/ulatin/ this crossAownershi& of chaebol startin/ fro% 1CCH# See 0I2, su&ra note Error@ +eference source not found# $his t"&e of crossAownershi& structure re%ains co%%on&lace for Asian con/lo%erates in /eneral# Sti.n Claessens > 1ose&h ,an, Cor&orate Governance in Asia@ A Surve" , : I<$'L +EB# ,I<# H1, H* 7())(9#

:D

companies reflected not only lac* of profitability but also concerns surrounding the distorted ownership structure. <otwithstanding his imperial position, &im did ma*e many e0emplary decisions. /irst, &im declared when he founded Daewoo that he would not transfer the reins of corporate control to any of his family members. 13 :e belie%ed his successor should be a professional manager chosen based on merit. :e trained managers and delegated authority to chief e0ecuti%es accordingly.1:: 3ubseIuently, &im withdrew all his relati%es from e0ecuti%e positions throughout the conglomerate.13C :is anti'nepotistic succession plan and management philosophy distinguished him from other heads who %iewed chaebol as personal possessions

1:(

0i% first &ublicl" announced this &led/e in 1CD*# HanA/u-Aui huA/"eA.a@ Gi%AuA.un/

DaewooA/euAru&AhoeA.an/ huA/"eA.aAneun nuA/aAdoeAna I0orea's Successors@ 4ho will be Successor to 4ooAChoon/ 0i%, Daewoo Grou& Chair%anVJ, 4EE0L
CH;S!<, Se&t# (:, 1CD*,

at 18 Ihereinafter 0orea's SuccessorsJF Daewoo Suicide, su&ra note Error@ +eference source not found, at (*D#
1::

(Daewoo considered itself to have /one %uch further than an" other lar/e 0orean fir% in

develo&in/ &rofessional %ana/e%ent#6 A/uilar > Cho, su&ra note Error@ +eference source not found, at E# San/AG"un <a%, DaewooA/euAru& *)Adae huA/"eA.a deun/A.an/Aseol &aAda IDaewoo Grou&@ +u%ors +ife of a *) 1CDC, at (*#
1:*

ear ;ld SuccessorJ, 4EE0L

CH;S!<, Se&t# 1),

;ne of 0i%'s older brothers did serve as &resident of a Daewoo affiliate fro% 1CHE and

1CD1 and then later as &resident of A.ou !niversit", a school owned b" the Daewoo Educational ,oundation, after a distin/uished career at another leadin/ universit"# Another brother acKuired a Daewoo co%&an" and went inde&endent# ;nl" 0i%'s wife, who %ana/ed the Hilton Hotel and 0i%'s "oun/est brother served in Daewoo for a substantial &eriod of ti%e# 0orea's Successors, su&ra note Error@ +eference source not found, at 1D#

:C

sub.ect to dynastic succession.135 ,o them, the interest of shareholders and sta*eholders to ha%e the most competent manager leading the company or the possibility that an heir might be unIualified were secondary issues. :ereditary entitlement to control was considered an established fact e%en for publicly listed companies. 2lthough he displayed an unwillingness to relinIuish control until it was too late, &im$s professional approach was a no%elty. >nfortunately, Daewoo$s collapse denied him the opportunity to fulfill this pledge that would ha%e had tremendous impact on the corporate world through the peer pressure it would ha%e generated. 3econd, in 19D!, &im donated o%er twenty billion won E$ . millionF to the

non'profit Daewoo /oundation that he had established in 19#D.13" ,he donation consisted of the bul* of his Daewoo 4orp. shares that amounted to se%enteen and a half billion won E$19.C millionF.1:H ,he foundation$s mandate pro%ided for it to engage
1:8

In 1CEC,

uhan Cor&oration founder Ilhan <ew beca%e what is considered the first %a.or
!AILAHA<

cor&orate leader not to transfer control of his co%&an" to an" of his heirs#
E;<AG!

7$he 0orean Acade%" of 3usiness Historians ed#, Shinwon Publishin/ Co# 1CC*9#

<o %odern da" exa%&les could be found of nonAhereditar" inheritance of control in a leadin/ chaebol# Cases of siblin/s or sonAinAlaws succeedin/ have existed, while, other than wives succeedin/ their husbands on occasion, fe%ale heirs assu%in/ control has seldo% occurred#
1:E

Initiall" called the Daewoo Cultural 4elfare ,oundation, the na%e was chan/ed to the

Daewoo ,oundation, in ;ctober 1CD), when 0i% donated an additional () billion won 7G((#( %illion9 of assets for the ex&ressed &ur&ose of develo&in/ and &ro%otin/ basic acade%ic studies# 0i%, su&ra note Error@ +eference source not found, at 1:A18#
1:H

At Phtt&@QQwww#daewoofound#co%S7last visited 2ar# H, ())H9# DaewooA/euAru& Gi%AuA

.un/AhoeA.an/ saA.ae ())Aeo- saAhoeAhwanAwon IDaewoo Grou& Chair%an 4ooAChoon/ 0i% +eturns to Societ" () 3illion 4on 7G((#( %illion9 in Personal Pro&ert" J, CH;S!< IL3;, Au/#

*)

in public interest acti%ities, primarily by conducting social welfare programs. 13D It established hospitals, supported museums, constructed low'income housing pro.ects and supported academic research. =stensibly, &im established the foundation as a philanthropic effort to repatriate his wealth bac* to society. ,hird, &im and his senior e0ecuti%es did not engage in widespread plundering.139 ;0hausti%e in%estigations by prosecutors, regulators, creditors and in%estors ha%e unco%ered only partial e%idence of misappropriation.1C! ,his contrasted with many other chaebol where personal enrichment by controlling shareholders and e0ecuti%es played a direct role in collapses. ,he secreti%e 1/4 funds for e0ample were allegedly used to help the conglomerate. 1C1 &im loyalists argue that gross accounting and loan fraud was committed for Daewoo and not for personal benefit.1C
:), 1CD), at 1F 0i%, su&ra note Error@ +eference source not found, at 1:A18#
1:D

At Phtt&@QQwww#daewoofound#co%S7last visited 2ar# H, ())H9# Daewoo Suicide, su&ra note Error@ +eference source not found, at (EA(H# In contrast, as

1:C

was discovered later, the chieftains of %ost of the other chaebol that colla&sed durin/ the financial crisis were often found /uilt" of considerable e%be??le%ent and ex&ro&riation# P!3# ,!<DS 2G2$# C;22'<, P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+ 18HA8C 7())*9#
1*)

())8 Gohab 8DD, su&ra note Error@ +eference source not found# Peter Cordin/le" >

Lax%i <a-ar%i, 4hat He 0nows Could E%barrass, ASIA4EE0, ,eb# 1E, ())1, at 1#
1*1

on/ASa% 0i% > Seun/AHo Son/, 0i%AwooAchoon/A/wa 1oA&un/AeonAui iAsan/Ahan -eoA

ne-As"eon I$he Stran/e Connection between 4ooAChoon/ 0i% and Pun/AEon Cho J,
2;<$HL
1*(

CH;S!<, Dec# ())1, at (*(#

0i%'s relativel" li%ited &ersonal ex&ro&riation has served as one reason wh" he continues

to /enerate alle/iance fro% for%er Daewoo %ana/ers# ,urther%ore, Daewoo alle/edl" did not en/a/e in real estate s&eculation li-e other chaebol and a&&arentl" was also the first %a.or chaebol to start hirin/ and retainin/ %arried fe%ale e%&lo"ees# 0i%, su&ra note Error@ +eference source not found, at 1H)# Daewoo labor union wor-ers and other victi%s

*1

4ritics, howe%er, hold a more cynical %iew toward the donations, suggesting that they ser%ed ulterior purposes. 2t the time, the mo%e allowed &im to a%oid a crac*down by the authoritarian go%ernment by preempting a threat to restrict his control.1*: ,he faOade of a non'profit organi-ation also allowed him to maintain control o%er the group while shielding his in%ol%ement.1** In =ctober 1993, for e0ample, compared to other foundations established by the top 3! chaebol, the Daewoo /oundation owned the highest percentage of shares.1*8 In the early 199!s, it held 11.C K of Daewoo 4orp., ."#K of Daewoo :ea%y Industries and C.3K of Daewoo /inance.1*E Initially, it operated as the de facto holding company of the conglomerate.1*H ,he foundation also acted as a ta0 shelter against personal inheritance ta0es, a loophole used by many chaebol foundations. In fact, after the ta0 laws were amended, the foundation reduced its sta*e in Daewoo 4orp. from o%er ten percent to

nevertheless hold 0i% hi/hl" cul&able# See Section IB#D#

1*:

Clifford, su&ra note Error@ +eference source not found, at E:#

1**

Gon/Ai-Abeo&Ain /"eA"eolAsa .uAsi- soA"uQDaewooA.aeAdan 1,(H8 eo- choeA/o I<onA&rofit

foundation affiliates' stoc-s &ossessionQDaewoo ,oundation's 1(H#8 billion is the lar/est J,

HA<0
1*8

;+EH,

;ct# E, 1CC:, at H#

Id#
3" Dece%ber 1CCD, however, the Daewoo ,oundation owned onl" :#(DX of Daewoo

1*E

Cor&#, (#1*X of Daewoo Electronics and (#E1X of Daewoo Heav", whereas the 0i% and his fa%il" owned 18#:X of Daewoo Heav"# Daewoo Cor&# later e%er/ed as the real

de facto

holdin/ co%&an" with its :HX ownershi& in Daewoo 2otor and its (C#1*X ownershi& of Daewoo Heav" Industries#
1*H

I<AHA0

!,

HA<AG!0A1AEA3E;LA!I

HAEA3!

IA DISSEC$I;<

;,

0;+EA'S CHAE3;LJ ()H

7PulAbit Publishers 1CC19# !ntil recentl", 0orea did not allow holdin/ co%&anies#

*(

5.D1K in 2ugust 1993.1*D /inally, the foundation operated not solely through &im$s personal donations but through contributions conscripted from Daewoo affiliates. ;nlisting such support particularly from listed companies diluted &im$s personal, philanthropic intentions. 3uspicions persist that &im and his insiders reaped substantial pri%ate benefits of control. /irst, allegedly o%er $#53 million from the secreti%e 1ritish /inance 4orporation remain unaccounted for e%en after a comprehensi%e audit by regulators.1C9 ,hese funds could ha%e been personally misused. In its <o%ember !!" decision, the 3eoul :igh 4ourt, in fact, affirmed that &im embe--led o%er $11" million from a special 1/4 account.15! &im$s family used these funds for personal in%estments, purchase of art wor* and acIuisition of real estate. 3imilarly, the &orea Deposit Insurance 4orporation E&DI4F brought a ci%il action on behalf of creditors related to $ .5 million in donations to :ar%ard >ni%ersity, where a son of &im was attending, and nineteen billion won E$15.D millionF, to 2.ou >ni%ersity. 1oth
1*D

DaewooA.u (E) %anA.u %aeA/a-QDaewooA.aeAdanQ/on/Ai-Abeo&Ain /"eA"eolAsaA.iAbae /"uA.e

ttaAra IDaewoo sold (#E %illion sharesQDaewoo ,oundationQ,ollows re/ulations on control b" Public ,oundations over AffiliatesJ, 0;;02I< DAIL , 2ar# 1(, 1CC*, at D#
1*C

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1E8F 0i% > Son/,

su&ra note Error@ +eference source not found, at (*(# ;ne &reli%inar" assess%ent even
clai%ed that G* billion of Daewoo's %one" could not be accounted for# Peter Cordin/le" > Lax%i <a-ar%i, In Search of DaewooLs 0i%, ASIA4EE0, ,eb# 1E, ())1#
18)

())8 Gohab 8DD, su&ra note Error@ +eference source not found#

$**#: %illion of the 3,C

funds were redirected to a Hon/ 0on/ &a&er co%&an" that served as a front for 0i%# ())8 Gohab 8DD, su&ra note Error@ +eference source not found, at 81Y8(F Cheon/A2o oo,

Daewoo ,ounder 0i%Ls Concealed Assets 4orth 41*), 0;+EA HE+ALD, <ov# C, ())1F 0i%
> Son/, su&ra note Error@ +eference source not found, at (*(.

*:

donations in%ol%ed use of company funds without board appro%al for seemingly personal reasons.151 3econdly, confidants, relati%es, or pseudo'Daewoo affiliates allegedly hold most of &im$s personal assets in pro0y. 15 1y concealing such funds under third party names, they can thwart claims by creditors. ,hese assets concei%ably could ha%e originated from e0propriated funds. 2ll in all, as founder and controlling shareholder, @oo 4hoong &im dominated affairs of the conglomerate without sufficient chec*s and balances. 2utocratic control might ha%e benefited Daewoo$s in its early years when its si-e was manageable and when &im maintained his astute business sense. Bet o%er time the organi-ational structure of unIuestioning loyalty to the controlling shareholder without appropriate chec*s or balances led to the malfeasance and fraud proceeding to unthin*able heights.

181

0i% > Son/, su&ra note Error@ +eference source not found, at (*(# Harvard has failed to

return these funds# 1an/A1in Hwan/, Activists De%and Harvard +eturn ExADaewoo ChiefLs

Donations, 0;+EA HE+ALD, 2a" :), ())(# In 1ul" ())1, 0DIC also clai%ed ei/ht senior
executives hid ten billion won 7GD#:: %illion9 in assets# 0i%, s u&ra note Error@ +eference source not found# See /enerall", on the issue of universities and nonA&rofit or/ani?ations receivin/ tainted cor&orate donations, Ariana Eun.un/ Cha, Cor&orate Scandals $aintin/

Donations, 4ASH# P;S$, Se&t# 18, ())(#

18(

Daewoo Suicide, su&ra note Error@ +eference source not found, at (EA(HF

eon/AHo

un,

Gi%AuA.un/ **:)A%anAbul &&aeAdolAriA/i UdeulAton/'AnatAda I4ooAChoon/ 0i%'s Si&honin/ of G**#: %illion has been Uex&osed'J, 4EE0L
D;<GA, <ov# 18, ())1F 0i% >

Son/, su&ra note Error@ +eference source not found, at (*(# At least six co%&anies could have been used as &otential fronts for this# 1on/ASu 0i%,

etADaewooA/euAru& wiA.an/A/"eA
;<HAP

"eolAsa EA/aeAsa .eo-Abal ISix Sha% Co%&anies of ;ld Daewoo Grou& Discovered J,
<E4S, 1an# (8, ())(#

**

1. 4eremonial 6epresentati%e Directors, Directors and 3tatutory 2uditors

Daewoo$s boards of directors, representati%e directors and statutory auditors failed to understand and fulfill their roles as fiduciaries. ,hey did not act to stem the primary conflict that arose out of controlling shareholder ta*ing ad%antage of non' controlling shareholders, sta*eholders and others.18: 2s legal institutions established under corporate law they should ha%e acted as internal counterweights to the domineering authority of the controlling shareholder. Instead, they maintained a passi%e e0istence due to historical legacies, wea*nesses in the law and a misguided understanding of their purpose. Generally, Daewoo$s directors, representati%e directors and auditors suffered the same problems that plagued most &orean companies. In practice, boards did not formally function in a legal sense.18* 1oards did not e%en hold official meetings. >pon recei%ing instructions from the conglomerate$s 4hairman$s =ffice, the office of planning of each affiliate would draft fictional board minutes tailored accordingly. 7inutes would be (appro%ed by the board) with personal seals of all the directors that the office of planning *ept under their care. 2t best, directors pro%ided input through the representati%e director who would then relay ad%ice to the chairman.
18:

0orean co%&anies faced a different &roble% fro% the standard 3erle and 2eans challen/e

in dis&ersed ownershi& countries that focused on the Kuandar" surroundin/ entrenched inside %ana/ers ta-in/ advanta/e of their &osition to the detri%ent of shareholders# AD;L, A# 3E+LE, 1+# > GA+DI<E+ C# 2EA<S, $HE 2;DE+< C;+P;+A$I;< 1:CA*) 71C::9#
18*

A<D

P+IBA$E P+;PE+$

53oard of directors of a 0orean cor&oration, in a real sense, has not existed before

now#6 2ichael Lewis, $he 4orldLs 3i//est Goin/A;utAofA3usiness Sale, <# # $I2ES, 2a" :1, 1CCD, P E 72a/a?ine9 at :* 7Kuote fro% a Daewoo s&o-es%an9#

*8

,he internal super%isory structure also remained wea* because at the time companies did not distinguish between directors and officers and had no outside directors. ,he director position ser%ed as the highest possible rung on the corporate ladder for an e0ecuti%e. 3enior officers when promoted became directors. 4ombining the two together into a unitary position wea*ened their ability to act as chec*s and balances against each other and, more importantly, o%er the controlling shareholder. In addition, &orean companies as a general matter did not ha%e any non'e0ecuti%e, outside directors until 199D.188 2 more serious problem was that directors and auditors were not answerable to non'controlling shareholders or other sta*eholders in any meaningful way and did not understand their obligations. 3hareholder litigation, particularly deri%ati%e actions, did not e0ist until 199#.18E ,he lac* of ci%il legal actions meant that fundamental obligations such as fiduciary duty remained unapplied, theoretical e0ercises. Directors could not de%elop an understanding or appreciation of fiduciary duties to shareholders because no one was e%er held accountable for %iolating them. 15# ,he chance of

188

Daewoo did elect (8 &ercent of its board as outside directors in all of its affiliates startin/

fro% 1CCD, even thou/h this was not reKuired before 1CCC# $aeAHo 0won, 0i%AwooAchoon/A

hoeA.an/ 7.u9 DaewooAdon/ :A/ot daeA&"o I4oo Choon/ 0i%, +e&resentative Director of Daewoo Cor&# and : ;ther Co%&aniesJ, HA<0
;+EH,

,eb# (H, 1CCD# Listed co%&anies were

first reKuired to have at least one outside director on their boards startin/ fro% 1CCD and (8 &ercent of their board startin/ fro% 1CCC# 0;+EA S$;C0 EMCHA<GE, SEC!+I$IES LIS$I<G +EG!LA$I;<S art# *DA8 7a%ended ,eb# 1*, 1CCD9# 1oon/i 0i%, +ecent A%end%ents to the

0orean Co%%ercial Code and $heir Effects on International Co%&etitions , (1 !# PA# 1#

I<$'L EC;<# L# (H:, (HC n#1D 7()))9#
18E

0i%, su&ra note Error@ +eference source not found#

18H

See 0on Si- 0i% > 1oon/i 0i%, +eva%&in/ ,iduciar" Duties in 0orea@ Does Law 2atter

*E

e0ecuti%es being held legally responsible was so low that director and officer liability insurance did not e0ist.18D +ac* of accountability to shareholders at large therefore left them sub.ect to the dictates of the controlling shareholder. In case of conflict, they had little incenti%e to defy the wishes of the controlling shareholder and act on behalf of the interests of faceless, silent non'controlling shareholders. 4ontrolling shareholders, on the other hand, made sure to reward loyal directors, e0ecuti%es and statutory auditors. 2fter retirement, they bestowed an array of benefits, hiring them as consultants, using them as suppliers, or gi%ing them outsourcing contracts or transitional support. :a%ing spent an a%erage of twenty years of their li%es to rise to senior positions, e0ecuti%es had no moti%ation to be (unfaithful) to the chairman, lose these benefits and be ostraci-ed from one of their most important social circles. ,he defense strategy of Daewoo e0ecuti%es in their criminal trials in particular re%ealed how they did not understand their duties or responsibilities.159 ,hey argued that they merely followed 4hairman &im$s directions as obedient subordinates. ,hey could not Iuestion his command, particularly when they recei%ed direct instructions to commit accounting fraud.1"! /urthermore, they committed
in Cor&orate GovernanceV, in GL;3AL 2A+0E$S, D;2ES$IC I<S$I$!$I;<S@ C;+P;+A$E LA4
A<D

G;BE+<A<CE

I< A

<E4 E+A

;,

C+;SSA3;+DE+ DEALS :H:, :DC 7Curtis 1# 2ilhau&t

ed#, ()):9 Ihereinafter +eva%&in/ ,iduciar" DutiesJ#

18D

3ernard S# 3lac- et al#, Shareholder Suits and ;utside Director Liabilit"@ $he Case of
A<D $HE

0orea, in C;+P;+A$E G;BE+<A<CE

CAPI$AL 2A+0E$

I<

0;+EA 7 oun/.ae Li%

ed#, ())89 at Phtt&@QQssrn#co%QabstractZE(D((:#S7last visited 2ar#H, ())H9#

18C

,ourteen executives were later found /uilt" for char/es that revolved around accountin/

fraud, loan fraud, forei/n currenc" violations and hidin/ assets overseas# See Section IB#D#
1E)

())1 Gohab 1H1, at D.

*H

accounting %iolations for the conglomerate because companies had to repay reoccurring debts. ,hey suggested that their actions should be .ustified because they did not personally gain from the fraud or e0propriate company funds.1E1 ,hey failed to grasp that allowing &im to use the company to defraud others for any purpose could not be .ustified. ,hey could not e0aggerate Daewoo$s business operations, inflate its status and disguise its actual financial situation to borrow funds and issue corporate bonds.1" ,hey could not commit accounting fraud to meet reoccurring debts or because they belie%ed it was the best time to e0pand operations and acIuire distressed companies. >nder this flawed reasoning, they perpetrated the financial crimes without a guilty conscience. 6egardless of whether they personally benefited or whether &im was a dominating figure, they failed to appreciate their duty to pre%ent the fraud. In the end, they allowed Daewoo to inflict (enormous damage upon the &orean people and the national economy.) /urthermore, contrary to their belief, they did deri%e personal benefit because they would (not lose the chairman$s fa%or) and could (maintain their positions.1"3 ,he ability of Daewoo directors might ha%e been affected more than other conglomerates because so many hailed from a particular schoolN&yongi :igh 3chool,

1E1

Contrar" to other failed chaebol, investi/ations have not revealed that executives en/a/ed

in wides&read &ersonal %isa&&ro&riation# $he Public ,und 2isconduct 1oint ;versi/ht $ea% re&orted onl" one case of %alfeasance involvin/ a executive who was indicted for usin/ C8) %illion won 7GHC1,H))9 in co%&an" funds to bribe /overn%ent officials and &oliticians to %ove the co%&an"'s headKuarters to a different cit"# P!3LIC ,!<D 2ISC;<D!C$ 1;I<$ ;BE+SIGH$ $EA2, G;<GA1E;0A1AAGE!2A3IA+I 2ISC;<D!C$ I<$E+2EDIA+
1E( 1E:

1!<GAGA<AS!ASAAG E;LAG4A

IP!3LIC ,!<D

I<BES$IGA$I;< +ES!L$SJ :, 7())(9#

())1 Gohab 1H1, at 8:F ())1 <o ()E:, at HDAHC. ())1 Gohab 1H1, at 8:F ())1 <o ()E:, at HC. 3ee

3ection I?.D.

*D

until 19#3, &orea$s elite secondary school.1E* 2s a &yongi graduate, &im surrounded himself with an inordinate number of alumni. In 4onfucian &orea, high school ties constitute a powerful bond that often forms the basis of a lifelong, %ertical social relationship. 3enior alumni traditionally ha%e considerable authority o%er .unior alumni. ,he old, schoolboy tie further consolidated the hierarchy in the upper echelons of management and wea*ened chec* and balances. Daewoo directors themsel%es belie%ed that school bac*ground was a much more important factor in being chosen as a director compared to other chaebol. 1E8 /urthermore, in the late 19D!s and early 199!s, Daewoo underwent the generational change where many, original e0ecuti%es who were senior &yongi alumni comparable in age and status to &im were replaced.1EE Gunior alumni that succeeded lac*ed the same standing to counterweigh the legendary, domineering chairman. =%erall, directors, representati%e directors and statutory auditors neglected their roles as fiduciaries. ,hey ultimately acted for their personal gain by placing a higher priority in maintaining their e0ecuti%e positions o%er the duty to obey the law,

1E*

<a%, su&ra note Error@ +eference source not found, at (8# So%e clai% that close to C)

&ercent of senior Daewoo executives were 0"on/i and Seoul <ational !niversit" /raduates#

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1::A:*F Sull et al#, su&ra
note Error@ +eference source not found, at C 7states that avera/e was :)X for senior executives9# Accordin/ to the author's deter%ination, at the CE; level, a&&roxi%atel" 8)A E)X were either 0"on/i Hi/h or Seoul !niversit" /raduates 7on file with author9# 0i% beca%e President of the 0"on/i Hi/h School Alu%ni Association in 1CCD as Daewoo's colla&se was unfoldin/#
1E8

Don/ASeo& 0i%, 1aeA/"eAui b"eol@ iAsaAdeulAui seA/"e I$he Stars of 3usiness@ $he 4orld CH;S!<, 1ul" (8, 1CCE, at **#

of DirectorsJ, 4EE0L
1EE

See &revious section III#A# on controllin/ shareholder#

*C

monitor the company and protect the interests of shareholders and sta*eholders. 3enior e0ecuti%es not only did not pre%ent but also acti%ely participated in the co%er' up and fraud. In the end, they demonstrated a confused understanding of fundamental duties and responsibilities.

4. In%estor Aassi%ity

Daewoo$s shareholders could not ha%e been more passi%e in o%erseeing managerial decisions.1EH ,hey did not raise Iuestions, reIuest information, attend shareholders$ meetings, engage in litigation, or meet with management. 4uriously, foreign institutional in%estors with considerable eIuity positions also remained complacent bystanders. Despite their sophistication, they neglected go%ernance' related action li*e e%eryone else. ,hey did not see* board representation, accountability or transparency and failed to act as diligent monitors to curb fraud. 7any factors such as legal restrictions and inherent apathy problems contributed to the in%estor passi%ity. 2fter the meltdown, the restitution process has finally made shareholders more acti%e participants. =ne problem for shareholders was that they could not easily e0ercise their rights.1ED ;%en after some of the most egregious corporate go%ernance problems, they did not e0ercise their legal rights or ta*e action. /or e0ample, when the presidential slush fund scandal re%ealed in 1995 that 1C! billion won E$155 millionF of Daewoo$s

1EH

3E+LE > 2EA<S, su&ra note Error@ +eference source not found# In fact, 0orean &olic"%a-ers deliberatel" wea-ened shareholder ri/hts to induce co%&anies

1ED

to list on the 0orea stoc- exchan/e that was stru//lin/ to develo&# ,or a detailed discussion on the various li%itations# See 0i%, su&ra note Error@ +eference source not found, at (D)AD:#

8)

money was used to bribe two former presidents, no legal actions let alone complaints ensued. =ne problem was that the regulatory framewor* set prohibiti%ely high minimum holding reIuirement for most shareholder rights such as standing for deri%ati%e actions or inspection rights.1"9 @ithout whistle'blowing by insiders or common law procedures such as disco%ery, shareholders also lac*ed the means to obtain information needed to Iuestion or challenge management. 3hareholders only brought ci%il actions against directors and controlling shareholders when they could use information obtained through regulatory actions or criminal prosecutions. 3hareholder representation through %oting li*ewise in particular faced many restrictions. Institutional in%estors, for e0ample, could only e0ercise their %otes through shadow %oting, effecti%ely neutrali-ing their participation. 3hareholders$ meetings were also manipulated to deter shareholders from raising issues. 4ompanies colluded to hold annual general meetings on the same day at the same time of the year to pre%ent acti%e shareholders from participating.1H) 3hareholders$ meetings when con%ened lasted no more than ten minutes according to scripts predetermined by the company. 2genda items such as appro%al of accounting statements and election of directors and auditors proceeded perfunctorily without discussion. >nder this en%ironment, in%estors, both domestic and foreign, beha%ed as though monitoring costs were too high to ha%e merit. /oreign in%estors in particular acted no differently e%en though they owned on a%erage 9.5 percent of the top fi%e
1EC

0i%, su&ra note Error@ +eference source not found, at (D1# In ()):, for exa%&le, H1#8X of the co%&anies with accountin/ "ears endin/ in Dece%ber

1H)

listed on the 0orean Stoc- Exchan/e held their annual shareholders' %eetin/s on : &articular da"s in 2arch ()):# ()): 1uA.uAchon/AhoeAilA.eon/Ah"eonAhwan/ IStatus of Annual

Shareholders' %eetin/ Da"sJ, 0orea Exchan/e# See /enerall" Phtt&@QQwww#-rx#co#-r#S7last

visited 2ar# H, ())H9#

81

Daewoo companies that committed the largest amount of accounting fraud. 1#1 @hen coupled with traditional collecti%e action problems, the (@all 3treet rule) of sell and mo%e on pre%ailed when companies reported bad news, managers %iolated their duties or abused their powers. 2t the same time, eIuity in%estment, particularly on the retail side, proceeded on an e0ceptionally short'term basis. ,rading turno%er of &orean in%estors ran*ed among the highest in the world. 2 %icious cycle de%eloped because the more short'term the ownership the more economically impractical monitoring became.1H( =nly after Daewoo$s brea*up ha%e in%estors, together with ban*s, creditors, suppliers and former employees, finally been stirred to ta*e action. ,hey ha%e brought a host of legal actions against Daewoo companies, managers and accountants. 1#3 In 7ay 1999, the Aeoples 3olidarity for Aarticipatory Democracy EA3ADF, &orea$s leading shareholder acti%ist group, filed the first ma.or ci%il action claiming twenty' four billion won E$ ! millionF in damages against @oo 4hoong &im and senior e0ecuti%es.1#C =%er forty cases see*ing a total of "!! billion won E$5!! millionF

1H1

In 1CCD, for exa%&le, forei/ners owned 1)#: &ercent of Daewoo Cor&#, 1#H &ercent of

Daewoo 2otor, H#D &ercent of Daewoo Securities, 1(#E &ercent of Daewoo Electronics and 1*#C &ercent of Daewoo Heav"# 0isline data# 7on file with author9#
1H(

0orea's short ter% tradin/ %i/ht be hei/htened due to the lac- of a ca&ital /ains tax

for s%all, retail investors#

1H:

!ntil ())*, however, %ost of the Daewoo liti/ation was sus&ended due to a constitutional

challen/e to the Constitutional Court re/ardin/ the false disclosure &rovision# 1ud/%ent of Dec# 1D, ()):, Constitutional Court, en banc, ())( Heon/a (: Panr"e.i& ICourt DecisionsJ 18A(, :C:A*)8#
1H*

$he action followed on the heels of a 1une 1CCD ,$C sanction a/ainst Daewoo for

i%&ro&erl" su&&ortin/ affiliates After five "ears of liti/ation, the Seoul District Court

8(

apparently were pending in &orean courts at one point. 1H8 =n 3eptember 1 , !! , shareholders e%en won their first ci%il decision arising out of claims related to Daewoo$s accounting fraud when &im, former managers of Daewoo ;lectronics, its accounting firm 2n.in and %arious accountants were held liable for 3"! million won E$3!!,!!!F for completing false annual reports and audit reports.1HE During this process, shareholders ha%e been assessed contributory fault for their negligence. In a !!5 case in%ol%ing Daewoo ;lectronics, a court held in%estors partially at fault while allocating different degrees of responsibility between accountants and directors.1HH ,hey found 1C.5 billion won E$1 .1 millionF in liability

dis%issed clai%s a/ainst 0i% that he should be res&onsible for ille/al su&&ort of Daewoo Cor&# on the /rounds that he was neither a director of the co%&an" involved nor did he &artici&ate or tacitl" a/ree to the su&&ort. At htt&@QQwww#&eo&le&ower(1#or/ 7last visited 2ar# H, ())H9# 1ud/%ent of <ov# 1C, ())*, Seoul District Court# DaewooA/"eA"eolAsa buAdan/A.iA

won 0i%AwooAchoon/Assi chae-Ai%Aeo&Aseo I4oo Choon/ 0i% <ot Liable for I%&ro&er Su&&ort of Daewoo AffiliatesJ,
;<HAP

<E4S, <ov# 1C, ())*# ,or a recent descri&tion of

PSPD's activities see Curtis 2ilhau&t, <on&rofit ;r/ani?ations as Investor Protection@

Econo%ic $heor" and Evidence fro% East Asia, (C

1H8

ALE

1# I<$'L L# 1EC 7())89#

Seo-AGi 2in, Daewoo bunAsi-AhoeA/"e i%Awon baeAsan/ &anA/"eol@ "uAsaAsaA/eon soAson/

itAttaAreul deut ICo%&ensation Decision A/ainst Executives for Daewoo Accountin/ ,raud@ Si%ilar Cases Should ,ollowJ, 2AEIL 3!S# <E4SPAPE+, 2a" :), ())*, at (#
1HE

1un/AEun Lee, 3unAsi-AhoeA/"e &iAhae, Daewoo tuA.aA.aAdeul seun/AsoA&anA/"eol IDaewoo

Investors 4in Case for Losses fro% Accountin/ ,raud J D;<GA IL3;, Se&t# 1(, ())(#
1ud/%ent of Se&t# 1(, ())(, Seoul District Court, ())) Gaha& HDD*1#
1HH

())) Gaha& HDD8D hard co&"# $hreeAhundred and sixt" investors brou/ht a se&arate action

on ;ctober (*, ())) a/ainst %ana/ers of Daewoo Electronics, Daewoo Heav" Industries and their accountants for their accountin/ fraud that settled in %ediation on 1anuar" ())8#

8:

for fraudulent audit reports.1HD 3hareholders were found to be contributorily negligent for 1! percent, while accountants were held 3! percent liable, directors directly in%ol%ed in the accounting fraud, including &im, C! percent, whereas (non'financial) directors and outside directors, only ! percent. 1HC Are%iously, shareholders pre%ailed against Daewoo :ea%y e0ecuti%es in a !!C case, but had their claim reduced due to contributory negligence as well.1D) ,he court found e0ecuti%es liable for 9#! million won E$D!D,3!!F for falsifying accounting records in the company$s 199# and 199D annual reports that in%estors relied upon but capped their liability to forty percent of the claim#1D1 $he court found shareholders negligent in in%esting in such a ris*y stoc* that had widely *nown financial difficulties#1D( ,herefore, while shareholders ha%e
1HD

Daewoo Electronics and its executives were found liable under Articles 1DEA8 and Article

1* of the Securities Exchan/e Act while the accountants were found liable under Article 1CH of the Securities Exchan/e Act and Article 1H, Para/ra&h ( of the External Audit Act#
1HC

())) Gaha& HDD8D, at *8A*E# 4hile reducin/ their relative liabilit", the court re.ected the

defense of outside directors that the" should not be assessed an" res&onsibilit" because the" were nonAstandin/ board %e%bers or because the" fulfilled their 5dut" of due dili/ence6 b" rel"in/ u&on the external auditors# ())) Gaha& HDD8D, at (:A(*#
1D)

1iA3o- +"u, Daewoo bunAsi-AhoeA/"e .uA/aAsonAsil baeAsan/Achae-Ai% IDaewoo Liable for

;<HAP

Stoc- Losses fro% Accountin/ ,raudJ,

<E4S, 2a" :), ())*# 1ud/%ent of 2a" (D,

())*, Seoul District Court, ())) Gaha& HDDE8#

1D1

())) Gaha& HDDE8, at CF Securities Exchan/e Act, art# 1DEA8, 1* W 1 7S# 0orea9# ())) Gaha& HDDE8, at 1HA1D# Investors that &urchased the co%&an"'s stoc- after ;ctober

1D(

1CCD, when serious accountin/ &roble%s were widel" re&orted in the %edia, were excluded outri/ht. Id# at 1:# In two others cases, however, different district courts found that liabilit" should extend until <ove%ber 11, 1CCC when the /overn%ent issued it for%al re&ort# San/A Hee 0i%, 3unAsi-AhoeA/"e tuA.aA.aAsonAsil silAsaA/"eolA/wa balA&"oAttaeA--aA.i IInvestor Losses

due to Accountin/ ,raud !ntil Announce%ent of Due Dili/ence J,

;<HAP

<E4S, Se&t# 1),

8*

made strides in see*ing restitution, they ha%e also been reproached for their own failures. Aassi%e Daewoo shareholders did not monitor managerial decisions. Institutional in%estors, particularly foreign ones, despite their holdings and sophistication remained .ust as complacent. 3hareholders faced inherent limitations, legal hurdles and company obstruction in their ability to see* accountability or transparency. Instead, they passi%ely relied upon the state to protect them. =nly after Daewoo collapsed were they prompted to ta*e action through legal recourse.

D. 4ompliant 4ommercial 1an*s and 3ilent Debt':olders

+enders and purchasers of debt were no different in their neglect of corporate go%ernance o%ersight. ,hey did not engage in go%ernance'related acti%ity such as demanding transparent accounting, ensuring lending discipline or electing representati%es to the borrower$s boards. 3ophisticated foreign ban*s and debt holders similarly should ha%e utili-ed their lending position to access financial information and monitor board decisions. 4ommercial sta*eholders neglected these opportunities. ,hey instead suffered from a combination of a historical legacy of contentment, o%er' reliance upon the go%ernment, dishonest practices, and their own go%ernance problems. ,he ineffecti%eness of ban*s in corporate go%ernance can be e0plained by
())*F 1ud/%ent of Se&t# 1), ())*, Seoul District CourtF 1ud/%ent of 1an# 1:, ())8, Seoul District Court, ())) Gaha& HDD8D, at *1A*(# 1ud/%ent of 1an# 1:, ())8, Seoul District Court, ())) Gaha& HDD8D# eon/A1ae 2oon, DaewooA.eonA.a soAae-A.uA.u, bunAsi-AhoeA/"e

sonAbaeAso ilAbuAseun/Aso IDaewoo Electronics 2inorit" Shareholders Partiall" 4in Accountin/ ,raud Co%&ensation ActionJ, EDAIL , 1an# 1:, ())8#

88

multiple factors. /irst, historically, ban*s followed the direction of policyma*ers who used administrati%e guidance to ma*e sure chaebol recei%ed policy loans for go%ernment'led pro.ects. >nder &orea$s main ban* system, each commercial ban* acted as primary lender of a particular chaebol.1D3 /inancial crisis partially spread because ban*s .ust followed policyma*ers and did not pro%ide adeIuate lending discipline o%er the chaebol as their corporate debt to eIuity ratios reached as high as 5!! percent.1D* Daewoo$s main ban*, &orea /irst 1an* E&/1F, &orea$s oldest ban*, in particular, was at the center of the storm during the financial crisis. 1D5 &/1 not only was a poor monitor of Daewoo but it also failed to detect its financial problems and did nothing to stem its credit problems.1D" &/1$s own incapability should ha%e recei%ed more attention because it ser%ed as main ban* for a string of chaebol that went ban*rupt right before the crisis.1D#
1D:

$he s"ste% drew its ori/ins fro% 1a&an. S!<GAHEE 14A, A <E4 PA+ADIG2 ,;+

0;+EA'S EC;<;2IC DEBEL;P2E<$ 7Pal/rave Press, ())19, at 1:C# ,or a review of the 1a&anese ban-in/ s"ste% see A0IHI+; 0A<A
A

> DABID 4;;, $HE 1APA<ESE 3A<0I<G

C+ISIS ;, $HE 1CC)S 7I2, 4;+0I<G PAPE+, 4PQ))QH, 1A<# ()))9#

1D*

Id# at (D# !nli-e 1a&an or Ger%an", the civil law countries fro% which 0orean law

derived, co%%ercial ban-s did not own eKuit" sta-es in their borrowers and focused on cor&orate lendin/ and /uaranteein/ bonds#
1D8

0i%, su&ra note Error@ +eference source not found, at :()A:((# Daewoo's woes to&&led

0,3 and led to a /overn%ent ta-eover#

1DE

At one &oint, Daewoo even atte%&ted to see- control of 0,3# Lee, su&ra note Error@

+eference source not found, at 1E*# Lar/el" to li%it chaebol ownershi&, the ban-in/ laws did not allow an individual investor to own %ore than * &ercent of a ban-# 3an-in/ Act, Law <o# EEC1 of ())(, art# (#
1DH

$he failures of 0ia 2otor, Hanbo Grou&, 4oosun/ Grou& and Sa%%i Grou& in fact

s&ar-ed the s&read of the Asian financial conta/ion to 0orea#

8E

,oreign

commercial lenders differed little from domestic ban*s in their la0

lending practices.1DD ,hey did not ensure accounting transparency or proper corporate go%ernance# ,hey displayed the same imprudence as domestic ban*s in mismanaging ris* e0posure to Daewoo. >nli*e domestic ban*s, howe%er, they could not blame Iuestionable lending decisions on administrati%e guidance, political pressure or lac* of financial e0pertise. In ma*ing $5.1 billion in foreign currency loans, foreign ban*s generally admitted that they had lent to Daewoo as bac*ed by (&orea Inc.) 1DC In the end, o%er 1C! ban*s from 1!! countries around the world lent to Daewoo affiliates. 1C)
,oreign

ban*s cannot escapes responsibility for failing to act as competent monitors.

Gi%en their sophistication, they remained .ust as culpable for passi%ity, improper ris* assessment and o%er'committing depositor money to high'ris* Daewoo loans. 1an*s themsel%es operated under ineffecti%e go%ernance.191 3election of ban* e0ecuti%es, for e0ample, was a politically'charged affair determined by a confluence

1DD

Interestin/l", 1a&anese ban-s were not ex&osed to Daewoo havin/ ended their loans in

,ebruar" 1CCE# Daewoo Suicide, su&ra note Error@ +eference source not found, at 18*#
1DC

$he loans were &ri%aril" %ade to Daewoo Cor&#, Daewoo 2otor, Daewoo Electronics and

Daewoo Heav"# 1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at 1HF Daewoo Suicide, su&ra note Error@ +eference source not found, at 1)*#
1C)

Let $he 2ar-et ,ix Daewoo, 3!SI<ESS 4EE0 I<$'L, Au/# 1E, 1CCC# 2nother account

&rovided that ()) forei/n credit ban-s were due GC#C* billion. Daewoo Suicide, su&ra note Error@ +eference source not found, at CHF 0i% Chon/A$ae, Des&erate %easures %i/ht be too

little, too late, 3!S# 0;+EA, Au/# 1, 1CCC 75Daewoo has !SGH#H billion in overseas debt,
althou/h that has been reduced b" !SG1#D billion since Au/ust 1CCD# ;f the total, the /rou& has /uaranteed the rede%&tion of !SG1#* billion#69
1C1

1AEAHA PA+0, ASIA< DEBEL;P2E<$ 3A<0 I<S$I$!$E, C;+P;+A$E G;BE+<A<CE

I<

;,

3A<0S

+EP!3LIC

;,

0;+EA 7())*9# See Section I#C#

8H

of bureaucratic in'fighting, party politics and chaebol lobbying. ?ulnerability to e0ternal pressure compromised independence, with the go%ernment$s policy interests usually pre%ailing. 1oards hence did not operate under mar*et'oriented principles that focused on profits, shareholder %alue or ris* assessment. ,hey followed the too'big' to'fail myth and rec*lessly e0tended credit under go%ernment direction. @hen financial crisis hit, ban*s stood paraly-ed without direction from regulators. In the worst cases, ban* officers recei%ed commercial *ic*bac*s from corporate borrowers when granting loans, not only on generous terms but also in undeser%ing, high'ris* situations.19 1an*s themsel%es operated under suspect accounting standards,

particularly their generous treatment of non'performing loans. /inally, in the case of Daewoo, ban*s argued that they were decei%ed by the concealed accounting fraud. ,hey claimed they did not *now the seriousness of the group$s financial situation due to the sophisticated international machinations. &/1$s senior managers testified that they first detected problems with Daewoo$s balance sheet, in particular its cash flow and business profits, only in 199#. 193 <e%ertheless, commercial ban*s appear to ha%e been complicit partners with a measure of *nowledge and disregard to warning signs.1C* 2s early as 19DD, for e0ample,
1C(

0i%, su&ra note Error@ +eference source not found, at :()A:((# In this cri%inal case, three Daewoo executives were for convicted for defraudin/ 0,3 in

1C:

1CC* into issuin/ a letter of credit for G18) %illion# $he court sentenced the defendants to &rison ter%s ran/in/ fro% two and one half "ears to three "ears# !n/Aseo- 0o, 'SinA"on/A

.an/ saA/iAdaeAchul' .eon DaewooAi%AwonAdeul silAh"eon/ ILetter of Credit Lendin/ ,raud@ Prison $er% for for%er Daewoo ExecutivesJ,
;<HAP

<E4S, 1une (1, ())(# 1ud/%ent of

1une (1, ())(, Seoul District CourtF Daewoo Suicide, su&ra note Error@ +eference source not found, at (1#
1C*

0i% > 3ae, su&ra note Error@ +eference source not found, at 1(#

8D

commercial ban*s charged Daewoo the highest rates among ma.or conglomerates due to its ris*s.1C8 =ne court found substantial contributory negligence against a ban* for a delinIuent loan to Daewoo 7otor#1CE Des&ite the accountin/ fraud, the ban* shared D! percent of the fault while e0ecuti%es were held liable for only si0 billion won E$5 millionF out of a forty billion won E$33.3 millionF loan. ,he court stressed that the ban* *new that (accounting fraud was rampant among &orean chaebol) and that they (*new that Daewoo 7otor financial condition was not good.)1CH 2s with shareholders, only after the meltdown ha%e ban*s and their insurers finally become acti%e in see*ing accountability. /irst, they pursued legal actions for repayment of delinIuent loans made possible through the accounting fraud. 19D In =ctober !!C, for instance, @oori 1an* won a billion won E$ millionF .udgment

against senior e0ecuti%es of Daewoo ;lectronics #1CC Defendants were found liable for
1C8

Susan Chira, Daewoo Awaits Aid 2ove, <# # $I2ES, <ov# C, 1CDD, at DC# San/AHee 0i%, DaewooAcha bunAsi-AhoeA/"eAdaeAchul, 0i%AwooAchoon/Assi deun/ E)Aeo-

1CE

baeAsan/ I4oo Choon/ 0i% and ;thers Liable for E 3illion 4on 7G8 %illion9 for Accountin/ ,raudArelated Loans to Daewoo 2otorJ,
of <ov# (*, ())*, Seoul District Court#
1CH

;<HAP

<E4S, <ov# (*, ())*F 1ud/%ent

Id#
Article *)1 of the Co%%ercial Code &rovided the basis for attributin/ director liabilit" to

1CD

third &arties such as the ban-# 1CC $he Seoul Hi/h Court u&held the liabilit" and also found the statute of li%itations a/ainst executives and accountants involved should be ten "ears and not three "ears as &rovided in the Civil Code# San/AHee 0i%, 3unAsi-AhoeA/"e daeAchulA&iAhae sonAbae soA%"eolAsiAh"o 1)A

n"eon I$en

ear Statute of Li%itations for Co%&ensation Clai% for Loan Losses fro%
;<HAP

Accountin/ ,raudJ,

<E4S, ;ct# (D, ())*# 1ud/%ent of <ov# E, ()):, Seoul District uA1in Shin, IAsaAdeulAi i%A%uAreul /eAeulAriAhan /"eolA/wa .eA:A

Court, ())( Gaha& D()H:F

.aA/a sonAhae bwatAdaA%"eon soA%"eolAsiAh"oAneun 1)An"eon IStatute of Li%itations $en

8C

accounting misrepresentations that led to 5.D billion won E$ 5.D millionF in losses to the ban*#()) 2s mentioned abo%e, in <o%ember !!C, @oori 1an* also won a si0 billion won E$5 millionF .udgment against fi%e Daewoo 7otor e0ecuti%es including @oo 4hoong &im#()1 3imilarly, in Guly !!1, the &orea ;0port Insurance 4orporation E&;I4F won a 5! billion won E$ !D millionF ci%il .udgment against @oo 4hoong &im for guarantees he made on %arious ban* loans to Daewoo. ! =ther than ban*s, debt'holders such as in%estments trusts, guaranty companies, merchant ban*s and insurance companies collecti%ely neglected corporate go%ernance despite acIuiring or guaranteeing 19.# trillion won E$1C.1 billionF

ears if Director's <e/lect of Duties Causes Da%a/e to $hird Part" J, L# $I2ES 7Seoul9,
<ov# H, ()):#
())

$he Court in &articular allowed the case to &roceed when it held that the statute of

li%itations for case brou/ht under Article *)1 of the Co%%ercial Code was ten "ears and not three "ears as &rovided under the Civil Code# $he defense had ar/ued that statute of li%itations would have ex&ired on <ove%ber ())(, three "ears after the due dili/ence audit of Daewoo Electronics in <ove%ber 1CC(# $his decision cleared the wa" for %an" other creditors in their actions a/ainst Daewoo# $he outside director, however, esca&ed liabilit" because a&&l"in/ a different standard the court found he did not co%%it /ross ne/li/ence .
()1

0i%, su&ra note Error@ +eference source not foundF 1ud/%ent of <ov# (*, ())*, Seoul

District Court#
()(

0DIC's clai% arose out of &ersonal /uarantees that the" had secured fro% 0i% for

insurin/ ex&ort financin/ loans to Daewoo Cor&# and Daewoo 2otor fro% several do%estic ban-s# 4hen Daewoo defaulted on the ban- loans, 0EIC &ursued le/al action a/ainst 0i%#

3eo&Awon 50i%AwooAchoon/Assi (AcheonA8))Aeo- /a&AaAra6 ICourt@ 54oo Choon/ 0i%, Pa" (8) 3ILLI;< 4;< 7G()D
:1, ())1, Seoul District Court#
2ILLI;<96J,
;<HAP

<E4S, 1ul" :1, ())1F 1ud/%ent of 1ul"

E)

Daewoo debt in 199D at e0orbitant interest rates.

!3

,he in%estment trust industry held

1D." trillion won E$15.5 billionF in Daewoo debt, almost one'third of the conglomerate$s total debt. !C 7erchant ban*s furthermore held .9 trillion won E$ .C billionF, life insurance companies, 1.1 trillion won E$!.9 companies, 1.1 trillion won E$!.9 billionF.
!5

billionF and securities

3eoul Guaranty Insurance, for instance,

had guaranteed a substantial amount of Daewoo$s bond offerings and was held responsible for o%er #. trillion won E$" billionF, which amounted to 1 K of

Daewoo$s total debt. !" ,hree hundred and si0ty'eight foreign institutions also owned at least $C.1 billion of Daewoo debt instruments.
():

!#

Debt holders and guarantors,

;f this debt, 11#: trillion won 7GD#1 billion9 consisted of cor&orate bonds and D#* trillion

won 7GE billion9 consisted of co%%ercial &a&erF in addition to D#* trillion won 7G8#E9 in bonds and :#E trillion won 7G(#*9 in co%%ercial &a&er that alread" existed at the end of 1CCH. 1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at (F 0i% > Son/, su&ra note Error@ +eference source not foundF 0i% > 3ae, su&ra note Error@ +eference source not found, at 11#
()*

Co%%ercial ban- ex&osure was relativel" lar/er when co%&ared to invest%ent trust

ex&osure# $he /overn%ent subseKuentl" too- over the lar/est invest%ent trusts, 0orea Invest%ent $rust and Daehan Invest%ent $rust, who held %ost of the debt . 1CCC Govern%ent

+e&ort, su&ra note Error@ +eference source not found, at *#

()8

Id#F Sa%Asun/A0"oAboDaeAhanAsaen/A%"eon/ Daewoo daeAchul san/AdaeA.eo-AeuAro -eo

ISa%sun/A0"oboADaehan Life's Loans to Daewoo +elativel" Lar/e J, CH;S!< IL3;, Se&t# 1:, 1CCC, at 1*#
()E

Id#
P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+,

()H

supra note ;rror5 6eference source not

found, at 1#. $hrou/h its le/al %andate, 0A2C; s&ent over 1(#H trillion won 7G1)#E
billion9 to acKuire :8#E trillion won 7G(C#H billion9 of Daewoo's nonA&erfor%in/ loans, of which over G* billion consisted of nonA&erfor%in/ loans fro% forei/n creditors# 0;+EA ASSE$

E1

domestic and foreign, suffered de%astating financial losses, partially due to their own neglect. Despite their holdings, these financial institutions did nothing in terms of corporate go%ernance. ,hey passi%ely acIuired Daewoo debt in part as a rec*less attempt to increase their own profit margins and in part due to implicit guarantees and pressure from the go%ernment. !D Daewoo bonds and commercial paper had long been discounted at substantially higher rates than other chaebol due to its ris*s.
!9

7any

clung to the same moral ha-ard that despite the ris* the go%ernment would ne%er let Daewoo go under. 1! /urthermore, in early 1999, regulators (threatened and pleaded) in%estment trusts to rollo%er Daewoo bonds that reached maturity. 6egulators resorted to arm'twisting because they belie%ed they had to pre%ent a dangerous run on Daewoo that could threaten the bond mar*et which almost occurred.
11

Daewoo$s

o%erwhelming debt compounded the go%ernment$s inability to respond decisi%ely. 3ince the financial crisis, ban*s, in%estment trusts and other debt holders

2G2$# C;+P#, <;<APE+,;+2I<G L;A< +ES$+!C$!+I<G ,!<D 4HI$E PAPE+ :*:A*8 7())*9 Ihereinafter 0A2C; 4HI$E PAPE+J#
()D

Daewoo Suicide, su&ra note Error@ +eference source not found, at H(#
$he 0DIC sued one executive of an invest%ent trust for violatin/ his dut" of care in

()C

&urchasin/ hi/hAris- Daewoo bonds# $he court dis%issed the case, a/reein/ that he fulfilled his fiduciar" dut" b" rel"in/ u&on credit ratin/ a/enc" re&orts . G DEB# I<S$# P;LIC
E;<GA2!0 I2,

0;+EA

+ESEA+CH SE+IES ())*A)*, CHAEAG4;<ASIA1A<GAEASE;A!I

SI<A ;<GA

P E;<GAGAAGIA<E!<G GAEASE;<AE!L 4IAHA< 1E;<GACHAE0A3A<GAH A<G

IP;LIC

S!GGES$I;<S

$; I2P+;BE $HE

C+EDI$ ASSESS2E<$ ,!<C$I;<

I< $HE

3;<D 2A+0E$J 8*

7())*9F Seoul District Court, ())1 Gaha& *8CD8 7())19#

(1)

Lee, su&ra note Error@ +eference source not found, at 1E8#

(11

Daewoo Suicide, su&ra note Error@ +eference source not found, at H:.

E(

related to Daewoo ha%e undergone e0tensi%e o%erhauls to impro%e their performance, transparency and independence. 7any ha%e been ta*en o%er by multinational entities. Go%ernment inter%ention that compromised independence has been curtailed. 7any institutions ha%e finally begun to operate with rigor under mar*et'oriented principles, particularly regarding their business practices. 2s with eIuity in%estors, howe%er, leading up to the debacle, lenders and debt holders, domestic and foreign, did not play a role in corporate go%ernance o%ersight. 1

;. +abor +imitations

2mong other actors, Daewoo labor and employees did not act to pro%ide internal controls or o%ersight concerning the conglomerate$s corporate go%ernance. 2s interested sta*eholders, they had incenti%e to function as acti%e monitors. Bet, they did not operate as a chec* to pre%ent wrongdoing by senior management. 2n assortment of factors ranging from board structure to wea* ownership, to lac* of information and to ineffecti%e organi-ation limited them from operating more %igorously. =nly after the collapse did labor representati%es ta*e action such as when they organi-ed international e0peditions to try to bring @oo 4hoong &im to .ustice. /irst, despite &orea$s continental law bac*ground that could trace its origins to German law, formal labor participation on boards of stoc* companies ne%er e0isted
(1(

Daehan Life Insurance a%on/ others later &ursued le/al actions to see- da%a/es fro%

Daewoo executives ste%%in/ fro% the accountin/ fraud related to the debt# 3ae-AGi 0i%,

53unAsi-AhoeA/"eAro sonAhae i&AeotAda6 0i%AwooAchoon/ .eon DaewooAhoeA.an/ deun/ san/Adae DaeAhanAsaen/A%"eon/ (DAeo- sonAbaeAsoA.eA/i IDaehan Life (#D 3illion 4on 7G(#: %illion9 Co%&ensation Suit A/ainst 4oo Choon/ 0i% Daewoo Chair%an and ;thers for
5Losses fro% Accountin/ ,raud6J, L# $I2ES, 1an# C, ())*#

E:

under corporate law.

13

&orean law adhered to a one'tiered board structure without

codetermination. +abor focused on impro%ing wor*ing en%ironment, .ob stability and wage increases. 4ontentious management and labor relations did not translate into policy discussion on securing board representation. In the case of Daewoo, due to its history of growth through acIuisition, it had the (highest possibility of labour conflict arising out of their restructuring efforts) because laborers from the acIuired company feared prospects of downsi-ing.
1C

1itter, prolonged stri*es plagued Daewoo

companies. 15 +abor, howe%er, did not e0tract concessions related to corporate go%ernance that might ha%e constrained e0cesses of the controlling shareholder and e0ecuti%es. 3econd, labor and employees were wea* owners. 2s with most &orean companies, Daewoo companies had employment stoc* ownership plans E;3=AF but they did not function as a monitoring force.
1"

/irst, a%erage holding of ;3=As in

(1:

0orea lar/el" followed 1a&an's cor&orate law that also ado&ted a sin/leAtier board des&ite

initiall" receivin/ a Ger%an trans&lant of cor&orate law# 0atharina Pistor et al, $he Evolution

;f Cor&orate Law@ A CrossACountr" Co%&arison, (: !# PA# 1# I<$LL EC;<# L# HC1, D*C

7())(9#
(1*

Seo-

un > 2"eon/A1in Shin, 0orea's $o& $en Chaebol@ Part I 71une 1CCD9, Credit

Suisse ,irst 3oston, at :)#

(18

Accordin/ to the 2inistr" of Labor, between 1CC8 and 1CCD, Daewoo had sixteen labor

stri-es, second onl" to H"undai. Id# at :1#

(1E

0orea started to ado&t ES;Ps in 1CH*, but ownershi& re%ained %ar/inal# Ca&ital 2ar-ets

Pro%otion Act, Law <o# ()*E of 1CED art# E 7re&ealed b" Law <o# 8(8* of 1CCH9# 3efore this law was even ado&ted, in 1C8D, uhan Cor&oration beca%e the first co%&an" to issue

ES;PAt"&e shares to its e%&lo"ees as a %eans of i%&rovin/ the welfare of e%&lo"ees and labor and %ana/e%ent relations# In ())1, the le/al fra%ewor- for ES;Ps was overhauled#

E*

Daewoo companies remained small and a%eraged only !."1K at the end of 199#.

1#

;3=As also remained capti%e to company interests with company insiders dominating operations. 1D 7oreo%er, under the regulatory structure go%erning ;3=As, plan participants had to either delegate %oting rights to the head of the ;3=A or e0ercise the %ote themsel%es. 4ollecti%e action problems similar to those of minority shareholders led plan participants to do neither. ,he head of the ;3=A would thus shadow %ote the shares of the plan. <o e%idence could be found that Daewoo$s ;3=A operated any differently. In the end, the %alue of Daewoo ;3=As plummeted, lea%ing thousands of employees without their retirement sa%ings. =ther factors affected the ability of labor and employees to become more acti%e monitors. ,hey had limited access to information. 2s witnessed through operation of the 1/4, for e0ample, only a handful of senior managers *new of the accounts. /urthermore, under the hierarchical decision'ma*ing structure, employees rarely challenged their superiors. 2 strong culture of group loyalty pre%ailed. <o one raised issues or engaged in whistle'blowing.
19

;%en after the dismantlement of the

E%&lo"ees 4elfare ,unda%ental Act, Law <o# E81) of ())1 art# (HA*( 7as a%ended Law <o# H18C of ())*9# Seon/AChan Par-, SinAuAriAsaA.uA.eAdoAui .uA"o naeA"on/A/wa h"an/Ahu

/aeAseon "eonA/u saAhan/ ICentral As&ects of the <ew ES;P S"ste% and ,uture +esearch Issues $oward Its I%&rove%entJ, * G;;D C;+P# G;BE+<A<CE +EB# ( 7())(9 7S#
(1H

0;+EA9#

1inban/ 0i%, ;wnershi& Structure, in HA<AG!0A!I 8ADAEA1AEA3E;LA3AE0ASE; I4HI$E

;<

PAPE+

$;P 8 0;+EA< CHAE3;LJ 7PSPD Partici&ator" Societ" +esearch Centre ed#,

<ana% Publishin/ 1CCC9,available at Phtt&@QQchaebol#inha#ac#-r#S7last visited 2ar# H, ())H9#

(1D

3eo% Cheol Cin, SinAuriAsaA.uA.eAdo SilAtaeA.oAsaAwa ;eA/u-A.eAdo 3iA/"oA"eonA/u IA

Stud" on the Actual ;&eration of ES;Ps and a Co%&arison with ,orei/n S"ste%s J, 2inistr"
of Labor 7())*9, at 8#
(1C

4histleblowers in the &ublic sector received le/al &rotections onl" in 1anuar" ())(# Crai/

E8

conglomerate, former Daewoo employees ha%e not written e0posQs on what led to the meltdown.
!

,herefore, labor and employees did not play a role in corporate go%ernance. ,hey did not ha%e influence in the selection of board members since codetermination ne%er emerged in &orea. +abor unions or ;3=As furthermore did not effecti%ely organi-e to pro%ide o%ersight as part of playing a more acti%e role in go%ernance. Institutional and legal barriers such as regulatory restrictions and lac* of information compounded the limitations they faced.

I?. @here @ere the Gate*eepers and Aublic Guardians8

2s with all corporate scandals, a flurry of finger pointing ensued as e%eryone sought to pin blame for Daewoo$s debacle. >ltimately, no single entity can be faulted for the fiasco. <ot only did standard internal corporate go%ernance brea*down, but also a comprehensi%e brea*down occurred on the e0ternal le%el. In particular, gate*eepers, domestic and foreign, did not fulfill their respecti%e functions.
1

2ccounting firms, credit rating agencies, securities analysts and in%estment ban*s did
P# Ehrlich > Dae Seob 0an/, Inde&endence And Corru&tion In 0orea, 1E C;L!2# 1# ASIA< L# 1 7())(9.
(()

;ne exce&tion is 4ooAIl 0i%, the for%er Daewoo senior executive in char/e of

restructurin/ of the entire /rou&# 0i% > Son/, su&ra note Error@ +eference source not found# He also wrote a se%iAfictional account of the con/lo%erate# 4;;AIL 0I2, 2!<AE;A<E!< 4AE 1!AGE;<A<E!<GAGAV I4H
((1

DID $HE ;C$;P!S DIEVJ, 7Daewoo 2>A ())89#

+einier H# 0raa-%an, Gate-ee&ers@ $he Anato%" of a $hirdAPart" Enforce%ent Strate/" ,

(# 1#L# EC;<# > ;+G# 8: 71CDE9F Ste&hen Choi, 2ar-et Lessons for Gate-ee&ers, C( <4# !# L# +EB# C1E 71CCD9F Coffee, su&ra note Error@ +eference source not found#

EE

not do enough to pre%ent the mismanagement and fraud. In addition, public sectors guardians did not establish the legal discipline necessary for corporate go%ernance to operate effecti%ely. 6egulators, prosecutors, .udges and ta0 authorities left corporate malfeasance uncorrected. Inordinately generous, their failure to discharge their public functions compounded the catastrophe. @hat gate*eepers and guardians *new in terms of Daewoo$s dire financial situation remains unclear. Gi%en the enormity of the fraud it is hard to belie%e that they did not ha%e an in*ling of problems. 4ourts ha%e reached conflicting conclusions. 3ome courts ha%e held that financial institutions and in%estment ban*s did not *now the e0tent of troubles because it was concealed by accounting fraud. ((( ,hey would not ha%e e0tended loans and would not ha%e acIuired or guaranteed bonds had they *nown the e0tremity of the situation. =ther courts, howe%er, reached contrary conclusions by finding sufficient awareness among certain parties, particularly accountants, and allocated contributory negligence.((: ,his chapter assesses the roles of gate*eepers and guardians in the Daewoo crisis. It specifically focuses on accounting firms, in%estment ban*s, analysts, credit agencies, regulators, prosecutors and the court system. It sur%eys how they maintained a neglectful attitude toward chaebol with regard to transparency and accountability. ,he chapter concludes with a discussion on the changes that ha%e strengthened e0ternal corporate go%ernance. ;nforcement discipline in particular has de%eloped out of new alternati%e mechanisms that operate outside of corporate law.

(((

())1 <o ()E:, at :H# $he Su&re%e Court affir%ed that ban-s and issuers did not -now

the extent of the accountin/ fraud# ())( Do H(E(, at EA1)#

((:

0i%, su&ra note Error@ +eference source not found.

EH

2. 2ccounting =%ersight5 4hong'>n and 3an ,ong

,he e0ternal auditor$s inability to pro%ide proper auditing and accounting contributed directly to Daewoo$s financial scandal. ,his occurred e%en though Daewoo$s accountants were associated with global accounting firms with stellar reputations. @hen Daewoo collapsed, local firms bore the brunt of the blame while global partners con%eniently escaped scrutiny.((* Daewoo$s accounting troubles were dismissed as &orean problems that arose out of a combination of ineffecti%e regulatory super%ision, a lac* of accountability, conflicts of interest and wea* self' regulation.
5

In the aftermath, unprecedented liability has helped to establish

compliance in the industry. Daewoo$s primary accounting firms, 4hong'>n and 3an ,ong, both leading accounting firms at the time, were associated with :orwarth International and &A7G, respecti%ely. 4hong'>n ser%ed as e0ternal auditor for Daewoo Arecision, &yungnam 7etal and Daewoo ,elecommunications#((E 3an ,ong, &orea$s second largest firm at one point, ser%ed as lead accountant for se%eral, ma.or Daewoo companies for o%er
((*

Chon/A!n served as the 0orea affiliate of Horwath International whereas San $on/ was

lon/Aassociated with 0P2G# 1ohn 3urton, Partners Endorse Pro&osed 2er/er, ,I<# $I2ES, 2ar# (), ())(, at *) 750P2G was onl" 5indirectl" affected b" the 1CCC colla&se of Daewoo69# Initiall", Daewoo sou/ht to differentiate itself as a leader in accountin/ trans&arenc"# In 1CHE, for instance, Daewoo beca%e one of 0orea's first co%&anies to follow international standards when it hired Peat, 2arwic- > 2itchell to start &roducin/ consolidated 7co%binedV9 financial state%ents accordin/ to !#S# accountin/ standards# A/uilar > Cho, su&ra note Error@ +eference source not found, at 1)#
((8

;<HAP

<E4S,

supra note Error@ +eference source not found.

((E

Ahn 0won audited Daewoo 2otor and An.in audited Daewoo Electronics#

ED

ten years.

7ar*et participants, domestic and international, relied upon the global

reputations of :orwarth and &A7G when doing business with Daewoo. :orwarth and &A7G in turn e0tracted benefits for lending their credibility. Bet, despite being aware of international auditing and accounting standards, but they did not adeIuately transplant these practices into their local partners. 2lthough accounting firms claimed that they did not *now of the accounting fraud because of Daewoo$s concealment, many other factors contributed to their inability to function properly.
D

/irst, tolerance to accounting misstatements and

opaIueness pre%ailed. Industrial policy under the de%elopmental state tacitly condoned inflation of financials under the prete0t that companies needed financing to grow.
9

2ccounting firms belie%ed that go%ernment would act as a safety net and

resol%e any serious problems. 2t the same time, regulatory, ci%il, or criminal accountability of the auditing industry remained practically non'e0istent. 2ccounting firms were not held responsible to shareholders, creditors or other sta*eholders at large due to wea* pri%ate and public enforcement.
3!

/ailure to comply with

accounting or auditing standards such as omitting important matters from audit reports
((H

$he" served as the lead accountant for Daewoo Cor&# in addition to Dinners Club 0orea,

Daewoo Heav" Industries, Daewoo 2otor Sales and Ssan/"on/ 2otor# At its &ea-, San $on/ had over H)) accountants. Daewoo Suicide, su&ra note Error@ +eference source not found, at (H)#
((D

CH;I, su&ra note Error@ +eference source not found, at E:AE*# 2

!<GAS!

((C

CH;I, D4IA1IPAE;A3;A<E!<

G E;<GA1E H;EAG EA3!A1E;<G IA AAGI

IEC;<;2ICS

$!+<ED A+;!<D@ ACC;!<$I<G 2ISS$A$E2E<$ S$;+IESJ (8 7Goodinfor%ation 1CCC9# See Section II#C > III# E#
(:)

eon/A3ae 0i%, Daewoo (:A.oAwon, --oAri .a&AhinAda IDaewoo's (: $rillion won 7G1C#(
;+EH,

billion9, $ail is Cau/htJ, HA<0

1ul" (E, ())), at (1#

EC

or ma*ing false statements led to criminal sanctions or ci%il liability in theory only.

31

/rom a practical standpoint, accounting firms belie%ed they could not afford to offend the chaebol, their dominant re%enue'generating clients.
3

2 structural

dependency de%eloped because firms relied on chaebol business that pressured them into o%erloo*ing Iuestionable accounting treatments.
33

In 2ugust 199", for e0ample,

a group of accountants from 3an ,ong apparently debated on whether to publicly e0pose Daewoo$s accounting problems.
3C

In another instance, 3an ,ong was

apparently informed that issuance of o%er 15 trillion won E$1".# billionF in commercial paper was based upon false records.
35

In both cases, business as usual

pre%ailed and nothing transpired. /inally, larger accounting firms de%eloped their own moral ha-ard because they presumed that their stature made them so important they could not be allowed to fail. 2fter Daewoo$s accounting fraud came to light, regulators sent shoc*wa%es throughout the industry when they suspended 4hong'>n and 3an ,ong from recei%ing new business, the most se%ere sanctions in history.(:E 4hong'>n recei%ed a one'month
(:1

External Audit Act, art# 1HF Securities Exchan/e Act, art# 1CH 7S# 0orea9# San $on/, for exa%&le, /enerated over 18 billion won 7G1(#8 %illion9 in annual revenue

(:(

fro% Daewoo co%&anies. 2olAra-Ahan /on/Ar"on/A/iAeo& UEnAronADaewoo' eoAtteon chaAi

itAna I,ailed Dinosaur Co%&anies@ Differences between Enron and Daewoo J, 2AEIL 3!S#
<E4SPAPE+, 1an# (8, ())(#
(::

0i%, su&ra note Error@ +eference source not found#

(:*

Daewoo Suicide, su&ra note Error@ +eference source not found, 1*8A8(#
$he executive su//ested that San $on/ should disclose that it did not discover the

(:8

fraudulent state%ents, but the fir% alle/edl" did not heed the advice . 0i% > Son/, su&ra note Error@ +eference source not found#
(:E

Daewoo Suicide, su&ra note Error@ +eference source not found, at 18D#

H)

suspension of all new business during 7arch and 2pril of 1999, while the /33 issued a twel%e'month suspension of new business against 3an ,ong.(:H In addition, two 3an ,ong accountants recei%ed the ultimate punishment when their licenses were terminated. Arior to this, e%en after a string of accounting scandals in 199# in%ol%ing &ia 7otor, 2sia 7otor and the :anbo Group, all companies audited by 4hong'>n or 3an ,ong, only indi%idual accountants were suspended and not firms.
3D

,he sanctions

ser%ed as death *nells for the firms, which collapsed shortly thereafter. &A7G and :orwarth meanwhile a%oided any censure while they Iuietly terminated their relationships. 2ccounting firms and accountants ha%e subseIuently faced a barrage of legal claims that ha%e helped to establish legal accountability in the industry. (:C &DI4 has ta*en the lead among claimants against accountants.
(:H

C!

2fter announcing that thirty'

Press +elease, Certified Public Accountant's Disci&linar" Co%%ission, 2ar# 1D, 1CCC# Aside fro% &a"in/ into the Co%&ensation ,und their entire 1CCH auditin/ fees fro% the

(:D

res&ective co%&anies, Chon/A!n and San $on/ were .ust restricted fro% auditin/ 0ia 2otor and Asia 2otor for three "ears# Chon/A!n continued to serve as the &ri%ar" external auditor of various Daewoo co%&anies for the 1CCD accountin/ "ear# Certified Public Accountants Act, Law <o# 1HCH of 1CEE art# *D 7as a%ended Law <o# ECC* of ()):9F I%&le%entin/ Decree, Decree <o# 1D:8( of ())* art# :)# See Section IB#C#
(:C

External Audit Act, art# 1HF Securities Exchan/e Act, art# 1CH# In one of the first civil

cases ever brou/ht b" an investor a/ainst accountants, in Se&te%ber 1CCH the Su&re%e Court held Chon/A!n liable for a delinKuent audit of 0orea Steel Pi&e, a co%&an" that colla&sed, under the Securities Act and /eneral tort law of the Civil Code that has a tenA"ear statute of li%itations# 1ud/%ent of ;ct# ((, 1CCC, Su&re%e Court, CH Da (E888#
(*)

$he fir%s i%&licated included An.in > Co#, Ahn 0won > Co# and San $on/ and Daewoo

executives were coAdefendants in the actions# Daewoo Executives Cause 4 *#(E $ril# in

Losses, 0;+EA $I2ES, Se&t# (8, ())(# See Section IB#D#

H1

fi%e accountants from four accounting firms collaborated with Daewoo e0ecuti%es to commit .D1 trillion won E$ .3C billionF in accounting fraud, &DI4 compelled ban*s to bring ci%il actions to hold them responsible.
C1

1an*s such as 4ho :ung 1an* and

@oori 1an* that recei%ed public funds sued the accountants of Daewoo 4orp., Daewoo :ea%y Industries, Daewoo 7otor and Daewoo ,elecom in <o%ember and December !! . C 3imilarly, &DI4$s subsidiary, the 6esolution and /inance

4orporation, directly commenced ci%il litigation against 3an ,ong and 2hn &won for their delinIuent audits of Daewoo 4orp. and Daewoo 7otor in 3eptember !!3.
C3

In the process, unli*e commercial ban*s, courts ha%e been more li*ely to attribute *nowledge of and liability for, accounting fraud. In one of the first criminal cases, a senior 4hong'>n accountant was held to be aware of the accounting fraud at Daewoo ,elecom.(** ,he court found that the company and accountant$s collusi%e
(*1

Id#F De&ositor Protection Act, Law <o# E1H: of ())) art# (1A(#
ChiA"eon/ Shin, DaewooAbuAsilA/a%Asa SonAbaeAso itAttaAra ILiabilit" Suits Continue for

(*(

Daewoo's DelinKuent AuditsJ, D;<GA IL3;, Dec# H, ())(# Cho Hun/ 3an- withdrew its case
a/ainst Ahn 0won > Co# related to Daewoo 2otor on 2a" (C, ())*# ())( Gaha& H8E1H# AH< 04;< > C;#, A<<!AL +EP;+$ 8( 7()):9# 4oori 3an- won a ( billion won 7G1#H %illion9 clai% a/ainst for%er Daewoo Electronics executives# 0i%, su&ra note Error@ +eference source not found#
(*:

,or %ore on the +,C, see Phtt&@QQwww#rtc#or#-r#S7last visited 2ar# H, ())H9# San/AHee

0i%, 0i%AwooAchoon/ DaewooAhoeA.an/ deun/ san/Adae 18)Aeo- sonAbaeAso I18 billion won

7G1(#8 %illion9 Co%&ensation Action a/ainst 4oo Choon/ 0i% Daewoo Chair%an and ;thersJ,
(**

;<HAP

<E4S, Se&t# 18, ()):#

0orea Develo&%ent 3an- a&&arentl" loaned 88*#8 billion won 7G:CE %illion9 to Daewoo

$eleco% based u&on the fraudulent accountin/ records such as the 1CCD Audit +e&ort Chon/A !n had a&&roved# ())1 <o 1)((, at C, 11# $he co%&an" en/a/ed in :*E#E billion won 7G(:1 %illion9 of accountin/ fraud in 1CCH and *HH#C billion won 7G:*1 %illion9, in 1CCD# ())1

H(

relationship indicated intimate awareness.(*8 ,he accountant recei%ed C#! million won E$39 ,!!!F in disgorgement penalties and an eighteen'month sentence that was suspended for three years.(*E In another criminal action, the head of 2hn &won R 4o., recei%ed a si0'month sentence in prison with a one'year suspension of e0ecution and the firm recei%ed a nominal fine of ! million won E$1",#!!F for belie%ing the
C#

company$s statements and not conducting a proper audit of Daewoo 7otor and.

In

ci%il cases, courts also ha%e assessed *nowledge by accountants of the accounting fraud. CD In a .udgment for Daewoo ;lectronics in%estors, for e0ample, one court held

Gohab 1(CF Seun/A1ae 3ae-, 1eonADaewooAton/Asin saA.an/ *An"eonAh"eon/, hoeA/"eAsaAdo silA

h"eon/ I,or%er Daewoo $eleco% CE; ,our

ear Sentence, Accountants Also Sentenced J,

CH;S!< IL3;, A&r# 1:, ())1F ())1 <o 1)((, at *A8.

(*8

4hen Chon/A!n was ordered to &a" additional funds into the 2onetar" Liabilit"

Co%&ensation ,und for its delinKuent auditin/, at the accountant's reKuest, the co%&an" a&&arentl" &aid this char/e on the fir%'s behalf because the" were coo&erative in &ast audits# ())1 Gohab 1(C, at EAHF ())1 <o 1)((, at HAD.
(*E

1ud/%ent of Au/ust :), ())1, Seoul Hi/h Court, ())1 <o 1)((. In the lower court,

.ud/%ent the defendant had been sentenced to two "ears . 1ud/%ent of A&r# 1(, ())1, Seoul District Court, ())1 Gohab 1(CF art# 1C, W :# External Audit Act#
(*H

$he wea- accountin/ standards at the ti%e, the accountant's lac- of &ersonal &rofit and

the financial re/ulators sanction of the% were considered %iti/atin/ circu%stances in the cri%inal sentencin/. DaewooAcha bunAsi-AhoeA/"e buAsilA/a%Asa, hoeA/"eAbeo&Ain .eonAdaeA&"oA

.i&A"u I,or%er Accountin/ ,ir% Head Sus&ended Sentence for Daewoo 2otor Accountin/ ,raudJ,
(*D

;<HAP

<E4S, 1an# (D, ())8# 1ud/%ent of 1an# (D, ())8, Seoul District Court#

$he failure to correct the &roble%s or disclose the% violated Article E and D of the

Accountin/ Auditin/ Standards# Accountin/ Auditin/ Standards, $he 0orean Institute of Certified Public Accountants#

H:

that accountants (disco%ered many facts that indicated possible e0istence of wrongdoing and errors in the financial statements.) C9 ,hrough the Daewoo saga, for the first time, serious accountant and auditor liability has been established. ;nforcement discipline has had a rippling effect because accounting firms finally ha%e a strong disincenti%e not to relent to corporate pressure to appro%e misrepresentations. ,hey can now point to the dire conseIuences of failing to comply with the law. +eading international accounting firms, in the meantime, a%oided contro%ersy. ,he impression remains that all problems were purely local in nature.

1. In%estment 1an*s, 3ecurities 2nalysts and 4redit 6ating 2gencies

6eputational intermediaries such as in%estment ban*s, analysts and credit agencies did not pro%ide adeIuate scrutiny o%er Daewoo$s decision ma*ing and accounting problems. ,he e0tent to which these e0perts *new about Daewoo$s financial situation, or refrained from *nowing, similarly lingers as a Iuestion. In%estment ban*s underwrote enormous sums of Daewoo securities throughout the financial crisis during 199# and 1999.
5!

Industry securities analysts did not issue

51

serious warnings about the conglomerate until the middle of 199D.

(*C

4redit agencies

())) Gaha& HDD8D at :*# 2ost of the Daewoo Grou&'s underwritin/ consisted of bonds# ,ro% 1CCH to 1CCC, the

(8)

Daewoo Grou&'s total eKuities offerin/ consisted of nothin/ in 1CCH, D) billion won 7G8H#1 %illion9 in 1CCD and 1) billion won 7GD#: %illion9 in 1CCC#
(81

+e/ulators started to re/ulate anal"sts onl" after the crisis in 2a" ())1# 1eun/A/wonAhoeA

saAui "eon/Aeo&Ahaen/AwiA.unAchi- ISecurities ,ir%Ls 3usiness ;&eration +e/ulationsJ# Press +elease, ,inancial Su&ervisor" Co%%ission 7Dec# (H, ())(9 7on file with author9#

H*

maintained in%estment grade ratings until as late as 7ay 1999. Gate*eepers associated with the most prestigious firms all professed ignorance, claiming they were blinded by Daewoo$s financial wi-ardry. >nli*e commercial ban*s or accountants, legal actions see*ing liability against them has not ta*en place. 2s early as 19DD, Daewoo raised o%er $1 billion both in &orea and in international capital mar*ets such as the +ondon'based ;uromar*ets.(8( Daewoo continued to issue securities domestically and o%erseas during the 199!s through leading global underwriters. /urthermore, during the most critical period of the financial crisis, in 199D, Daewoo successfully issued 19.# trillion won E$1C.1 billionF in corporate bonds and commercial paper at interest rates ranging from 15 percent to as high as 5 percent.(8: 1etween Guly and <o%ember of 199D right before the
5C

collapse, Daewoo 7otor alone issued 1.1 trillion won E$#D! millionF in bonds.

During the underwriting process, in%estment ban*s and securities firms, domestic and international, were apparently obli%ious the problems. During criminal trials against Daewoo e0ecuti%es, courts applied a high burden of proof and agreed that financial institutions and in%estment ban*s did not *now the e0tent of the troubles.(88 4ourts held that in%estment ban*s would not ha%e acIuired or guaranteed
(8(

Chira, su&ra note Error@ +eference source not found, at DC#

(8:

1CCC Govern%ent +e&ort, su&ra note Error@ +eference source not found, at (F 0i% >

Son/, su&ra note Error@ +eference source not foundF 0i% > 3ae, su&ra note Error@ +eference source not found, at 11#
(8*

())1 <o ()E:, at D:# ())1 <o ()E:, at :H# $he Su&re%e Court affir%ed that issuers did not -now the extent

(88

of the accountin/ fraud# ())( Do H(E(, at EA1)# $his /enerous standard contrasts shar&l" with the recent %ultibillion dollar settle%ents involvin/ underwriters of 4orldCo% bonds based u&on clai%s that underwriters i%&ro&erl" relied u&on the lead underwriter and failed to

H8

Daewoo bonds had they *nown the e0treme situation concealed by the accounting fraud.(8E In general, under the generous standards of &orea$s securities law, underwriters could a%oid liability as long as they could pro%e they engaged in (due diligence.) 5# Due diligence could be established through minimal effort by merely demonstrating reliance upon an accounting firms$ audit report.
5D

>nli*e in other

countries, &orea has not seen any legal actions against underwriters for failing to conduct proper due diligence. 3ome in%estment ban*s e%en helped the chaebol flout the laws by improperly supporting affiliates. In the case of bond offerings, for e0ample, securities firms within a conglomerate were restricted from directly underwriting unsecured bonds from related affiliated companies. 6egulations e0isted to pre%ent securities firms from becoming conduits to unduly support affiliated companies. ,o circum%ent the restriction, howe%er, securities firms from different conglomerates colluded to lend each other their names to underwrite bonds of affiliates from each other$s conglomerates. 59 :ence, bonds issued by Daewoo affiliates would Scirculate in the mar*et$ through a third'party purchase by a securities firm of another conglomerateH that security would then sold them bac* to Daewoo 3ecurities. "!
conduct due dili/ence on their own# Gretchen 2or/enson, 4orldCo% $eaches a Price"

Lesson, <# # $I2ES, 2ar# 1:, ())8# See /enerall" 2erritt 3# ,ox, Shelf +e/istration, Inte/rated Disclosure and !nderwriter Due Dili/ence@ An Econo%ic Anal"sis, H) BA# L# +EB#
1))8, 1)18A(8 71CD*9.
(8E

Id.
Securities Exchan/e Act, art# 1* 7S# 0orea9# 2or/enson, su&ra note Error@ +eference source not found# ())1 <o ()E:, at *)#

(8H

(8D

(8C

(E)

Id#

HE

3ecurities analysts, among the most sophisticated obser%ers, did not differ and functioned ineffecti%ely. ,he first official concerns o%er the state of Daewoo were finally raised in Gune 199D when 4redit 3uisse /irst 1oston E43/1F issued a comprehensi%e report ad%ising caution.
"1

43/1 highlighted that relati%e to the other

"

ten leading chaebol (Daewoo stands out as ha%ing e0tremely high financing needs.)

,hey rated Daewoo$s profitability among chaebol as one that (ran*s as one of the lowest.) "3 ,hey determined that Daewoo had the highest net cross'guarantees at the end of 199#. "C In particular, they stated that they (continue to be alarmed at about Daewoo$s massi%e guarantees e0tended to its o%erseas affiliates.)
"5

,hey assessed
""

that Daewoo was in the worst position in its ability to benefit from restructuring.

3e%en months after the financial crisis hit &orea, a leading securities firm issued the first warning of Daewoo. ,hen, in =ctober 199D, <omura issued its (2larm 1ells are 6inging) report. "# In essence, the report declared that the (*ing was not wearing any clothes.)

(E1

In 2arch 1CCH, one hi/hl"Are/arded anal"st did co%%ent on 4oo Choon/ 0i% with

foresi/ht that 5I donLt -now how he %ana/es to finance all these &ro.ects, /iven that Daewoo is alwa"s short on cash#6 2atthew ,letcher > Lax%i <a-ar%i, Drivin/ $o $he

4orld, ASIA4EE0, 2ar (1, 1CCH#

(E(

un > Shin, su&ra note Error@ +eference source not found, at 1D#

(E:

Id# at (1# Id# at (E Id# at (H# Id# at *)#

Althou/h Daewoo's ris- was noted in <o%ura's 1une 1CCD re&ort Hanwha and Don/

(E*

(E8

(EE

(EH

Ah Construction were dee%ed the %ain restructurin/ concerns and not Daewoo and a 5hold6 and not 5sell6 reco%%endation re%ained for Daewoo Heav" Industries# 0oh,

HH

<omura compiled the report in response to the /inancial 3uper%isory 4ommission$s E/34F decision to impose a limit on the amount of corporate bonds financial institutions could hold. <omura foresaw that Daewoo would ha%e difficulty to withstand its credit crunch because of its o%er'reliance on corporate bonds and short' term debts, low mar*et capitali-ation and lac* of attracti%e assets. ,he report stated that during the financial crisis Daewoo (sur%i%ed solely on liIuidity procured through bond issuances.) "D ,he report e%en anticipated that Daewoo would ultimately threaten local ban*s with its (uniIue logic of too big to fail) and that o%erseas creditors would not be persuaded by it.
"9

<omura went so far as to terminate its

#!

co%erage of Daewoo ;lectronics and Daewoo :ea%y Industry.

=ne can speculate

that it too* securities analysts so long to issue warnings because their firms remained capti%e to in%estment ban*ing business. 2mong reputational intermediaries, credit rating agencies were perhaps slowest to assess the precarious state of Daewoo$s affairs. (H1 ,hey were critici-ed for reacting to unfolding e%ents instead of acting as warning systems that should ha%e led

su&ra note Error@ +eference source not found, at 1A(#

(ED

0oh, su&ra note Error@ +eference source not found, at (#

(EC

Id# at :# Id# at (#
Si%on Davies > Edward Luce, South 0orea@ Credit +atin/ A/encies !nder ,ire, ,I<#

(H)

(H1

$I2ES, Dec# 1(, 1CCHF +is- 3e"ond 2easure, EC;<;2IS$, Dec# 11, 1CCH# Do%esticall", the three %a.or credit ratin/ a/encies, 0orea Investors Service 70IS9, 0orea +atin/s and <ational Infor%ation > Credit Evaluation 7<ICE9 were established in the late 1CD)s# In 1CC), Standard > Poors be/an its covera/e of 0orean co%&anies issuin/ bonds overseas and established a local office in Au/ust ()))# <ICE si/ned a strate/ic alliance with 1a&an's +atin/ and Invest%ent Infor%ation in A&ril ()))#

HD

the mar*et#(H( In particular, leading domestic and international credit rating agencies did not downgrade &orea$s so%ereign ratings or the credit ratings of Daewoo and other chaebol in a timely fashion. ,hey all a%oided responsibility and ha%e not faced any significant scrutiny for their failures. #3 Domestic credit rating agencies maintained in%estment grade ratings for most Daewoo affiliates throughout 199D and well into 1999. ,hey remained unaffected by warnings issued in the Gune 199D 43/1 6eport and the <o%ember 199D <omura 6eport. =nly in Ganuary and /ebruary 1999 did agencies downgrade local currency credit ratings on Daewoo bonds of leading companies such as Daewoo 4orp., Daewoo 7otors, Daewoo ;lectronic, Daewoo :ea%y, Daewoo 3ecurities and Daewoo 4apital from an 2' to 111' rating. 6atings dropped from an in%estment grade of 111' to speculati%e grades of 11 or 11T si0 months later in 7ay and Gune 1999.(H* ,hese reputational intermediaries too* more than a year to respond after 43/1$s initial report. /urthermore, during this time, &I3 entered into a .oint %enture with 7oody$s in 2ugust 199D and &orea 6atings began a business alliance with /itch in Ganuary 1999. International firms pro%ided their reputations to local institutions but did not impro%e their credit assessment capability in time. International credit rating agencies located o%erseas only pro%ed marginally
(H(

Id#F G!ILLE+2; LA++AI<

E$ AL#,

E2E+GI<G 2A+0E$ +IS0

A<D

S;BE+EIG< C+EDI$

+A$I<GS, 7;ECD DEB# CE<$+E 4;+0I<G PAPE+ <o# 1(*, 1CCH9F CreditAratin/ a/encies@

4ho rates the ratersV, EC;<;2IS$, 2ar# (:, ())8 75how could S>P, 2ood"Ls and ,itch
have been so oblivious to AsiaLs /atherin/ financial &roble%s in the %idA1CC)s Ionl" to catch u& with re&eated down/rades once the &roble%s were widel" -nownJV69#
(H:

I2, su&ra note Error@ +eference source not found, at 8:# ())) Gaha& HDD8D, at 18F P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+, su&ra note Error@

(H*

+eference source not found, at (1)#

HC

more rigorous, although they did not distinguish Daewoo with other chaebol in terms of foreign currency ratings of bonds issued abroad. 1efore the crisis precipitated, Daewoo 4orp. and most other chaebol companies maintained the same in%estment grade credit ratings of 122 from 7oody$s and a 111' from 3tandard R Aoors. /oreign currency bonds generally recei%ed lower credit ratings due to foreign e0change ris* and transaction costs. ,hen as contagion spread, on December ,

199#, agencies simultaneously downgraded so%ereign ratings of emerging mar*ets such as Indonesia, 7alaysia, 6ussia and &orea.
#5

,he &orean downgrades in

particular were the (most dramatic instances of so%ereign rating downgrades in the history of so%ereign ratings, bar none.)(HE Downgrades of the chaebol corresponded with so%ereign rating downgrades. 6atings for ma.or chaebol plunged together two places each on two consecuti%e days for a total drop of four places from 111' to 1T. ## Daewoo was treated no differently. =nly after se%en month in Guly 199D did Daewoo and :yundai companies recei%e additional downgrades from 1T to 1. 2nother eight months e0pired before 3RA finally downgraded Daewoo 4orp. from a 1 to 1' in 2pril 1999. 1y Guly 1999, 3tandard R Aoor$s and /itch I142 downgraded Daewoo 4orp. by two stages from a 1' to a 444 rating that indicated that default was a possibility.
(H8

#D

E%er/in/ %ar-et debt shar&l" lower on Asian woes, +E!$E+S <E4S, Dec# ((, 1CCH#
Christo&her Huhne, After Asia@ So%e Lessons of the Crisis, ,I$CH I3CA S;BE+EIG<

(HE

C;22E<$, 1an# 1:, 1CCD, at (#

(HH

$he onl" distinction was that Daewoo Cor&# was initiall" down/raded three &laces on

Dece%ber ((, 1CCH, %ost li-el" as a result of its ino&&ortune &urchase of Ssan/"on/ 2otor# Daewoo Cor&# .oined the down/rade to a 3[ ratin/ with other 0orean cor&orates the next da"#
(HD

,itch I3CA also re%oved Daewoo Cor&# fro% its +atin/ Alert &ositive list where it had

D)

1oth domestic and international credit rating agencies therefore did not ser%e as effecti%e gate*eepers in detecting Daewoo$s problems. ,hey followed a herd mentality in mo%ing together and reacting belatedly to red flags. ,heir inability to assess the creditworthiness in a timely fashion helped lull in%estors and creditors into a false sense of security. 3e%eral factors limited their effecti%eness. /irst, until the financial crisis most corporate debt consisted of secured bonds and not unsecured debentures. #9 ,his reduced need for an acti%e mar*et for credit assessment of bonds. /urthermore, credit rating agencies faced conflicts of interest when rating corporate bonds. 4ommercial ban*s were not only the primary shareholders of credit rating agencies but also owned and guaranteed a substantial amount of bonds. <egati%e ratings by an agency could ha%e a direct impact upon the %alue of the ban*$s bond holdings. :ence, agencies faced business pressure. >nderwriters, corporate ad%isors, securities analysts and credit agencies, many from the most prestigious firms in the world, a%oided scrutiny in their roles in Daewoo$s debacle. >nli*e commercial ban*s or accountants, they ha%e not faced legal challenges. ,hey acti%ely represented and analy-ed Daewoo companies but they claim were blinded by its financial wi-ardry. 2pplying an antiIuated, high burden of proof, some courts e%en held that financial institutions and in%estment ban*s could not be held liable because they did not *now the e0tent of the problems. ;%entually, these mar*et players must face the same le%el of accountability they face in ad%anced capital mar*ets for e0ternal corporate go%ernance to de%elop in emerging mar*ets such as &orea.

been since ,ebruar" 1CCD# ,itch I3CA Down/rades Daewoo Cor&#Ls +atin/, ASIA P!LSE, 1ul" (1, 1CCCF Lee, su&ra note Error@ +eference source not found, at 1ED#
(HC

I2, su&ra note Error@ +eference source not found, *EA*C#

D1

4. /inancial 3uper%isory 3er%ice, /air ,rade 4ommission and &DI4

In the aftermath of the scandal, policy ma*ers and regulators bore the brunt of condemnation because regulatory o%ersight malfunctioned and a state of paraly-ed indecision followed. D! ,hey failed to detect problems, did not monitor and did not establish regulatory discipline. 6egulators were the (only actor who could ha%e stopped the Daewoo collapse or at least minimi-eL M the cost by inter%ening Iuic*ly,) but they did not ta*e initiati%e, particularly throughout the critical time of 199D.
D1

,ogether with policy ma*ers, they suffered from a combination of disincenti%es for see*ing acti%e solutions, o%erconfidence as architects of &orea$s economic success and fear of the un*nown if they allowed a ma.or chaebol to fail.
D

+ac* of regulatory

discipline in particular nurtured la0 compliance that fostered the mismanagement and fraud. 2lthough not traditional regulators, the &DI4 has emerged as one of the most effecti%e public sector sources of corporate go%ernance discipline. ,hey ha%e helped generate an enforcement mechanism operating outside of the statutory corporate law framewor* that has ser%ed to establish accountability.(D: =%er the years, warning signs e0isted to ascertain the magnitude of Daewoo$s troubles. 3tarting from 19D", for e0ample, the &orea 1an*ers 2ssociation operated a consolidated financial information system. ;%eryone with access could determine that the Daewoo Group$s loans from ban*s amounted to appro0imately eight trillion won E$D.9 billionF, but that financial statements stated that their borrowing was only fi%e
(D)

+e&eated freedo% of infor%ation reKuests with the ,SS for the re/ulator" audits of

Daewoo have been denied# 7on file with author9#

(D1

Lee, su&ra note Error@ +eference source not found, at 1H(#

(D(

Id# at 1H:AH*#
Coffee, su&ra note Error@ +eference source not found#

(D:

D(

trillion won E$5." billionF. 2ny regulator could ha%e noticed a three trillion won E$3.3 billionF discrepancy.
DC

=nce again, signs of the conglomerate$s problems could ha%e

been detected in the mid'199!s.(D8 ,o obtain financing from foreign mar*ets, the group had been among the first chaebol to pro%ide consolidated financial statements in the mid'19#!s, but they suddenly stopped pro%iding them in the mid'199!s, an ob%ious red flag. D" +ater, other than financial restrictions on its debt, blunt warnings from 43/1 and <omura in 199D did nothing to spur further regulatory action. Go%ernment did (practically nothing until =ctober 199D to force Daewoo to reform.)
D#

2s late as

<o%ember 199D, instead of a warning to protect the unwary, the 7inister of /inance and ;conomy e%en issued a statement to allay fears o%er the <omura report that (there was no liIuidity crisis in relation to the Daewoo Group.) began direct restructuring efforts only in December 199D. D9 /inancial regulators such as the /33 in particular failed to establish legal compliance in the accounting profession. In theory, accounting firms numerous criminal, ci%il and regulatory sanctions. ,hey could be sub.ect to three years
DD

,he go%ernment

(D*

0i% > Son/, su&ra note Error@ +eference source not found#

(D8

Daewoo Suicide, su&ra note Error@ +eference source not found, at 188#
Startin/ fro% 2arch 1CC8, senior %ana/e%ent in fact be/an to receive secret Kuarterl"

(DE

re&orts on Daewoo's 5s&ecial borrowin/ 7,A<e/o96 that was conducted throu/h false ex&ort docu%ents# ())1 Goha& 1H1, at ((Y(:#
(DH

Lee, su&ra note Error@ +eference source not found, at 1EH# $he /overn%ent did curtail

bond and co%%ercial &a&er issuances# See Section II#D#

(DD

0"uASeon/

Lee,

1aeA/"eon/AbuA.an/A/wan

5Daewoo

"uAdon/Aseon/

wiA/iAeo&Ada#6

I2inister of ,inance and Econo%" 0"uASeon/ Lee@ \Daewoo has no liKuidit" crisis6 J, 2AEIL 3!S# <E4SPAPE+, <ov# (C, 1CCD#
(DC

Lee, su&ra note Error@ +eference source not found, at 1ED#

D:

imprisonment or a thirty million won E$ 5,!!!F fine for ma*ing omissions or false statements in an 2udit 6eport.
9!

2ggra%ated punishment pro%isions could e0tend

prison terms to a minimum of three years if monetary gains from accounting fraud e0ceeded 5!! million won E$C1#,!!!F.
91

2ccountants and their firms could ha%e their

licenses suspended or terminated. 9 2ccountants also had to report wrongdoing or important facts that indicated %iolation of laws or the articles of incorporation.
(C)

93

External Audit Act, art# (), W (# ,ro% 1CDC to 1CCD, the &unish%ent was for u& to two

"ears i%&rison%ent or a %illion won 7GD::9 fine# In ()):, a new &rovision was added which reKuired u& to five "ears i%&rison%ent or a :) %illion won 7G(8,)))9 fine for deliberate falsifies, alters, da%a/es or destro"s audit wor-&a&er %ade in &re&aration for an Audit +e&ort# art# (), W (# External Audit Act 7as a%ended Law <o# *1ED of 1CDCF Law <o# 88(( of 1CCD9# In ()):, the Securities Exchan/e Act was a%ended to &unish accountants for falsel" recordin/ i%&ortant facts in reKuired disclosure docu%ents, Annual +e&orts, Se%iannual +e&orts or =uarterl" +e&orts for u& to five "ears i%&rison%ent or a :) %illion won 7G(8,)))9 fine# art# ()HA:# 7a%ended b" Law <o# H)(8 of ()):9# ,or nonAlisted stocco%&anies, the Co%%ercial Code &rovides that a &erson that i%&ro&erl" records or ne/li/entl" re&orts accountin/ state%ents would be sub.ect to a &enalt" of u& to onl" 8 %illion won 7G*,1()9# Co%%ercial Code art# E:8, W 1, no# C# Althou/h now deleted, fro% ())1 until ()):, the Cor&orate +eor/ani?ation Pro%otion Act had &rovided that if a co%&an" did not &ro&erl" o&erate an internal accountin/ s"ste% or if one for/es, alters or da%a/es such accountin/ records then the" would be sub.ect to u& to five "ears i%&rison%ent or a thirt" %illion won 7G(8,)))9 fine# art# :H# Law <o# E8)* of ())1 7as a%ended Law <o# ECC1 of ()):9#
(C1

A//ravated Punish%ent Act, art# :# Gains of over 8 billion won 7G*#1H %illion9 call for a

%ini%u% &unish%ent of five "ears# Id#

(C(

See Section IB#A#

External Audit Act, art# 1)# <o a&&lication of this &rovision has been found#

(C:

D*

Aunishment, howe%er, seldom occurred for non'compliance. +ight monetary fines or sanctions were issued e%en for repeated in%ol%ement in accounting fraud.
9C

4oupled

with the lure of business and intense competition, wea* enforcement left accountants e0posed to company demands for aggressi%e accounting with only their own sense of ethics to constrain them. @hen gra%e signs of Daewoo$s accounting troubles surfaced in 199#, financial regulators did not respond. In 7ay 199#, as part of its General 2udit 6e%iew of listed companies, for e0ample, the 333 found that 199" annual reports of Daewoo 4orp. and Daewoo Arecision underreported substantial amounts of assets and
(C*

,or Hanbo Steel's E#E trillion won 7G*#H billion9 in accountin/ fraud in 1CCH, its auditors

Chon/A!n received %ini%al sanctions# 4hen 0ia 2otor and Asia 2otors colla&sed shortl" thereafter, Chon/A!n and San $on/, a/ain received %inor sanctions even thou/h the" failed to discover over :#: trillion won 7G(#:E billion9 and 1#8E trillion won 7G1#1( billion9 in accountin/ fraud co%%itted, res&ectivel", over a sevenA"ear &eriod startin/ fro% 1CC1# $he Securities Su&ervisor" Service 7SSS9 restricted Chon/A!n and San $on/ fro% auditin/ onl" 0ia 2otor and Asia 2otors for three "ears and %onetaril" .ust reKuired the% to &a" their entire 1CCH auditin/ fees fro% those co%&anies to the Liabilit" Co%&ensation ,und# $hree Chon/A!n and San $on/ accountants were sus&ended for six to nine %onths but not the fir%s the%selves# $he SSS also restricted Chon/A!n fro% bein/ desi/nated auditors for one "ear fro% the five leadin/ co%&anies sub.ect to re/ulator" desi/nation# 1inA/un Chun/ > HunAsoo 0i%, HwanAranA.uAbeo% 0ia hanbo /a%AsaAinAe %"eonA.eAbu IPardon for Auditors

0ia and Hanbo's, the Princi&al ;ffenders in the ,orei/n Currenc" Crisis J, 2AEIL 3!S#
<E4SPAPE+, Dec# (*, 1CCDF HeeAchun Cho, 0iAaA.eo-A.a *A.o 8,H:D eo-AiAna .ulA"eo balA&"o IAnnounce%ent of 0ia's Deficit +educed ,i/ures b" *#8H:D trillion won 7G:#(H billion9J, CH;S!< IL3;, Dec# (*, 1CCD, at :*F Soonbin Par-, 0iaAsiaAcha *A.o D cheonAeo- bunAsi-, I0iaAAsia 2otor *#D trillion won 7G:#*: billion9 of accountin/ fraudJ, HA<0 1CCD, at 1)# ())1 <o 1)((, at HAD#
;+EH,

Dec# (*,

D8

liabilities. 95 /urthermore, regulators disco%ered o%er 9! billion won E$3 in off'balance sheet liabilities of Daewoo 4orp. reIuest for a correction.
9# 9"

millionF

<othing happened other than a

,he 333$s General 2udit 6e%iew the ne0t year in 7ay

199D disco%ered that Daewoo ,elecom did not record "1 billion won E$1D" millionF on its accounting boo*s. 2s in the past, only minor correcti%e action followed.
9D

/inally, no reaction followed when a whistleblower allegedly told senior regulators in early 1999 that Daewoo companies had engaged in o%er 3! trillion won E$ 5 billionF in accounting fraud. 99 6ed flags about Daewoo$s accounting problems were repeatedly disregarded. In contrast, the /air ,rade 4ommission E/,4F ser%ed one of the more acti%e regulators toward go%ernance problems of the chaebol. 3tarting in Guly 199 , the /,4 began to regulate improper support among affiliates of the largest chaebol. 3!! ,hey
(C8

4hile done on a rando% rotatin/ basis, this was first /eneral audit of a Daewoo affiliate

in three "ears# ,ift"Aseven other co%&anies were included as &art of this annual /eneral audit#
(CE

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1C(#
$he SSS later tried to %ar/inali?e the results of the audit review b" clai%in/ that it et, if that were the case

(CH

re&resented the efforts of one re/ulator wor-in/ for six wee-s#

then %uch %ore wron/doin/ %i/ht have been unearthed if the SSS had devoted &ro&er resources# Id# at 1DHAD#
(CD

())1 Gohab 1(C, at EAH#

(CC

Daewoo Suicide, su&ra note Error@ +eference source not found, at 1D*AC8# $he ,SS issued

a &ress release den"in/ such a %eetin/# ,SS, Press +elease, Se&t# (*, ())1# $he SSS later %er/ed into the newl" created ,inancial Su&ervisor" Service#
:))

,$C focused on the &rovision and outsourcin/ of /oods and services at discounts or

&re%iu%s often throu/h transfer &ricin/# Such su&&ort was viewed as 5unfair trade acts6 under which chaebol discri%inated in favor of their affiliates a/ainst other inde&endent

DE

gained authority to reIuire companies to terminate such support, force them to publish notices of their wrongdoing and fine surcharges of up to two percent of sales from the prior year.3!1 In serious cases, they could refer persons or companies for criminal prosecution, who could then face up to two years$ imprisonment or 15! million won E$1 5,!!!F in fines.3! @hile the /,4 foresaw the dangers in the wea* corporate go%ernance of the chaebol, they could not generate the political mandate to effecti%ely monitor them. ,hey conducted their first real in%estigation in 1993, but it ended without much conseIuence. In the end, they pro%ed unable to curb unreasonable support of subsidiaries before the crisis. In 199D, the /,4 launched two full'scale in%estigations against leading chaebol including Daewoo. ,hey focused on unreasonable financial and personnel support, instead of .ust traditional goods and ser%ices. 3!3 ,hey disco%ered substantial,

co%&anies# ,AI+ 5DAEAG

1!<6

$+ADE

C;22ISSI;<,

G;<GA1E;<GAGE;A+AEA4IA4;<AH;E

<AEA3!A1IACHI2

!A2;AGIAE;PA1IPADA<A!I 3!LAG;<GA1E;<GAGE;A+AEAHAE<GA4IAE DAEAHA< SI2ASAAGIA

IInternal Guide@ \Evaluation Standard for Lar/e Con/lo%erate Grou&Ls !nfair $rade

Acts6J, art# (:, W 1, no# 8F Law <o# H:18 of 1CC( art# (HF I%&le%entin/ Decree, art# :E#
:)1

Law <o# H:18 of 1CC( art# (*A(# $he &ossible surchar/e was raised fro% two &ercent to

five &ercent in Dece%ber 1CCC# A%ended Law <o# E)*: of 1CCC#

:)(

Law <o# H:18 of 1CC( art# EH# W (F art# H)# In ())), the ,$C for the first ti%e

referred a co%&an" for cri%inal &rosecution# As of A&ril ())), the to& chaebol %ust &rovide board of director a&&roval for internal transaction above a certain a%ount# art# 11A(F I%&le%entin/ Decree art# 1HAD#
:):

$his was based u&on a si/nificant revision of the fair trade law in Dece%ber 1CCE, .ust

before the financial crisis# art# (:, W 1, no# H, 3uAdan/Ahan .iAwonAhaen/AwiAui si%AsaA.iAchi%

HAho I+eview Guidelines for I%&ro&er Su&&ort Acts <o# H J# 1ul" (C, 1CCH# ,air $rade
Co%%ission#

Daewoo in particular underwent four in%estigations from 199D to !!1

DH

improper affiliate subsidi-ation, e%en though companies had been warned that the in%estigations were pending.3!C In the case of Daewoo, they found that si0 companies improperly supported se%en affiliates a total of C"1 billion won E$3 9 millionF. Daewoo 4orp. and Daewoo :ea%y in particular pro%ided financial support to affiliates on non'mar*et terms by refraining from collecting account recei%ables, pro%iding interest'free loans for employees that purchased Daewoo 7otor cars, or purchasing bonds, commercial paper or foreign e0change under unfa%orable conditions. =f course, the accounting fraud most li*ely understated the actual scope of improper support.3!5 In the end, the /,4 fined Daewoo a comparati%ely light 13.3 billion won E$9.5 millionF.3!" and recei%ed three separate fines.
:)*

1eA(:A.o .eA1Ahan/ .eAHAhoAe wiAbanAdoeAneun buAdan/A.iAwonAhaen/Awi II%&ro&er Su&&ort

Acts that Contravene Article (:, Para/ra&h 1, <o# HJ# ,air $rade Co%%ission#
:)8

Daewoo reKuested reAexa%inations of three investi/ations but the" were all dis%issed# In

the ;ctober ())1 investi/ation, the ,$C announced how Daewoo used sha% affiliates &osed as unrelated co%&anies# 3" dressin/ the%selves as inde&endent co%&anies unaffiliated, sha% co%&anies were utili?ed to avoid ,$C re/ulations# After a threeAwee- search, based u&on stoc- ownershi& and %ana/e%ent control, the ,$C found six sha% co%&anies that belon/ed to the Daewoo Grou&# 4oo Choon/ 0i% controlled these co%&anies throu/h stoc- owned throu/h Daewoo Cor&#, other senior %ana/ers, dual a&&oint%ents of directors and excessive tradin/ and lendin/# Press +elease, ,air $rade Co%%ission, Gu daeA/"uA%oA/iAeo&A.i&Adan

UDaewoo' %it UDaewoo Cor&#' ui wiA.an/A/"eA"eolAhoeAsa .oAsaA/"eolA/wa I+esult of the Investi/ation of ,or%er lar/e co%&an" /rou& LDaewooL and LDaewoo Cor&#L's Sha% Affiliated Co%&aniesJ 71an# (8, ())(9 7on file with author9# !lti%atel", the ,$C referred the
case for &rosecution and in his cri%inal trial the court found hi% /uilt" for o%ittin/ data on 1E sha% co%&anies# ())8 Gohab 8DD, at 8EA8H#
:)E

After its fall, a third investi/ation was held in 1CCC that found that Daewoo &rovided

DD

,herefore, regulators sIuandered opportunities to pre%ent the crisis. ,hey too* action only after the collapse.3!# Daewoo$s brea*down led to an e0hausti%e audit of twel%e ma.or companies and discipline for those in%ol%ed. 3!D ,he 3ecurities and /utures 4ommission E3/4F referred fi%e Daewoo companies and twenty'one e0ecuti%es who had committed more than 5!! billion won E$C1# millionF in accounting fraud for criminal prosecution and also four partner'le%el accountants that had audited the companies.3!9 ,he 3/4 also recommended that 4hong'>n and 3an
D8#D billion won 7GH1#8 %illion9 in unreasonable su&&ort to its affiliates, second onl" to H"undai# Daewoo received a relativel" heavier fine of 1:#8 billion won 7G11#(8 %illion9# ,inall", the ,$C conducted a fourth investi/ation in ;ctober ())1 u&on which a %ar/inal surchar/e of EHH %illion won 7G8E*,())9 was levied a/ainst three related co%&anies# Daewoo Cor&# was excluded because the" were under/oin/ dissolution# Press +elease, ,air $rade Co%%ission, Daewoo Construction deun/ * /aeAsaAui buAdan/AnaeAbuA/eoArae .oAsaA/"eolA/wa I+esult of the Investi/ation on I%&ro&er Internal $ransactions of Daewoo Construction and : ;ther Affiliated Co%&aniesJ 7Dec# (C, ())19 7on file with author9#
:)H

Sur&risin/l", no tax evasion char/es have been brou/ht b" the tax authorities or

&rosecutors# ;ne ironic twist has been that a recent Seoul Ad%inistrative Court has held that the tax authorities %ust refund excess taxes that were &aid as a result of inflated accountin/ fi/ures# Daewoo Electronics a&&arentl" has a si%ilar case &endin/# IASeo- ;h, 3unAsi-AhoeA

/"eAro deo naen beo&AinAse, dolAr"eoAbatAeul su itAda IExcess Cor&orate $ax Paid $hrou/h Accountin/ ,raud Can 3e +eclai%edJ, L# $I2ES, Au/# (H, ())*#
:)D

Startin/ fro% Dece%ber 1CCC and lastin/ until Au/ust ())), the Daewoo S&ecial Audit

$ea% established at the ,SS conducted &ostA%orte% audits . S,C ())) +e&ort, su&ra note Error@ +eference source not found#
:)C

Id# $he five co%&anies were Daewoo Cor&#, Daewoo 2otor, Daewoo Heav" Industries,

Daewoo Electronics and Daewoo $eleco%# In addition, nine Daewoo co%&anies were ordered to have s&eciall"Adesi/nated auditors and twent"Aone executives and seven accountants were

DC

,ong should be suspended on the firm le%el, three accountants should ha%e their registrations re%o*ed and nineteen accountants should be suspended.31! In the aftermath, the &DI4 has become the most %igorous institution in holding corporate e0ecuti%es, accountants and financial institutions accountable. 3ince !!!, the &DI4$s mandate reIuired it to reclaim public funds that in.ected into financial institutions that became defunct from those responsible.:11 ,hey pressed for legal actions against e0ecuti%es that were in%ol%ed with companies and ban*s that collapsed during the crisis. In the process, they established functional enforcement of the legal duties of directors, auditors, accountants and ban*s outside of the traditional corporate law enforcement framewor* by holding parties accountable to someone other than controlling shareholders#31 ,he &DI4$s efforts contributed in establishing both shareholder and sta*eholder oriented enforcement. &DI4 acted as a shareholder in holding ban*ing and financial e0ecuti%es liable to their respecti%e institutions. 2t

referred to investi/ative a/encies for further cri%inal &robes . Cri%inal Procedure Act, arts# (:*, (8H#
:1)

S,C ())) +e&ort, su&ra note Error@ +eference source not foundF External Audit Act, art#

1EF Certified Public Accountant Act, art# C# Another :E accountants received li/hter sanctions such as restrictions fro% auditin/ and warnin/s#
:11

Daewoo Executives Cause 4*#(E $ril# in Losses , 0;+EA $I2ES, Se&t# (8, ())(# De&ositor

Protection Act, Law <o# 8)*( of 1CC8 7as a%ended Law <o# H)(H of ()):F Law <o# E1H: of ()))F Law <o# E:(: of ()))9 art (1A(F Public ,unds 2ana/e%ent S&ecial Act, Law <o# E(D1 of ())) 7A%ended Law <o# H111 of ())*9#
:1(

$o &rotect de&ositors and investors of ban-s, securities co%&anies, insurers and %erchant

ban-s, 0DIC in.ected 1)H trillion won 7GDC#( billion9 of &ublic funds into insolvent financial institutions durin/ the crisis. P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+, su&ra note Error@ +eference source not found, at E8#

C)

the same time, by defrauded financial institutions bringing legal actions against the corporate e0ecuti%es of borrowers, this has added to sta*eholder'orientation accountability for companies. Bet, unfortunately all of these actions occurred after the fact. &DI4$s efforts in%ol%ed a two stage process. /irst, the &DI4 compelled C5# financial institutions to bring a total of 1.5 trillion won E$1. 5 billionF in compensatory claims against D, 35 former e0ecuti%es and controlling shareholders for their delinIuent management and lending decisions of their financial institutions #:1: ,he claims added unprecedented legal compliance to the financial industry, particularly in pushing lenders to impro%e their own corporate go%ernance and establish lending discipline. 7ore importantly, in the second stage, &DI4 pressed financial institutions to bring claims directly against companies that defrauded them in the first place.31C Daewoo$s e0ecuti%es and their accountants became among the first

:1:

P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+, su&ra note Error@ +eference source not

found, at 18*# Co%%ercial Code, Law <o# E8*8 of ())1, art# :CC, art# *)1A(# $he 0orean Asset 2ana/e%ent Co%&an" 70A2C;9 lost a Hi/h Court case that held that the Adonis Golf Club did not constitute hidden assets of 4oo Choon/ 0i%# Act on the Efficient Dis&osal on <onAPerfor%in/ Assets of ,inancial Institutions and the Establish%ent of 0orea Asset 2ana/e%ent Cor&oration I0A2C; ActJ, Law <o# 8:H1 of 1CCH 7as a%ended Law <o# EH:H of ())(9# San/AHee 0i%, AAdonAniAseuA/olA&euA.an/, 0i%A4ooAChoon/Assi bonAinA.aeA

san aAniAda IAdonis Golf Club <ot 4oo Choon/ 0i%'s ;wn Pro&ert" J,
,eb# D, ())8F 1ud/%ent of ,eb# D, ())8, Seoul Hi/h Court#
:1*

;<HAP

<E4S,

In A&ril ())8, however, the 0DIC lost a decision to reclai% 0i%'s hidden assets when

the court deter%ined that ((),))) shares ri/htfull" belon/ed to his dau/hter and were not his ille/all" concealed assets. IASeo- ;h, 0i% 4oo Choon/ 1eonADaewoo Grou& hoeA.an/Ai ddalA

eA/eA.un isuAhwaAha- .uAsi-Aeun %"eon/AuiAsinAta- aAnin .eun/A"eoAda IIsu Che%ical Stoc-

C1

targets. ,he &DI4Us special fact'finding team announced on 3eptember !! that @oo 4hoong &im and forty'eight other e0ecuti%es and thirty'fi%e accountants caused C. " trillion won E$3.55 billionF in losses to the groupUs fi%e affiliates and their creditors.315 ,he &DI4 claimed Daewoo e0ecuti%es manipulated accounting to defraud se%enteen creditor ban*s of 3.D1 trillion won E$3.1#5 billionF between 1995 until 1999. ,hey pro%isionally sei-ed o%er "3. billion won E$5 .# millionF of &im$s property and reIuested that creditor ban*s bring ci%il actions against Daewoo$s e0ternal auditors.31" ,he &DI4 e%en referred cases of personal enrichment for criminal prosecution.31#
that for%er Daewoo Grou& Chair%an 4oo Choon/ 0i% Gave to Dau/hter was Gift not <o%inal $rustJ, L# $I2ES, A&r# 1:, ())8#
:18

1eon/A! Hwan/, DaewooAbuAsil i%A.i-Awon *CA%"eon/, hoeA/"eAsa :8A%"eon/ sonAbaeAso

;<HAP

IDaewoo ,raud, Liabilit" Suits A/ainst *C Executives and :8 Accountants J, Se&t# (*, ())(#
:1E

<E4S,

De&ositor Protection Act, art# (1A(# See Section IB#A# 0DIC referred over sixt"Asix for%er chaebol chiefs to cri%inal &rosecution when the" $he 0DIC, for instance, alle/ed that

:1H

discovered evidence of e%be??le%ent or ex&ro&riation#

G**#: %illion of the 3,C funds were si&honed off to a Hon/ 0on/ &a&er co%&an" that served as a front for 4oo Choon/ 0i%# $hese alle/ations were later confir%ed in 0i%'s cri%inal trial# ,urther%ore, 0DIC alle/ed that 0i% %ade G(#8 %illion in donations to Harvard !niversit" and nineteen billion won 7G18#D %illion9 to A.ou !niversit" throu/h co%&an" funds and without board a&&roval# $hese controversial donations ca%e to li/ht when the 0DIC brou/ht its civil actions on behalf of Daewoo creditors . Cheon/A2o oo, Daewoo

,ounder 0i%Ls Concealed Assets 4orth 41*), 0;+EA HE+ALD, <ov# C, ())1F 0i% > Son/, su&ra note Error@ +eference source not found, at (*(. &im R 3ong, su&ra note Error@
+eference source not found, at (*(#

:wang, supra note ;rror5 6eference source not

C(

2cti%e monitoring by regulators and policy ma*ers such as /33, /,4 and others could ha%e sa%ed incalculable damage while sparing countless %ictims. ,hey failed to detect the seriousness of the situation, monitor companies, e0ecuti%es and accountants and enforce laws and regulations. &DI4 efforts, howe%er, represent a distincti%e e0 post facto enforcement mechanism that has emerged. It operates outside of the legal framewor* associated with corporate go%ernance that traditionally re%ol%es around remedies in corporate law and securities law.

D. Arosecutors, 4ourts and other Aublic Guardians

Arosecutors, courts and other public guardians such as the media remained passi%e in establishing an effecti%e corporate go%ernance framewor*. 4orporate defendants, whether they were directors, e0ecuti%es or controlling shareholders, faced criminal or media scrutiny through prosecution, criminal punishment or public shaming only when companies collapsed. /urthermore, in the rare case of con%iction, &orean Aresidents ha%e been notoriously generous in granting clemency. 4omplacency toward legal discipline and public sanction for corporate wrongdoing stemmed from a %ariety of reasons such as a socio'cultural legacy of leniency, emphasis on economic growth, lac* of training and improper influence. 2 dramatic shift toward serious enforcement against corporate defendants and their ad%isers too* place when Daewoo e0ecuti%es recei%ed actual prison terms and some of the largest monetary penalties in history. =%erall, an unwritten custom e0isted that corporate defendants should be granted leniency due to their roles in de%eloping the economy. 4orporate e0ecuti%es of the largest companies recei%ed the most special status and benefits from soft found.
C:

enforcement. =ne theory propounds that those of pri%ileged standing such as chaebol e0ecuti%es were bestowed preferential treatment as part of 4onfucian tradition. 31D Arosecutors and courts also e0pressed e0aggerated concerns that punishing corporate defendants, especially from larger chaebol, would damage the reputation of the company and country, causing serious economic damage. 319 4haebol chairmen in particular recei%ed the most generous treatment compared to other corporate defendants. @hen being in%estigated for serious crimes, for e0ample, prosecutors would accommodate reIuests to a%oid media attention, by Iuestioning them in special locations away from public %iew under the rationale that negati%e media co%erage would harm the economy.3 ! 3imilarly, for many years, prosecutors refrained from prosecuting corporate bribe gi%ers instead focusing their efforts on bribe ta*ers. 4ourts acted similarly. ;%en when they found chaebol e0ecuti%es guilty, they routinely commuted their sentences based upon (enormous contributions to the economy.) 2ctual imprisonment or ci%il liability hardly occurred. @oo 4hoong &im, for instance, was con%icted se%eral times, yet he ne%er ser%ed prison time. In December 199C, a lower court found him guilty for gi%ing a E$ !! million won

,!!!F bribe to a former electric company head in relation to an atomic power

plant contract.3 1 =n appeal, he was only sentenced to eight months with a one'year
:1D

Chan 1in 0i%, 0orean Attitudes $owards Law, 1) PAC# +I2 L# > P;L'

1, E 7()))9#

:1C

HeonAP"o Hon/, <oeA%ulA/on/A"eoA.oe I$he Cri%e of 3riber"J, CH;S!< IL3;, 1une (1,

1CC8F Editorial, Geo%AchalAui bulA/on/Aseon/ I$he !nfairness of ProsecutorsJ, D;<GA IL3;, 1une 1), 1CC8, at :#
:()

eon/AChan

oon, 2ilAsilA/uAtae deuAreoAnaen "ulA/o-AsuAsa I ul/o- Investi/ation +eveals

;ld Practice of Secret +oo%sJ, D;<GA IL3;, 1ul" 1C, 1CC:, at (#

:(1

Seon/A3on/ Ha, AnA3"eon/AHwaAssi .in/A"eo- :An"eonAseonA/oQ.aeAbeol : hoeA.an/Aeun

.i&Ahaen/A"uA"e IAhn 3"un/ Hwa Sentenced to $hree

ears Q $hree Chaebol Chiefs'

C*

suspended sentence.3 3imilarly, in the presidential slush fund trials, &im and a do-en leading chaebol chairmen were found guilty of contributing o%er 51! billion won E$"3D millionF in bribes during the 19D!s and early 199!s to two Aresidents. :(: 2ll of them recei%ed suspended sentences due to their (contributions to the economy.):(* In the final act to the enforcement process, &orean Aresidents reconfirmed the en%ironment of leniency.3 5 Aresidents routinely granted pardons to con%icted controlling shareholders and e0ecuti%es of large companies.3 " In 1995 and 199#, @oo 4hoong &im, for e0ample, recei%ed separate Aresidential pardons for his two con%ictions for bribery.3 # ;0ecuti%e clemency could be %iewed as part of a legacy
Sentences Sus&endedJ, HA<0
;+EH,

Dec# H, 1CC*, at (:# 1ud/%ent of Dec# E, 1CC*, Seoul

District Court# $he /overn%ent official that received the bribe received a :A"ear sentence in contrast#
:((

DA18 saA%"eonAbo-A/won nunA--ilA--euAneun eolA/ulAdeul I<otable ,aces in the Au/ust

;+EH,

18 Pardon and +einstate%entJ, HA<0 PardonJ#

:(:

Au/# 1(, 1CC8, at 8 Ihereinafter Au/ust 18

0i% &aid 1*) billion won 7G188 %illion9 in bribes for a lucrative sub%arine contract,

a%on/ other ite%s# 0i% > 0i%, su&ra note Error@ +eference source not found, at 8EHAEC#
:(*

Id#
A%nest" Act, Law <o# ( of 1C*D, arts# :, 8, C and 1)F +e&ublic of 0orea Constitution,

:(8

Law <o# 1 of 1C*D 7as a%ended ;ct# (C, 1CDH9, art# HC#
:(E

In the final da"s of Dae 1un/ 0i%'s la%eAduc- &residenc", for instance, ei/ht executives

who received sus&ended sentences all obtained &residential &ardons and s&ecial reinstate%ent# ;ver a do?en other leadin/ cor&orate executives that had been found /uilt" for econo%ic cri%es after the financial crisis were also /ranted a%nest" and reinstate%ent# 2"un/A1in Lee,

I2,

/wanAr"eonA/iAeo&Ain

daeA&o-AsaA%"eon

.oAchi

I2ass

Pardon

of

I2,A+elated

3usiness%enJ, CH;S!< IL3;, Dec# :1, ())(, at A*#

:(H

Six other leadin/ chaebol chair%en were also &ardoned and reinstated to/ether with 0i%

C8

from &orean history under which *ings were e0pected to e0tend their bene%olence upon those of pri%ileged status.3 D 3ince the prosecutors$ office is technically underneath the 7inistry of Gustice and part of the e0ecuti%e branch, Aresidential clemency sent a message to law enforcement on how corporate e0ecuti%es should be e0cused. 3e%eral other factors contributed to soft enforcement. /irst, corporate defendants could generally afford better legal representation which might e0plain why they fared better. Arosecutors and .udges also recei%ed limited training in sophisticated corporate abuses. ,hey remained ine0perienced in financial and accounting affairs because claims in%ol%ing accounting fraud, mar*et manipulation, insider trading and misrepresentation seldom occurred. 7oreo%er, prosecutors and courts from ci%il law traditions felt constrained from .urisprudential acti%ism to de%elop new areas of the law and ad%ocate newer theoretical de%elopments in such areas as the burden of proof and pro%ing and calculating damages. :ea%y caseloads and time constraints further burdened the legal system. 3 9 Arosecutors rarely brought cases against corporate wrongdoing unless they recei%ed a referral for criminal prosecution from regulatory authorities. 6egulatory authorities, in turn, rarely referred cases. Arosecutors thus at times sought enforcement against corporate managers in an
in 1CCH. Au/ust 18 Pardon, su&ra note Error@ +eference source not found, at 8F 1eon/AGuoon > GiADae an/, 1aeAbeolAchon/Asu deun/ (1A%"eon/ /aeAcheonA.eol saA%"eonAbo-A

/won I$went"Aone Includin/ Chaebol Chiefs Pardoned and +einstated in <ational Da" J,
D;<GA IL3;, Se&t# :), 1CCH#
:(D

0i%, su&ra note Error@ +eference source not found## Seun/ Hwa Chan/, $he +ole of Law In Econo%ic Develo&%ent And Ad.ust%ent Process ,

:(C

:* I<$'L L# (EH, (H:A(H* 7()))9# Due to &rocedural difficulties, cor&orate liti/ation rarel" occurred and little &recedent develo&ed.

CE

inconsistent manner compared to other defendants.33! +i*ewise, the media did not fulfill their roles as public guardians against corporate misbeha%ior.331 In%estigati%e .ournalism rarely directed its attention toward go%ernance issues.33 7edia scrutiny generally in%ol%ed reporting e%ents of

wrongdoing after the fact. 4ritical reporting analy-ing Daewoo$s state of affairs that could ha%e foreshadowed its difficulties did not occur. /oreign media offered only marginally more critical reportage of Daewoo.::: ,hey too operated wea*ly as public guardians in shedding light on its problems. ,he wea* state of the media as a gate*eeper stemmed from a mi0ture of reasons. /irst, corporate interests, particularly the chaebol, wielded considerable clout o%er critical reporting. ,he media, for e0ample, to a significant degree remained capti%e to ad%ertising re%enue of conglomerates.::* ,he media also faced threat of libel
::)

0i% > 0i%, su&ra note Error@ +eference source not found. Alexander D"c- et al#, $he Cor&orate Governance +ole of the 2edia@ Evidence fro%

::1

+ussia, <3E+ 4or-in/ Pa&er <o# 41(8(8 7Se&t# ())E9#

::(

3ernard 3lac-, et al#, Cor&orate Governance in 0orea at the 2illenniu%@ Enhancin/

International Co%&etitiveness, (E 1# C;+P# L# 8:H, 88( 7())1975financial &ress re&ortin/ of

cor&orate /overnance abuses has not been a si/nificant influence on chaebol behavior69#
:::

Clifford, su&ra note Error@ +eference source not found, at 8(F Perle?, su&ra note Error@

+eference source not found 75How Daewoo, a debtAladen co%&an", &lans to finance the ra&id ex&ansion is not exactl" clear69#
::*

3lac-, su&ra note Error@ +eference source not found, at 88(# 0i%A4ooAChoon/ hoeA.an/

soAhwan chu-AsoAboAdo %ulAui@ DaewooA/euAru& eonAronAsaAe Usa-A.e' "oAcheon/ ICriticis% over +educed +e&ortin/ of Chair%an 4oo Chon/ 0i%'s Su%%ons@ Daewoo Grou& +eKuested UDeletion' to 2edia Co%&aniesJ, HA<0
;+EH,

1ul" 1E, 1CC:, at 1)# 1on/AH"u-

Lee, Gate-ee&in/ $"&es as Screenin/ ,irst Edition <ews&a&ers and P+ Practitioners

Evaluations, *EAE 0;+EA< 1# 1;!+<ALIS2 > C;22# S$!D# 1C1 7())(9# A recent account

CH

or defamation actions.::8 /urthermore, in the case of newspapers, companies could e0ert pressure through a contro%ersial practice in%ol%ing prior publication of the ne0t day$s morning newspaper as (/irst ;ditions) newspapers on the e%ening before. ::E 4ompanies re%iewed the contents of the ne0t morning$s edition before it was widely circulated. @hile this granted the company a chance to point out errors, in the worst cases, they could influence editorial content toward their li*ing. /inally, se%eral ma.or newspapers were owned by families with family ties with the controlling shareholders of leading chaebol.33# <ewspaper owners reportedly ha%e been *nown to influence editorial %iews. 2fter the financial crisis, the o%erall en%ironment of soft enforcement and public scrutiny dramatically changed. Aublic uproar led to piercing of the informal %eil that had been shielding corporate e0ecuti%es. In December !!1, the prosecutors$ office formed a Aublic /und 7isconduct Goint =%ersight ,eam consisting of representati%es from the police, ta0 authorities, customs authorities, &DI4, /33 and

involvin/ the abilit" of chaebol to influence the &ress found that 5IiJf true, the case would show how South 0oreaLs bi//est business /rou&s, -nown as chaebol, can influence news&a&ers throu/h their heav" advertisin/ s&endin/ and fa%il" connections to the countr"Ls &ress barons#6 Andrew 4ard, <ews&a&ers in S0 Cor& +ow, ,I<# $I2ES, 2ar# 1, ())*, at (:#
::8

Accordin/ to the Press Arbitration Co%%ission that handles %ost defa%ation dis&utes,

cor&orations brou/ht a total of :C: defa%ation actions to the Co%%ittee a/ainst the &ress between ())) and ())*# See /enerall" Phtt&@QQwww#&ac#or#-r#S7last visited 2ar# H, ())H9#
::E

;n ;ctober 18, ())1, 1oon/an/ Ilbo beca%e the first %a.or news&a&er to cease this

&ractice# Lee, su&ra note Error@ +eference source not found, at 1C(#
::H

1oon/an/ Dail", Don/AA Ilbo, two of 0orea's leadin/ &a&ers, are leadin/ exa%&les of

news&a&ers with direct, fa%il" relationshi& with leadin/ chaebol#

CD

&274=, Daewoo being a ma.or target. 33D Arosecutors then sought unprecedented, harsh sentences against Daewoo officials including 4hairman &im. ,he .udiciary obliged and sentenced &im, despite his age and poor health, to eight and a half years and the former head of Daewoo 4orp. and Daewoo 7otor to fi%e years, both without any commutation.339 4ourts pronounced astronomical monetary penalties upon se%en defendants. 7atching the scale of the accounting fraud, disgorgement penalties of .oint and se%eral liability ranging from between 1. 5 trillion won E$1#.# billionF and 3.!3 trillion won E$19. billionF were le%ied first against three .unior directors and officers of Daewoo 4orp. and then 4hairman &im#:*) /our senior e0ecuti%es recei%ed
::D

As a result, 1D1 &ersons fro% leadin/ financial institutions, co%&anies and accountin/ fir%s

were detained and ei/ht"Athree &ersons arrested# $he &rosecutor's office in &articular brou/ht cases a/ainst do?ens of Daewoo executives, includin/ Chair%an 0i% and their accountants. P!3LIC ,!<DS 2A<AGE2E<$ 4HI$E PAPE+, su&ra note Error@ +eference source not found, at 1*C, 18C#
::C

;ther Daewoo defendants, however, received .ud/%ents between ei/hteen %onths and

seven "ears that were sus&ended in ter%s of actual .ail ti%es# Several did not receive sus&ended sentences in the lower courts# ())1 <o ()E:, at 8F ())( Do H(E(, at *# ())1 Gohab 1(C, at (# ;n a&&eal two of these defendants subseKuentl" received sus&ended sentences# ())1 Gohab 1H1, at 81F ())1 <o ()E:, at 8AEF ())( Do H(E(, at :A*# Sus&ended sentences are co%%on for convicted whiteAcollar cri%inals in 1a&an as well# 2ilhau&t, su&ra note Error@ +eference source not found, at 1C1#
3C!

())1 <o ()E:, at EF ())( Do H(E( at :, * 7the Su&re%e Court reduced the &enalt" b"

1#: trillion won 7G1 billion9 for one these defendant9F ())8 Gohab 8DD, su&ra note Error@ +eference source not found, at (F A//ravated Punish%ent Act, art# 1)# ,orei/n Currenc" 2ana/e%ent Act, su&ra note Error@ +eference source not found, art# ::# +e&ortedl", the hi/hest fines ever" levied a/ainst a co%&an" was 8*( billion won 7G*81#H %illion9 a/ainst the Han.in Grou& in ;ctober 1CCC for tax evasion# Cheon/A%o oo, Chaebol stunned b"

CC

smaller disgorgement penalties ranging between 1.C# trillion won E$1.#5 billionF and 3.#1 trillion won E$C.1" billionF.:*1 ,he disgorgement penalties were the largest in &orean history, if not the world$s. ,he sentences and penalties sent a powerful message how e0ecuti%es and chaebol would be held accountable. 2 consensus emerged to le%y actual prison sentences against senior e0ecuti%es of chaebol and to hold them responsible for damages they caused.:*( 4ourts emphasi-ed the impact of Daewoo$s actions upon the economy, society, financial institutions, in%estors and guaranty companies. 3C3 ,he lesson of Daewoo was that (it clearly demonstrated the enormous damage to the country and people caused by criminal acts such as continuous and systematic accounting fraud and lending fraud.3CC 4ourts further asserted their determination that (&orean society must be firmer and stricter against large scale economic crimes committed by those that disregard corporate social responsibility and corporate

/overn%entLs hard line on refor%, heft" tax fines, 0;+EA HE+ALD, 1une 1), 1CCC#
:*1

())1 <o ()E:, at EF ())( Do H(E( at :, *# $he onl" ano%alous as&ect of the sentences

was that, other than Chair%an 0i%, the three defendants who received the heavier &enalties were relativel" %ore .unior officials# Lo/icall", the senior executives with %ore su&ervisor" authorit" should have borne %ore res&onsibilit" and &enali?ed accordin/l"#
:*(

$he i%&rison%ent of the chair%en of 0ia, Hanbo and %ore recentl" S0 re&resent cases

actual &rison sentences have been levied#

:*:

())1 Gohab 1H1, at 8(A8:F ())1 <o ()E:, at HD# $he Hi/h Court virtuall" restated the

trial court's conclusions verbati% re/ardin/ the reasons for the harsh sentences and the Su&re%e Court affir%ed these .ud/%ents#
:**

$he" also dis%issed the 5it was

a common practice) argument. ())1 Gohab 1H1, at

8:F ())1 <o ()E:, at HC#

1))

ethics.)3C5 ?arious mitigating circumstances combined with a measure of unfairness e0ist surrounding the se%erity of the punishments. 2rguably, all chaebol supported undeser%ing affiliates and committed accounting and loan fraud and foreign e0change %iolations leading up to and during the financial crisis. Bet, Daewoo was singled out. :ad they successfully turned the company around, perhaps, they would ha%e been lauded and all would ha%e been forgotten. Daewoo apologists suggest that they were scapegoats for the crisis or %ictims of political intrigue. 3C" /urthermore, defendants did contribute to the country$s economic growth and they did not appear to ha%e benefited financially from the crimes.3C# 2lthough they might ha%e been subsumed charges under the accounting and loan fraud, for e0ample, other than &im, none of the e0ecuti%es were prosecuted for embe--lement or e0propriation. /inally, e0ecuti%es wor*ed under a corporate culture that demanded obedience to &im who ga%e (authoritati%e orders,) and maintained (absolute influence o%er the careers of the defendants.)3CD
:*8

Id# Daewoo Suicide, su&ra note Error@ +eference source not found#
Des&ite exhaustive investi/ations b" &rosecutors, re/ulators and auditors, other than

:*E

:*H

Chair%an 0i%, onl" one case of %alfeasance involvin/ a Daewoo executive was re&orted# P!3LIC ,!<D 2ISC;<D!C$ I<$E+2EDIA+ I<BES$IGA$I;< +ES!L$S,

supra note ;rror5

6eference source not found.

:*D

())1 <o ()E(, Seoul Hi/h Court at EF ())1 <o 1)((, at C 75Chair%an 0i%'s difficult

to disobe" order was the basis for cri%e6 co%%itted b" the defendant FH Don 0ir-, ,or%er

Daewoo Executive Char/ed, <# # $I2ES, 2arch H, ())1. $he court also cited that the
executives had belatedl" re&ented their actions and that the" had lac-ed &rior cri%inal records#

1)1

<otwithstanding, e0ecuti%es were culpable because they ultimately did participate in the fraud for their own personal gain in disregard of their duty to shareholders. ,hey inflicted (enormous damage upon the &orean people and the national economy) .ust so that they would (not lose the chairman$s fa%or and to maintain their positions.)3C9 ,hey failed to understand that they did personally benefit because they maintained their pri%ileged status as corporate e0ecuti%es of one of &orea$s premier conglomerates with its monetary and reputational benefits. 35! 4ourts thus re.ected the defense that they had to passi%ely follow &im$s orders. 351 2s professional managers, they had (a responsibility to pre%ent autocracy by immoral conglomerate heads and controlling shareholders and to protect minority shareholders and general in%estors.)35 ,hey abandoned the duty to wor* to enhance corporate transparency and engage in business operations legally e%en if this conflicted with &im$s aims. Instead, they (a%ailed themsel%es of @oo 4hoong &im$s irresponsible, o%er'le%eraged management.)353 ,heir acti%e participation in the co%er'up further undermined their claims that they acted in good faith on behalf of the company.35C =%erall, prosecutors, courts, the media and ultimately Aresidents acted
:*C

())1 Gohab 1H1, at 8:F ())1 <o ()E:, at HC. In the cri%inal case a/ainst an executive of Daewoo $eleco%, one lower court did consider

:8)

the lac- of direct &ersonal &rofit a %iti/atin/ circu%stance for sentencin/# ())1 Gohab 1(C, at 18#
:81

$he Hi/h Court o&inion in fact recites virtuall" verbati% the conclusion of the District

Court while addin/ so%e additional findin/s of its own# Id# at 8:F ())1 <o ()E:, at HC. $he defendants did not raise these defenses on a&&eal to the Su&re%e Court#
:8(

())1 Gohab 1H1, at 8:F ())1 <o ()E:, at HCAD).

:8:

Id#
())1 <o ()E:, at HD.

:8*

1)(

together to create a la0 compliance structure for corporate e0ecuti%es. 2 tacit policy of soft enforcement pre%ailed in the treatment of white collar crime. <o matter how serious the infraction chairman, controlling shareholders or directors from the largest conglomerates often a%oided actual discipline. ,he failure to obser%e corporate go%ernance duties, laws and regulations became an inconseIuential e%ent.

?. 4onclusions

Daewoo$s mismanagement and, worse yet, accounting malfeasance went (unchallenged because corporate go%ernance simply did not e0ist.) 355 @hile primary fault with Daewoo$s troubles lies with its controlling shareholder and directors, other mar*et participants, both domestic and foreign, share a significant portion of responsibility. +eading commercial ban*s, in%estment ban*s, reputational

intermediaries, gate*eepers and public sector guardians, in particular, not only failed as monitors to detect serious accounting problems but also tacitly permitted it to persist. ,he brea*down of corporate go%ernance through the failures of these interconnected mar*et players was ne%er fully e0aminedH years later, in the form of ;nron, @orld4om and Aarmalat, comparable meltdowns were repeated, roc*ing financial pillars around the world. >nfortunately, Daewoo$s warning signs were dismissed as an aberration, limited to a distant country called &orea who was a %ictim of the 2sian financial contagion. ,his forensic study of Daewoo$s implosion also co%ered formation of formal corporate go%ernance in an emerging mar*et through the prism of a &orean chaebol. It described how chaebol first operated under a system where the state played the central role as lead monitor, not directors, shareholders or regulatory institutions
:88

Lee, su&ra note Error@ +eference source not found, at 1H8#

1):

operating according to the dictates of formal law. 2s the state$s influence ebbed, howe%er, legal protections were not established to replace its o%ersight function. =wnership dispersion e0acerbated agency problems, lea%ing chaebol further susceptible to abuses. ,he financial crisis e0posed the %ulnerabilities of ineffecti%e corporate go%ernance, Daewoo being the most egregious case. ,his study of Daewoo builds upon the comparati%e corporate go%ernance literature regarding the relationship between formal law and enforcement discipline and trends toward con%ergence. ,he role of enforcement in establishing compliance of corporate go%ernance duties and responsibilities was emphasi-ed. /ollowing Daewoo$s collapse, the controlling shareholder, corporate e0ecuti%es and reputational intermediaries ha%e been held liable, both ci%illy and criminally, on an unprecedented scale. ;nforcement discipline has been spearheaded by such institutions as the &DI4 that e0ist outside of the normal confines of corporate or securities law. In practice, &orea has also con%erged from a state'oriented model toward a more shareholder' oriented system with some emphasis on accountability toward sta*eholders. /ormal con%ergence has emerged through legal and regulatory reforms that followed the financial crisis. ,he Daewoo case offers a %ariety of lessons for corporate go%ernance specialists of emerging mar*ets. =nly through a comprehensi%e internal and e0ternal framewor* can companies shed the perception of opacity to recei%e competiti%e %aluations. 4orporate scandals continue to erupt demonstrating that transparency and accountability must be %igilantly pursued within such a framewor*. In particular, local laws, mar*ets and institutions do not bear sole responsibility, but international mar*et participants must be properly enlisted into the process.1

1)*