Corporate Governance of Newly Privatized Firms: The Remaining Issues in Korea

Abstract

In this paper, we review the developments that took place in the 'Big Four' after their full privatization. We show that POSCO, KT, and KT&G, which were privatized to have dispersed share ownership, have relatively high corporate governance standards. We also show that the 'Big Four,' have either maintained their superior performance or at least improved them. The remaining of the paper discusses on the two remaining concerns often raised regarding the newly privatized firms. That is, the issue of desired corporate ownership structure and the role of government.

As for the first issue, we try to provide a number of reasons why chaebols are not appropriate candidates to acquire newly privatized firms. One argument is that the ownership structure of Korean chaebols suffers from a number of incentive problems: other people's money agency problem, entrenchment agency problem, and tunneling. Related to this, we show that there is a considerable separation between the control and cash flow rights in chaebol-affiliated firms, and introduce empirical literature showing the link between separation and firm performance.

As for the second issue, we strongly argue that the most important role a government could play after privatization is to make sure that the newly privatized firms are management independent of government interference. But, we also emphasize that government should improve the institutional environment that would induce better governance from Korean corporations. In this respect, we stress the importance of enforcement, protection of minority shareholders' right, and the role of institutional investors. To make domestic institutional investors to take a more active role in improving the governance of Korean corporations, we argue that the first step would be to revamp the governance structure of Korean National Pension Fund.