Edited by Duck-Koo Chung and Barry Eichengreen
Chapter 9: Corporate restructuring
9. Corporate restructuring Sung Wook Joh INTRODUCTION Without question, weaknesses in the corporate sector played a major role in the Korean crisis. The low rates of proﬁtability characteristic of Korean corporations in the decade leading up to the crisis, and the ﬁnancial problems of the country’s large conglomerates (or chaebols) in particular, are consistent with the argument that problems in the nonﬁnancial sector were what rendered Korea so susceptible to the contagion from abroad. A weak system of corporate governance had allowed sub-par rates of proﬁtability to persist, uncorrected, for years. Six of the country’s 30 largest conglomerates had failed, their meager proﬁts being insufﬁcient to cover their debt servicing costs, even before the crisis broke out in Thailand and spread to the rest of the East Asian countries (Joh, 2001b). The failure of these large ﬁrms weakened the position of Korean ﬁnancial institutions, saddling them with enormous loads of bad debt. Alarmed by these developments, foreign investors sold off their holdings of Korean equities, and foreign banks demanded repayment of the short-term loans they had extended to Korean ﬁnancial institutions, bringing the crisis of November–December 1997 to a head. In this chapter, I describe the structural environment that allowed these deep-seated problems to develop. I then examine how Korea’s weak system of corporate governance, along with supportive government policies, allowed poorly performing ﬁrms to remain aﬂoat for so long. Finally, I summarize the measures taken since the crisis to reform corporate governance...
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