Global Insight Perspective | |
Significance | The month-long investigation into bribery and corruption allegations at the Hyundai Motor Group is drawing to a conclusion with the revelation that an arrest warrant is being sought for Chairman Chung Mong-koo. |
Implications | Hyundai's operations have been hamstrung since the scandal erupted, and the company's strategic plans have been put on the backburner, with groundbreaking opening ceremonies for new factories in the United States and Europe cancelled. The dynastic control of the firm is likely to end if Chung is found guilty of any wrongdoing, as plans to hand over to his son, Kia President Chung Eui-sun, will almost certainly be abandoned. |
Outlook | Hyundai Motors is still in fundamentally good shape despite the scandal as vehicles of both the Hyundai and Kia brand continue to sell well in the global market. However, the scandal could effect the long-term strategy to expand the firm's global production capability and could see the end of Chung Mong-koo's successful reign and his family's control over the company. |
Hyundai in Turmoil as Authorities Look to Arrest Chairman
South Korean prosecutors investigating charges of bribery and corruption relating to the business activities of the Hyundai Motor Group have issued an arrest warrant for the company's chairman, Chung Mong-koo. The man in charge of the investigation, prosecutor Chae Dong-wook, said in a media briefing, 'We requested an arrest warrant for chairman Chung...on charges of raising some 100 billion won [US$106 million] in slush funds and embezzling it.' Prosecutors spent 15 hours interrogating Chung on Monday (24 April) over the allegations and they appear to have subsequently decided to arrest and charge the 68-year-old. Chung Mong-koo's son, Chung Eui-sun, who is president of Hyundai affiliate Kia, has also been implicated in the scandal. However, prosecutors have opted not to seek an arrest warrant for the younger Chung in order to minimise the impact of the probe on the operations of Hyundai Motors. As well as the slush fund allegations, both men are being investigated over allegations of using share dealing in Hyundai's affiliates to aid the illegal transfer of power to the younger Chung, in an effort to ensure his succession at the head of the group.
Other Arrests Could Follow
Chung Eui-sun and other senior managers at the company could also face indictment later this month or early in May. Last week, Hyundai Motors issued a public apology and the Chungs promised to donate to charity their 60% holding, worth some US$1 billion, in Glovis, Hyundai's freight and logistics unit. The irony here is that Glovis was at the centre of the original investigation into alleged illegal slush funds used to bribe officials. Its chief executive, Lee Ju-eun, was arrested last month on charges of embezzlement in connection with the case. Glovis has also been at the centre of the illegal power transfer allegation. The company was also allegedly used as a channel to raise funds for main shareholder Chung Eui-sun through an initial public offering (IPO) so that he could buy further shares in Kia and consolidate the Chung family's control over Hyundai Motors. Prosecutors have applied to the courts for the arrest warrant for Chung Mong-koo, and a decision is due to be made today.
Outlook and Implications
The likely arrest and prosecution of Chung Mong-koo is an enormous blow to Hyundai's corporate reputation and image, although the short-term effects on the company are likely to be somewhat limited. The chairman's legal difficulties are unlikely to have an effect on the company's production and sales, and the company's model range is one of the youngest in the global automotive industry. However, the company's vitally important long-term strategy could be severely affected. Hyundai has already cancelled a groundbreaking opening ceremony for a new plant in the Czech Republic, and Kia has also delayed indefinitely a similar event at its vital new plant in the United States.
Chung Mong-koo's managerial style can be described as successfully autocratic, and he has the ultimate say over investment and major strategic decisions. If he is indisposed, it will leave Hyundai hamstrung as an organisation, unable to make key decisions vital to extending the enormous period of success Chung has overseen over the past decade. As a result, it is vital that any legal proceedings take place speedily and transparently, as the longer they take, the more detrimental it will be to Hyundai. However, the South Korean authorities have done the right thing in not bowing to pressure from Hyundai workers and suppliers to be lenient on Chung.
The global reputation of South Korean business has been severely tarnished by a number of scandals in recent years and there is the growing feeling that corruption is endemic and largely goes unpunished. By vigorously pursuing one of South Korea 's most powerful industrialists, the authorities will send out a powerful message to investors and the global financial markets that the country is trying to reform its standards of corporate governance. If Chung is prosecuted, it is also likely to herald a new era of professional corporate management for Hyundai, thus breaking the dynastic control of the firm, which originated with Chung-Mong koo's father, who established Hyundai Motors in 1967.