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Scourge of the chaebol

How a soft-spoken, orchid-growing professor became South Korea's most audacious shareholder champion.

How a soft-spoken, orchid-growing professor became South Korea's most audacious shareholder champion.

By Kevin Hamlin
April 2001
Institutional Investor Magazine

How a soft-spoken, orchid-growing professor became South Korea's most audacious shareholder champion.

In his wire-rimmed spectacles and nondescript suits and ties, the studious-looking Jang Ha Sung could be any professor at Korea University's College of Business Administration. At night this mild-mannered soul nurtures orchids on his apartment balcony. "The orchid is very restrained, controlled and patient," he says in a soft voice, as if perhaps describing himself. "But when it blooms, the smell is beautiful and so sweet. Just one blossom permeates the whole house."

Orchids aren't Jang's only passion. Nor is he as meek as his manner might sometimes suggest. The fact is, Jang is South Korea's boldest shareholder rights advocate, a man who once grilled Samsung Electronics Co. senior executives for 13 hours at the semiconductor maker's annual meeting. A member of a prominent political family, Jang has entered into high-profile battles with South Korea's powerful chaebol, or conglomerates - such as Samsung Group (see box, page 66) - spurring reforms and endearing himself to many middle-class workers.

One regulator dubs him a "true revolutionary." David Coe, the International Monetary Fund's senior resident representative in South Korea, says Jang is "doing extremely important work in the process of moving Korea to a market economy. What he's providing is a type of market discipline." Bill Hwang, head of Asian equities for Tiger Management Corp., insists that Jang must stop chain-smoking "because Korea desperately needs him around as long as possible." Jang is often mentioned as a candidate for high public office. Given his family background and elite education, Jang might well have run a chaebol (indeed, he did work at one). Instead, he has chosen to challenge the industrial establishment head-on.

Jang's declared aim is simple: to make these massive, mostly family-controlled businesses transparent, accountable and responsible corporate citizens. He charges that the companies' anachronistic management and corporate governance practices hold back South Korea and cost it trillions of won in forgone profits and undervaluation of assets.

"Just look at the price-earnings valuations of Korean companies," Jang says. The South Korean stock market trades at seven or eight times earnings. By comparison, he notes, Taiwan's market trades at 18 times earnings, Malaysia's at 21 times and India's at 16 times. "The value we are losing here is because of the quality of management and poor corporate governance," Jang argues. "With more transparency and greater investor confidence, we can easily create W10 trillion to W20 trillion [$8 billion to $16 billion] of value."

Many of Jang's arguments may be hard to refute. But they pose a direct threat to South Korea's ruling business and political classes. The chaebol became the country's sturdy engine of industrial growth in the 1960s, when a shortage of capital prompted the government to single out just a few industrial groups to drive the economy. In return for inexpensive funding from government-controlled banks, the fledgling chaebol were assigned high growth targets in government-selected sectors, such as shipbuilding and steelmaking. If they consistently met their goals, they received protection from foreign competitors and first dibs on new business licenses.

The formula worked spectacularly. South Korea's rapid economic growth became known as the Miracle on the River Han. Chaebol such as Daewoo Group, Hyundai Group and Samsung became familiar names around the globe. But South Korea's corporate socialism proved to have an Achilles' heel. Ready access to cheap funds caused the chaebol to overexpand, and by 1997 most had dangerous debt-to-equity ratios exceeding 5-to-1.

During the Asian economic crisis of 1997 and '98, more than a dozen chaebol failed. Among the more conspicuous casualties were Hanbo Iron & Steel Co., Kia Motors Corp., Sammi Steel Co. and Haitai Group. South Korea's economy was left in shambles. Today even the once-unassailable Daewoo is operating in receivership, its staggering $75 billion debt load having brought it to the brink of collapse.

To Jang and his supporters, the current problems of the chaebol merely reinforce the need for a more market-driven economy to replace a government-led system. "Through the '70s, '80s and '90s, we established an industrial base that was ahead of all Asian countries except Japan," Jang points out. "But the only way we can achieve sustainable growth now is by adjusting ourselves to the new global standard and making our companies globally competitive. That means we must upgrade the quality of our management and build a more transparent society, if we are to move to the next stage of development."

Jang's efforts are being closely watched in Asia and elsewhere, as he is virtually the only nonforeigner aggressively pursuing shareholder rights. If he is perceived to succeed, other Asian countries may find they have to contend with their own Jangs. But if he ultimately fails, progress in South Korea and Asia generally toward more open, investor-friendly economic systems is likely to slow or stall.

Ridiculed by the chaebol and often defeated in court, Jang and his colleagues are nevertheless slowly but not surely, forcing one of the most notoriously closed economic systems in Asia to pay at least lip service and perhaps more to shareholder rights. "Every Korean company is concerned about the [People's Solidarity for Participatory Democracy, Jang's civic action group], every company is talking about the PSPD. It's like another branch of government," grumbles a senior executive at one of the chaebol.

When Jang and his colleagues started out in 1996, they could not have picked a riper moment to confront the chaebol. The conglomerates' cozy - and sometimes illegal - links to politicians and banks were making front-page news. In early 1997 Hanbo collapsed, after it came out that the company had obtained loans by bribing government officials. The ensuing disclosures brought down eight senior politicians, as well as bankers and aides to then-president Kim Young Sam. An investigation into Hanbo's bankruptcy - it was $6 billion in debt - also led to the arrest of Kim Hyun Chul, Kim Young Sam's son. He was pardoned in 1999 by incoming President Kim Dae Jung, after having served six months of his two-year sentence for graft and tax evasion. Meanwhile, the heads of five of the chaebol were sentenced to jail terms for having bribed politicians, but each of the five had his sentence suspended and later received a presidential pardon.

With the seamier side of the chaebol in full view, Jang's PSPD found a ready audience for its free-market agenda. "We started as a small group," says Jang, who today works with about 30 lawyers, accountants and academics, all volunteers. "We were dreamers. We thought it would take five years to let the people know what we were doing."

Their time horizon was too conservative. Again events intervened. In July 1997 Asia's financial crisis struck, exposing financial weaknesses throughout the region. The PSPD decided to strike. Its first big legal battle, against the former operators of Korea First Bank, soon followed. The organization accused the bank's executives of mismanagement, and in late 1998 - in an unprecedented decision - a South Korean court ordered the managers to reimburse shareholders for W40 billion in losses. The initial challenge to Korea First was "where it all started," says Jang.

Even before that court victory, the PSPD chalked up another win. This was over SK Telecom Co., South Korea's largest telecommunications company and part of the SK Group chaebol. Jang and his colleagues formed an alliance with a group of major overseas shareholders, including Julian Robertson's Tiger Management, Scudder Kemper Investments and Oppenheimer Global Fund, to force the company to elect three outside board members, create an audit committee and see to it that SK Telecom recovered the $234 million it had used to support troubled affiliates. Faced with a powerful and committed investor base, SK Telecom acceded to the demands in March 1998. Tiger's Robertson says that because of the efforts of Jang and his colleagues, "international investors should eventually be more willing to invest in Korean companies."

The SK Telecom battle highlighted a theme running through almost all of Jang's fights: Family owners frequently use their most successful units, like Samsung Electronics, SK Telecom and Hyundai Heavy Industries Co., to subsidize weaker affiliates or to guarantee their debts - to the detriment of minority shareholders. These sparsely documented subsidies, Jang and his colleagues argue, often result in potentially productive capital's being diverted to keep troubled businesses afloat.

A prime example of this tendency is Samsung Electronics, which the PSPD sued over the failure of its Samsung Motors Corp. affiliate in 1999. Group chairman Lee Kun Hee guaranteed creditors of Samsung Motors that they would be repaid their $2.5 billion in loans. As collateral, he pledged 4 million unlisted shares from another affiliate, Samsung Life Insurance Co., that Credit Suisse First Boston had valued at about $630 a share. Other Samsung affiliates, including Samsung Electronics, passed board resolutions committing themselves to compensating creditors if the life insurer's shares failed to cover Samsung Motors' debts. With Samsung Life Insurance shares later valued at less than $170 each (based on sales by a Samsung affiliate), Samsung Electronics and other group companies were faced with having to pay off a portion of Samsung Motors' debts. The PSPD filed a lawsuit to nullify the Samsung Electronics board's resolution and also filed for a court injunction to prevent the company from paying anything to the creditors. After the PSPD filed for the injunction, Samsung Electronics in December of last year said it would not make any payments to creditors, in deference to shareholders' interests. The PSPD had won again.

Jang pursues these battles with a mixture of factual mastery, persistence, occasional humor - and genuine passion. Scene: At the Samsung Electronics annual general meeting in Seoul on March 9, Jang and his group of PSPD supporters have been questioning management for more than seven hours. Suddenly, a Samsung Electronics employee in the crowd of 700 grabs the microphone and blasts Jang's group: "I think you insult us. I'm disappointed at the shareholders. Our company accounted for 12 percent of Korea's exports. That's $21 billion. What did the shareholders do?" A shouting match breaks out, and Jang yells at the crowd of angry employees: "We paid your salary, we paid your bonus, we are the owners of this company, we provide you with everything. It's our company. We own it." A little later, and more calmly, he notes, "There's so much education that needs to be done."

In sessions with investors in London and Edinburgh just before the Samsung Electronics shareholder meeting, Jang leavens his intensity with humor. He tells investors of one chaebol manager who uses a threatening letter Jang wrote to the company as a weapon to prevent family owners from abusing minority shareholders. "He called me up recently and asked for a new letter," says Jang. "The old one doesn't work any more."

Jang's underlying message - that the chaebol are still hiding all sorts of antishareholder transactions - gets through. Angus Tulloch, head of global emerging markets at Colonial First State Investments, which has more than $50 million invested in South Korea, says that because of Jang, "management is made to think twice before undertaking activities that may conflict with the interests of minority shareholders."

While some investors like Tulloch are willing to back Jang, many offer little more than verbal support or the occasional vote. "It's difficult for investors to get involved when [South Korea] doesn't represent an enormous part of their portfolio," says Richard Samuelson, a branch manager at UBS Warburg in Seoul who knows Jang well. "It's time-consuming, and they're under pressure to perform."

James Rooney, until recently the head of Templeton Asset Management in South Korea, says corporate governance appears relatively low on most fund managers' radar screens. "It's not the determining factor," he says. "The company's weighting in the MSCI index, liquidity and profitability are all more important. Fund managers are typically far away and looking at the world as a whole. There's no incentive for them to be activists."

With some improvement in investor relations by the chaebol and Asia's financial crisis largely over, some believe that the momentum behind Jang has waned. Samsung Electronics' investor relations chief Chu Woo Sik insists that this was evident at the company's March shareholder meeting. "The PSPD was not able to come up with one single criticism on something that has happened in the past year," Chu says.

Such sentiments have emboldened some of the chaebol. South Korea's five biggest business associations, all with close ties to the chaebol, held a press conference in March to criticize the PSPD for purportedly damaging the image of South Korean companies and thereby undermining the value of their shares. The associations charged that Jang's attempts to elect an outside director to Samsung Electronics' board were motivated by political rather than business considerations. Samsung has also lashed out at the PSPD, accusing it of duplicity and intimidation, as well as spreading false rumors. The PSPD wants to "destabilize the legitimacy of the chaebol business model," Samsung insisted. Mark Mobius, head of Templeton Asset Management, notes that "Samsung is doing everything in its power to stop Jang, firing every round of ammunition it has." He marvels at the activist's "bravery and fortitude." Several newspapers that are heavily reliant on the chaebol for advertising have suggested that the PSPD is too leftist. Jang scoffs at his opponent's effort to "paint somebody a red color" and says that assigning an adversary a vague political motive is an old chaebol maneuver.

What motivates a 48-year-old married man with a 15-year-old son and a secure job to stand up to the most powerful businesses in his country? Inhaling deeply on one of his ever-present Time cigarettes, Jang suggests that his courage comes from two sources. The first is truth, he says gravely. The second, he says in a lighter tone, is ignorance. "I really didn't know the reality that well; I didn't know how big this problem is, how complicated the chaebol structure is, how slippery the chaebol managers are," he confides. If he had known all along, he says, he might have stuck to his orchids. In fact, Jang is a driven man who believes that reforming the chaebol is South Korea's most important task.

This conviction was born in the U.S., where Jang studied free markets both formally and informally. He received an MA in economics at the State University of New York at Albany in 1982 and a Ph.D. in finance - his dissertation was on financial markets - at the University of Pennsylvania's Wharton School in 1987. He then taught finance to undergraduates at the University of Houston in Texas between 1987 and 1990.

When Jang returned home in 1990 to join Korea University as a research assistant, he quickly became frustrated. His research work was intellectually stimulating but irrelevant to South Korea, as he saw it. One project he recalls well was an analysis of specialist order flows on the New York Stock Exchange, for which he won a Graham & Dodd award from the U.S.'s Financial Analysts Journal and the Association for Investment Management and Research in 1995. His key finding? That spreads on end-of-day transactions were much larger than reported to the NYSE because specialist firms wanted their profit margins to look small. The import of such work - because it had no impact on South Korea at all - "was a micro, micro, mini, mini thing," says Jang.

What Jang wanted was a way to bring his U.S.-gleaned market theory together with his knowledge of South Korean business practices. His own business experience included a stint as a salesman covering the U.S. for Kumho Group, the 11th-biggest chaebol and parent of Asiana Airlines, between 1977 and 1980. "You couldn't trust the numbers companies reported; the managements weren't transparent; and families ran companies, not professional managers," recalls Jang. "Market theory was completely out of touch with the reality in Korea because that's not the way the market operates here."

Over the years he has written several provocative articles for local papers. In a 1996 column he said South Korean banks could fail. Many laughed at the premise, Jang says, but a year later South Korea's banking system nearly collapsed in the midst of the Asian financial crisis. An even more incendiary Jang column was entitled "Why I'd rather drive a foreign car." While conceding that South Korea's protection of its auto industry provided some benefits, Jang argued that shielding automakers from imports meant South Koreans paid a higher price for lower-quality products. But life as a scribe didn't satisfy Jang any more than academic work. Writing columns "was just a cry," he says. "Nobody was listening."

That Jang would go on to help create a shareholder rights organization isn't so surprising. A rebellious streak "runs in my blood," he says. His family has a history of activism. Jang's grandfather fought for Korean independence against the Japanese, and his granduncle was a cabinet member in Korea's government in exile in China. Jang's mother, a housewife and restaurateur, joined a protest against a corrupt election in the 1960s and was so badly beaten by riot police that she later received a medal of honor from the government. Jang was a student activist himself but declines to talk about it. "People always have a prejudice about these things in Korea," he says. "I'm negative on taking issues to the street because this is not the way to resolve conflict in society any more. Now it's time to follow due process."

The Jang family is actually part of the establishment. Jang's uncle Jang Jae Sik is chairman of the National Assembly's budget committee and a member of Kim Jong Pil's opposition party. One brother is prominent at the Korea Development Institute, an elite think tank, while another was head of Korea Electric Power Corp., the state-owned utility.

Jang himself is an adviser to the Korea Stock Exchange and to the Fair Trade Commission, the country's antitrust agency. He is credited with designing the Korea Stock Exchange's benchmark Kospi 500 index and more recently an index of 50 leading companies on Kosdaq, the Internet-heavy technology bourse.

Jang's influence in South Korea has spread so rapidly that even his adversaries acknowledge that he would win a landslide victory if he were to run for public office. Does he have political ambitions? "You never know," says Jang, quickly adding that it's "not on my list now, not at all." Before he would contemplate a government post, he says, he would need to see a "good leader that I totally wanted to serve."

For the near future Jang considers that unlikely, though he is an admirer of President Kim Dae Jung, with whom he met at Kim's request in early 1999 for an 80-minute discussion of Daewoo and other matters. "Kim is Korea's best hope for further reform," says Jang, who sees the president as a genuine reformer, but one stymied by the country's powerful bureaucracy. "He's a prisoner of the technocrats," says Jang.

Many others would be perfectly happy if Jang continues to push the chaebol. And he's doing it almost single-handedly: "Why should Jang as a one-man band be out there doing this? It's the failure of the supervisory authorities," says Templeton's Rooney.

Jang is full of plans. The PSPD wants to set up a corporate governance rating agency and start a fund that would invest in companies with good governance. Both would help put additional pressure on companies. The PSPD is also lobbying for the introduction of class-action lawsuits to allow shareholders to take legal action against managements that show lax fiduciary responsibility. And Jang hopes to export shareholder activism to other parts of Asia.

"The next step is to institutionalize things, to make this movement a part of the system in the market," says Jang. "It cannot be activism all the time. The question now is how to make it a part of the system." Jang is willing to be patient. He is, after all, a man who will wait two years for a single, sweet-smelling orchid to bloom.

Stalking Samsung around the globe

Shareholder-activist Jang Ha Sung and Samsung Group chairman Lee Kun Hee are like veteran boxers who have developed a grudging respect for one another. "It's an irresistible force against the immovable object," says one former Samsung executive of these seasoned combatants.

Although it's not always clear who's winning their battles, Samsung's flagship semiconductor affiliate, Samsung Electronics, has felt the sting of Jang's attacks and - like many of his targets - has been forced to rethink some of its practices (story). The company no longer makes loans to directors to buy stock at insider prices; it has asked foreign shareholders to put up candidates for board seats; and its top managers, whose attendance at board meetings was once spotty, now put in regular appearances.

As is typical of many of the confrontations between Jang's People's Solidarity for Participatory Democracy organization and South Korea's chaebol industrial conglomerates - usually over family control, insider transactions and bailouts for troubled affiliates - there are countless lawsuits, public relations campaigns, accusations and counteraccusations and, on both sides, a passionate courting of investors.

Jang's relentless focus on three big chaebol - SK Group, Hyundai Group and Samsung - reflects his belief that the best way to achieve broad reform is to go after the most admired, most influential companies. "My team's resources are very small," he points out, "so our strategy is to have the best spillover effect on other companies."

Samsung Electronics' concessions to date have hardly appeased Jang. He alleges that in early 1999 he persuaded the company's management to agree in principle to broad-ranging corporate governance reforms. But he confides that he learned later that Samsung Group chief Lee stepped in at the last minute to scuttle the deal. "When you experience the chaebol managers stabbing you in the back, that really makes you angry," Jang says.

The 59-year-old Lee, whose family founded Samsung and still controls about one fifth of the stock, has built Samsung into perhaps South Korea's most successful chaebol. But critics accuse the Samsung chairman of autocratic tendencies, and in 1996 he received a suspended sentence after being convicted of contributing to a political slush fund. (He was later pardoned.)

Jang has landed his own sharp blows against Samsung Electronics. A company director, Song Ja, was named South Korea's education minister in September. But Jang helped to trigger his resignation just 23 days after he took office by drawing public attention to a loan Song received from the company to buy Samsung stock at a discount.

In their latest confrontation, Jang tried - unsuccessfully - to have the first independent outside director elected to Samsung Electronics' board at the annual meeting in March. Institutional Investor Hong Kong Bureau Chief Kevin Hamlin accompanied Jang to London and Edinburgh as he argued his case before foreign shareholders, which own 54 percent of the company's stock. In those cities, and in Amsterdam, Zurich and Milan, Jang urged investors to vote for the PSPD's candidate, Junn Sung Chull, the respected dean of Sejong University's business school.

Samsung struck back early against Jang's campaign. Rejecting the PSPD candidate, the company countered with its own choice, Lee Hak Soo, president of Samsung's group restructuring headquarters, a unit set up largely at the government's behest in the wake of the 1997 Asian economic crisis. The Samsung candidate, no relation to the chaebol's chairman, also happens to be a defendant in a number of lawsuits filed by the PSPD to block Samsung from subsidizing ailing affiliates. Jang and other critics argue that chaebol support for deadbeat corporate siblings detracts from their core operations and thus hurts shareholders.

Not to be upstaged by Jang's global road show, Samsung Electronics launched its own tour - to London, Edinburgh, Amsterdam, Zurich, Abu Dhabi, Singapore and Hong Kong - two weeks after his trip. The company rolled out vice chairman and CEO Yun Jong Yong, Fortune magazine's Asian businessman of the year in 1998 and the architect of Samsung Electronics' recent resurgence, to woo European and Asian investors. CFO Choi Wang Yuel had a similar mission in the U.S. At the shareholders' meeting, Yun said: "There may not have been accurate information flowing [from Samsung once], but that's the past and we can't explain the past constantly. We've apologized. We have become transparent."

For his part, Jang sees plenty of issues with Samsung. In his meetings with European investors, he presented a 28-page report containing allegations about Samsung practices that he said were unethical and harmful to shareholders. Jang charged the company's directors with "self-dealing." He asserted that eight directors, including Song, had made huge profits by allocating themselves unsubscribed shares from rights issues at discounts of up to 40 percent. And as directors, Jang said, they were able to borrow money from the company to buy the shares. According to Jang, the eight directors made an immediate paper profit of $4 million (5.24 billion won) altogether and by mid-January were sitting on collective profits of $10 million.

Samsung counters that such practices are common in South Korea and completely legal. Moreover, the company's investor relations head, Chu Woo Sik, disputes Jang's contention that the stock was sold to the directors at discounts of up to 40 percent. The law, he says, sets the maximum discount in such instances at 30 percent. That said, he adds that Samsung will not offer directors loans to buy company shares in the future.

Jang's message seems to resonate with the investors he meets. "This is absolutely disgraceful, just incredibly dishonest," said George Robinson, a director of London hedge fund manager Sloane Robinson, after Jang presented his case. "Frankly, Professor Jang, I'm shocked to hear that they are still doing these kinds of things."

Next in Jang's show-and-tell is a spirited account of what he calls ghost directors. He notes that Lee and Lee Hak Soo, a board member and Samsung Electronics' current candidate for director, didn't attend a single board meeting out of the 24 held in 1998 and 1999. Kim In Joo, one of the chairman's executive secretaries and also a board member, attended none of the 11 meetings in 1998 and just two of the 13 in 1999. Chu doesn't deny that Lee Hak Soo and other directors have missed board meetings, but he notes that they were busy with restructuring and that their record has improved. In 2000 Lee Hak Soo attended eight out of ten board meetings, and Kim nine out of ten.

Chairman Lee, who recently recovered from cancer, remained an absentee. Lee prefers to oversee the company's strategy and leave board decisions to directors and professional managers, Chu points out. Even Jang concedes that Lee has created a "superb company." The chairman has a reputation as a visionary. As early as 1993 he was sponsoring corporate events at which Samsung products were smashed with hammers to symbolize the need for innovation. Lee's message to his staff: "Change everything except your wife and children."

Jang's report to investors resumed with an account of what he titled "Expropriation of Minority Shareholders: Stealing by Chairman's Family." At issue was a February 1999 sale by Samsung SDS, an information technology firm in which Samsung Electronics holds a 40 percent stake, of W23 billion of bonds with warrants exchangeable for Samsung SDS stock. Jang says the bonds were bought by Lee's son, Lee Jae Yong, and other family members, as well as by senior executives of Samsung SDS. They paid the equivalent of W7,150 per share for the bonds when the market price of Samsung SDS shares was W58,000. The buyers thus sat on instant profits of W165 billion in toto.

Minority shareholders were not allowed to participate in the bond issue and, what's more, saw their stake in Samsung SDS diluted from 18.3 percent to 14.5 percent. The proportion of the company owned by chairman Lee's children increased to 25.1 percent from 14.8 percent. Jang, arguing that a gift tax should be levied against the paper profit, has filed a complaint with the National Tax Service. South Korea's Fair Trade Commission (which Jang advises) backed his position, but the Seoul District Court rejected the PSPD's application for a temporary injunction to prevent the exercise of the warrants. Samsung says only that the bond sale fully complied with South Korean law.

Legal setbacks are common enough for the PSPD. "The judicial system is very pro-company," complains Kim Joo Young, a lawyer who helps the group. Jang is more philosophical. "Judges are really poor at understanding the capital markets," he says. But he contends that, by and large, they are not corrupt and that South Korea's legal system is truly independent. Thus the PSPD has won several important rulings, despite many "very bad decisions," Jang says. He is confident that the PSPD has a fair chance of prevailing in some of the many lawsuits it has filed against Samsung Electronics.

Jang's 40-minute presentation includes an allegation that Samsung Electronics' seven outside directors are handpicked by management and therefore unlikely ever to challenge its actions. Investor relations head Chu bristles at this. He notes that one outside director, Tetsuo Iwasaki, a Japanese-American who heads Applied Materials, Japan, a maker of silicon-wafer fabrication systems, was nominated by a foreign shareholder. And he says Samsung is inviting its biggest foreign investors to propose candidates as outside directors this year.

Chu also points out that Institutional Shareholder Services, the U.S.-based provider of proxy voting and corporate governance services, chose Samsung Electronics as one of five recipients of its global 2001 award for excellence in corporate governance. ISS praised Samsung for transforming itself "into a world-class company that is more attentive to shareholders' concerns" and providing "above-average corporate and financial disclosure." Nevertheless, ISS endorsed PSPD's candidate for director, not management's.

Jang buttresses his case for corporate governance reforms by highlighting the contrasts between South Korean stocks and those of foreign competitors. Samsung Electronics trades at a price-earnings ratio of only five times, whereas Micron Electronics trades at a multiple of 13 and Taiwan Semiconductor Manufacturing Co. at more than 20. No doubt South Korea's country risk accounts for some of Samsung's discount to the U.S.'s Micron, but governance issues are the major contributor to the disparity, stock analysts say.

But if Jang has a story to tell, so does Samsung Electronics. It had record profits of W6 trillion in 2000 - up 89 percent from 1999 - and a 40-plus percent return on equity. Investors who bought the company's stock at the end of 1997 saw it surge from W38,400 to a high of W388,000 last year, before it plummeted to W158,000 at year-end on worries over falling semiconductor demand. But by late March the stock had rebounded to W217,000.

In the end, Samsung investors overwhelmingly backed the company's candidate for director, Lee, over the PSPD's Junn, who got 16 percent of the vote. Jang supporters like Emil Wolter, investment manager at Pictet Asset Management U.K., were disappointed: Samsung's investor relations' record is better, but "if an outside director had come in and helped improve the process further that would have been a very positive precedent for other companies in emerging markets."

But even in this latest defeat, Jang sees progress. South Korea's National Pension Fund Public Co., the Government Employee Public Pension Public Co., the Korea Regional Administrative Cooperative and Seoul Investment Trust Management Co. - all voted for the PSPD's candidate, the first time they have backed Jang.

Besides, the final bell has yet to ring. Leading off the latest round, Samsung Electronics announced in March that chairman Lee's son, Lee Jae Yong, would become a vice president. His brief? Ironically, to enhance shareholder value and improve corporate governance. The PSPD promptly counterpunched, charging nepotism.

Jang warfare

In early 1999 Warburg Dillon Read sponsored an Asian road show to introduce South Korean shareholder-activist Jang Ha Sung (story) to institutional investors. The first session - in Singapore - went well, and Jang was looking forward to presenting his case for reforming Korea's chaebol to a larger audience in Hong Kong.

But then the Warburg banker accompanying him purportedly got a call. It seems that one of the most prominent chaebol, Samsung - a frequent target of Jang's jabs (see box, page 66) - had warned Warburg that supporting his activities would jeopardize the firm's chances of participating in securities issues by Samsung Electronics. Within hours, remembers Jang, the Warburg banker was on his way back to Seoul, and the road show appeared doomed.

But at the last second, Jang says, Jardine Fleming, now part of J.P. Morgan Chase & Co., stepped in for Warburg. It, too, received threats from Samsung, relates Jang, but it stuck by him.

This, at any rate, is Jang's recollection of the episode. A well-placed banking source offers a slightly different version. Warburg and Jardine were joint sponsors of Jang's trip from the outset, he asserts, and Jardine was always supposed to take over on the Hong Kong leg. But, the banker says, both firms felt pressure from Samsung Electronics. The company's investor relations chief, Chu Woo Sik, says, "I believe that such incidents did not take place."

Ambiguity often characterizes relations with the chaebol. Clearly, though, escorting Samsung critic Jang on a road show is no way to go about winning underwriting mandates from the conglomerates - certainly not from Samsung. Nonetheless, HSBC Investment Bank, which would like to build its corporate finance business in South Korea, was so bold as to sponsor Jang on a jaunt through Europe in January.

Why risk the wrath and possible revenge of the chaebol? Sean Kang, the London-based head of Korean institutional equity sales for the securities arm of HSBC, explains that the bank went ahead and sponsored Jang, because clients' expressed an overwhelming desire to meet the activist. "Everybody wanted one-on-one meetings with him," marvels Kang. "There wasn't one space left on a weeklong agenda." Says Angus Tulloch, head of global emerging markets at Colonial First State Investments, "HSBC did, in this case, go where others may have feared to tread." Reliable reports indicate that Samsung did not seek to derail this recent road show.