South Korea’s Moment for Chaebol Reform is Now

In late 2016, South Korea’s President Park Geun-hye was impeached and removed from office following revelations of massive corruption in her government. While the scandal included plenty of sensational and salacious material, the core accusations involved improper quid pro quo relations between the Park administration and several chaebols—the massive, dynastically controlled business conglomerates that are the cornerstones of the South Korean economy. Following impeachment, President Park and several senior officials in her administration were arrested, tried, and convicted for a variety of offenses, including bribery, abuse of power, and coercion. In the aftermath of this massive scandal, new President Moon Jae-in swept into office with a commanding majority and a pledge to clean up the mess by instituting strong anticorruption reforms.

However, most of President Moon’s anticorruption initiatives have received mixed reviews at best. For example, President Moon’s proposed Anti-Corruption Agency, though authorized by parliament in December 2019, has yet to be established, and has been roundly criticized for its potential to be used to suppress political opponents. And President Moon’s attempt to exert more centralized control over prosecutors was derided by critics as a retaliatory measure against prosecutors investigating government corruption. But perhaps the greatest disappointment of the Moon administration’s approach to anticorruption is its reluctance to target the root of the country’s most serious corruption problem: the unchecked power of the chaebols. Though President Moon announced chaebol reform as a platform priority, his actions since his election have borne little fruit.

That chaebols were at the center of the Park administration scandal is neither surprising nor unusual. Indeed, chaebols have been at the center of South Korea’s most significant grand corruption cases, and they are routinely implicated in scandal after scandal after scandal. But neither the chaebols themselves nor their senior executives face a meaningful risk of significant liability. Even when prosecutors bring cases, chaebols and their executives benefit from judicial leniency, a phenomenon that has been documented both anecdotally and quantitatively. Indeed, South Korean high courts are infamous for overturning stricter lower court sentences in favor of what has come to be known as the “three-five” rule, available exclusively for chaebol executives: a guilty chaebol executive typically receives a three-year prison sentence, suspended for five years, and subsequently commuted—meaning that the executive serves no prison time. There are two likely explanations for this unusual and counterproductive judicial leniency toward chaebols and their executives.

  • First, Chaebols have long been deemed “too big to jail”—and the larger the company, the lighter the sentence. Viewed most charitably, judges are worried that harsh punishment of a major chaebol or its senior leaders could have adverse effects on the South Korean economy. Though courts rarely explain the rationale underpinning individual sentences, in a few cases judges have explicitly raised concerns that imposing a harsh sentence on a chaebol executive would cause “system risk” to the economy, or cited the chaebol executive’s “contributions to economic development” as a mitigating factor. This “system risk” hypothesis has never been put to the test; chaebol executives are rarely ever placed in jail for a meaningful amount of time.
  • Second, and even more troublingly, judges’ interest in later employment in lucrative positions with chaebols may give the judges an incentive to be more lenient. Importantly in this context, South Korean judges do not serve for life. Not only is there a mandatory retirement age, judges must be periodically reappointed every ten years, and many are not. So judges need to think about post-judiciary career opportunities, and chaebols may take advantage of this by (implicitly) dangling job opportunities for career judges (and prosecutors) after they leave the Korean justice system. We can’t know for sure whether such factors may influence judges’ sentencing decisions, but there are certainly some troubling illustrations of the concern. Consider Kim Hi-hyung, who was the presiding judge in a 2009 Samsung corruption case. Judge Kim confirmed a lenient sentence and in 2012 was promoted to the Supreme Court by President Lee Myung-bak. (President Lee was himself the former CEO of a chaebol (Hyundai), and was later convicted on charges of bribery, embezzlement, and tax evasion.) Judge Kim retired from the Court and now serves as the head of the compliance commission for Samsung, another chaebol.

Despite his tough campaign talk about uprooting chaebol corruption, President Moon has so far done little to practically reduce chaebols’ stranglehold on the judiciary and economy. President Moon hired a so-called “chaebol sniper,” Kim Sang-jo, but he began his tenure by lowering expectations, and has not accomplished much. And President Moon has shown little appetite for aggressively reforming the judiciary more generally, calling instead for courts to engage in “self-reform.” So, three years since President Moon took office, nothing has functionally changed, as demonstrated by yet another Samsung scandal, in which courts refused to issue an arrest warrant for the de facto head of Samsung, J.Y. Lee, notwithstanding strong evidence of criminal misconduct.

To be fair, chaebol reform is an uphill battle. This is partly because chaebols are entrenched into the fabric of South Korea, and are credited with transforming the South Korean economy into the technological powerhouse it is today. Another obstacle to reform is the fact that chaebols are large donors to politicians, which can make it difficult to get parliament to enact laws that credibly threaten chaebols’ interests. Nevertheless, since his April 2020 reelection, President Moon is in an unusually powerful position, enjoying a historic majority and very high approval ratings—the latter in part due to the administration’s lauded handling of the COVID-19 pandemic. That makes this a prime opportunity for bold action.

While there are many things that can and should be done to address chaebols’ excessive power, there are a few reforms that President Moon should push to specifically address the excessive judicial deference to chaebols and their executives described above.

  • First, President Moon should push for updating South Korea’s sentencing codes to remove the loopholes that judges can deploy at their discretion to allow for more lenient charges and sentences. (In South Korea, a civil law jurisdiction, judges determine sentences by first ascertaining the facts of the case and then applying the appropriate codes. Reforming the codes would therefore restrict judicial discretion without violating the independence of the judiciary.)
  • Second, President Moon should make clear his opposition to giving chaebols and their executives special treatment—explicitly rejecting and denouncing the idea that harsh punishments for such defendants would put the economy at risk, or that the chaebols’ economic contributions are mitigating factors—and should signal his seriousness about this by refusing to appoint Supreme Court justices who have invoked such considerations to justify unusual leniency in the past. (In South Korea, the president has the power to appoint Supreme Court justices, generally with the approval of the Chief Justice and consent of the National Assembly.) Such a strong statement might not only affect sentencing, but also, through the signal it sends, could make judges less likely to give chaebols preferential treatment at earlier stages in the judicial process.
  • Third, President Moon ought to encourage all government figures, including himself and all judges, to keep their distance from chaebol executives. For example, President Moon should not pardon chaebol executives as his predecessors did. Moon should set the standard of avoiding close association with chaebols in order to signal to judges that he will enforce clear boundaries between chaebol influence and matters of governance. While Moon cannot control where judges and prosecutors go after government service, at the very least he should encourage them to avoid chaebol influence while on the government’s dime.

These reforms are only a small piece of the puzzle. In the longer term, genuine reform may require more dramatic actions to restructure South Korean economic and judicial systems. But in the near term, these sorts of measures would do a great deal to end the de facto impunity that the most powerful chaebol executives currently enjoy. However, the opportunity is fleeting. Public support for President Moon’s party may deteriorate prior to another round of parliamentary elections in April 2021 and the next presidential election in 2022. Thus, although President Moon concededly has plenty of other things on his plate, including relations with North Korea and the coronavirus pandemic, he should use the occasion to show the chaebols and courts that he means business.

6 thoughts on “South Korea’s Moment for Chaebol Reform is Now

  1. Without knowing much about how the judiciary is regulated in South Korea: would another possible solution be establishing a pension of some sort for retired judges, simply to alleviate at least some of the financial incentive for judges to cozy up to the chaebols in order to secure employment after the fact?

    • From what I understand, judges, along with every other South Korean government employee, are eligible for a pension as long as they meet the minimum requirement of 20 years of service. The problem is, most judges quit the position (or reach the mandatory retirement age) long before they hit that mark. Instead, most judges would take a lump-sum retirement package. Further, what’s a small pension compared to a Samsung salary?

      There are certainly some financial incentives that could change things (for example, raising the salary of a judge, which currently sits on average at ~$44K USD) but I think that attacking things on a financial level would A. require a lot more money than President Moon would be able to marshal, and/or B. fail to address the structural factors that led us here in the first place.

  2. Thanks for this post! It seems that President Moon has a few avenues to take a stand against the chaebols, if he is willing. Along these lines, do you think that there is a role for campaign finance reform as another way of wrestling power away from the chaebols? Is this is practical or even possible? I wonder about the effectiveness of President Moon/the legislature’s reform efforts if chaebols are still pulling the purse strings.

    • Hi Laurel! This definitely could be a lever of influence! South Korea does have strict spending caps for campaigns and limits as enumerated in their Political Fund Act, which limits contributions and how parties allocate funding. If an elected official is found to have violated this law, they are fined and banned from office for five years. However, there’s always room for improvement and the law likely is underenforced and violations are under-investigated.

  3. Thanks for a great post Jaylia! Do you have a sense how much President Moon’s political base is dependent (or not) on the chaebols? Some of the reforms you mentioned presumably would be easier if it was not, but as you foreshadowed the impact of chaebols are pervasive. So I am curious what the political cost might be, if any, are for him to pursue this path. Also you hint at restructuring the political economy so it’s less dependent on chaebols more generally, how feasible is this long-term idea, and what would it take given the contribution of chaebols in the South Korean economy?

    • Hi Steven, excellent (and big!) questions! Though President Moon was elected on a platform of chaebol reform, in my opinion, the political costs are exactly what’s been slowing things down. Since the reopening of talks with North Korea and COVID’s economic impact, there are certainly a lot of factors that will pressure President Moon to remain cautious, as Moon may need chaebols or their influence in diplomatic or economic recovery efforts. That being said, just a few days ago, Moon unveiled a corporate reform package targeted at chaebols (see here: https://www.bloomberg.com/news/articles/2020-11-19/korea-set-to-crack-down-on-chaebols-with-corporate-reform-steps).

      As for restructuring the South Korean economy– it’s the goal, not the road. It’s what chaebol reformists have long been advocating for, and you’re hitting on the right questions of feasibility. There are some ideas, such as legislative initiatives that would increase transparency and oversight on merger deals, state support of small/medium businesses, stricter enforcement of fair competition rules, etc. It definitely will not be an overnight venture, and there are people that are far more qualified than I am to answer these questions!

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