Issue

[Issue] [September 2015] Special issue : What is Wrong with Lotte Group?

What
is Wrong with Lotte
  Group?


Kwon Oh-in

Director,
Economic Policy Team

In the midst of recent disputes over Lotte
group’s managerial rights, anti-Lotte sentiment regarding corporate owning,
immoral management, and unfair practices have been spreading. During a press
interview on August 11, Shin Dong Bin, the chairman of Lotte group, proposed
corrective action through a public apology. The main contents of his apology
included reducing 80% of the company’s cross-shareholding by the end of the
year, the listing of Lotte Hotel on the stock market, the reduction in the
amount of stake held by Japanese affiliates, conversion as holding company in
the middle to longer term, establishment of a task force for the improvement of
corporate governance. There are some aspects in his apology. His apology
reinforces the transparency of Lotte Hotel, but the identity of Japanese
capital, which is dominating control of the hotel, was not unveiled. There were
also no reform measures addressing unfair corporate practices. Therefore, it
was a merely an attempt to patch up the pre-modern way of managing business to
avoid negative public opinion.
   

 

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The
Lotte Group: grown by prerogative of government and unfair practices

The Lotte Hotel occupies the top postion,
dominating Korean Lotte Group. The hotel’s income is about 3 trillion and 900
billion KRW (approximately 3.2 billion USD), due largely in part to its duty
free business, which accounts for 84% of its total sales amount. In the present
system, duty free business can expect monopolistic profit by paying 0.05 % of
patent fee for its gains, which equates to hundreds of billions of KRW.
Apparently, there is a prerogative system for conglomerates, and as a result, Lotte’s
stepping-stones for growth were laid by exclusive government business. According
to the Fair Trade Commission, the penalty on Lotte shopping from 2012 to June
2015 has reached 12.6 billion KRW, which is the largest among distribution
industry companies whose cost reduction and profit originated from unfair
practices such as plutocratic despotism against suppliers.


Obscure
ownership structure and immoral behavior stir controversy surrounding
nationality

Lottle chairman, Shin Dong Bin emphasized
that the Lotte Group belongs to Korea during the press interview. In the case
of Lotte Hotel, however, 99% of stakeholders are from Japan. Moreover, when the
hotel purchased the site for its Busan branch, their tax was exempted by the
act of foreign investment promotion. It was and is an infamous transaction.
Since its 99% of stakes belong to Japan, and its monopolistic profit keeps
going to Japan as dividends. In the past 4 years, the hotel has been allocating
25 billion KRW per year to its Japanese stakeholders. It is highly questionable
whether we should still regard the group a domestic company, considering its
ruling structure and immoral behavior.
 

 

Fundamental
solutions for Lotte Group’s ownership and pre-modern management problems

Most of all, Lotte Group’s obscure
ownership structure and succession of management, which has allowed it to enjoy
profits from immoral and unfair practices, have been causing vast anti-Lotte sentiment.
It originated from the perception that the group is the private property of its
unethical owners. The Lotte Group is ranked 5
th among Korean
companies. It has 93 trillion KRW in total capital across about 80 affiliates.
The owning family controls 29% stake in the company, which they rule through
complicate ring of cross-shareholding. The Lotte Group has ranked 5
th
through vast speculation in real estate, promoting an affiliate by intergroup
contracts, prerogative duty free business, unfair business practices against
customers and subcontractors, as well as cutting labor costs through
non-standard employment. This allowed Lotte Group to enjoy enormous profits,
which were feasible through its obscure ownership structure. Lotte Group and
Shin should carefully deliberate the ongoing boycott campaign and suggest
fundamental solutions for their pre-modern way of management in order to
resolve the matter of the ownership system.

 The problem facing the Lotte Group is not
only their own, but also that of all the other conglomerates in Korea. If the
group cannot solve its problems by itself, it is time for the government and
the National Assembly to intervene. There must be an aggressive plan to reform
conglomerate practices. Thus, the government and the National Assembly need to actively
resolve corrupt ownership structures, root out unfair business practices, and place
checks and balances on the economic concentration of conglomerates to develop a
more sound Korea.
 


 Translator : Myung Jin Gun