Corporate Governance: Of Korean 'Nut Rage' & BMW

Headlines here in Asia have been dominated by the story of the Korean Air executive who went ballistic on a flight attendant because he had served her nuts in a bag instead of on tableware. Hence the "nut rage" label applied to Cho Hyun-ah, the daughter of the Hanjin (chaebol conglomerate) chairman that owns Korean Air. Talk about nuts: She boarded the flight at JFK headed for Incheon and ordered it returned to the boarding gate over macadamia nuts to unload the poor fellow. The flight attendant Park Chang-jin was even coerced to cover up the incident to Korean government investigators. Does that make this incident "Nutgate"?

[Cho] ordered him off the plane and forced the flight to return to the gate at John F Kennedy airport in New York City. After being confronted about the nuts, senior flight attendant Park Chang-jin told South Korea's KBS television network he and his colleague kneeled down before Cho. According to Park, Cho yelled at the crew to "call right now and stop the plane. I will stop this plane from leaving."

Park said when he returned to South Korea on a separate flight, five to six officials from Korean Air came to visit his home every day and asked him to tell investigators that Cho did not use abusive language and that he voluntarily got off the plane. On Friday, in her first public appearance since the incident, a gloomy-faced Cho bowed and said "I sincerely apologise. I'm sorry," before droves of journalists in an almost inaudible, trembling voice.

At any rate, the Koreans have been fascinated with this incident. Just as the Sewol ferry accident caused much soul-searching, so has this "nut rage" reawakened questions about corporate governance in South Korea. In particular, chaebol reform has been on the to-do list of the government for quite some time now. Aside from dominating the business environment and discouraging dynamic small- and medium-sized businesses, cozy government-business ties have long generated accusations of favoritism. That is, chaebol may be too big to fail, block dynamic new entrants, and worst of all, abuse their dominance in the overall Korean economy.

Auntie points us to a thought-provoking article in the Korea Times that discusses corporate governance in their nation: are chaebol really so prone to these kinds of abuses? In particular, why are these conglomerates not meritocratic like their Western counterparts? Prior to this incident which has resulted in Cho Hyun-ah becoming an unlikely successor to her father at Hanjin, she was on track to do so. Here Hanjin is being compared to Germany's BMW here owned by the Quandt family who are largely uninvolved in day-to-day operations:

[Cho Hyun-ah] has shown behavior typical of someone born with a silver spoon in their mouth. In contrast, BMW recently named 49-year-old production executive Harald Krueger as the successor to CEO Norbert Reithofer, starting from May. The CEO in waiting joined the automaker in 1992 as a trainee, working his way to the top of the corporate ladder of the 98 year old company. His 11 predecessors have also been professionals without direct ties to the Quandt family, which owns a 46 percent stake of BMW.

Business experts say independent management was key to making BMW what it is now. "With no intervention coming from the owner family, BMW CEOs can concentrate on management issues, and maintaining the firm's growth," a BMW official said. "Had the company been directly controlled by an owner family, it is uncertain whether BMW would have reached the status it enjoys today because owners turned CEOs might have found themselves distracted at work by issues related to their ownership," an industry source said.

Contrast this trainee-to-CEO success story to what's supposedly happening in Korea:

Korean Air is owned by Hanjin Group led by Cho Yang-ho, the son of the firm's founder; he controls the company with a 15.49 percent stake. His three children ― Heather [Cho Hyun-ah], Won-tae and Hyun-min ― hold less than 2.5 percent each. One of those three will likely become the chairman's handpicked successor, a typical leadership transition seen at family-run conglomerates in Korea.

"Perhaps the recent nut rage incident was one of the dismal side effects of such a dynastic leadership succession," said Kim Sang-jo, a business professor at Hansung University and chief of the People's Solidarity for Economic Reform. "With chances of landing a top seat guaranteed, they may not feel any guilt looking down on employees of their father's company and treating them like their servants. "This is a feudal form of employer-employee relationship that should disappear as early as possible."

A bigger problem, he pointed out, is that the dynastic succession could lead Korean Air to fall into the hands of what he described as an "unqualified" leader. "Cho will choose his successor from a limited pool of candidates or out of his three children," the professor said. "Nothing wrong would happen if there is a qualified person among the three and the chairman makes the right choice. If it's not the case, however, his selection would usher in a tragedy. It's a very risky deal."

Make no mistake that there remains a pecking order of globalization envy. Us folks in  developing Asia look up to Korea. In turn, Koreans look up to Germany which has a similar profile of being an export-oriented, manufacturing-based economy. Every so often we have one of these "why can't these !@#$%*+ Koreans be more like Westerners" despite the country being the most successful of Asians. IMHO folks are making too much of a high-profile incident, but suffice to say that "nut rage" has resurfaced concerns about Asian forms of governance that lay dormant for some time after the Asian financial crisis became yesterday's headline. Meanwhile, the incident has little direct bearing on the firm's performance.

UPDATE 1: The Korean transport ministry is said to be filing a case against her, too.

UPDATE 2: Singapore's Straits Times offers a more sympathetic story about how Cho Hyun-ah was able to make several improvements to Korean Air before the fateful incident. 

UPDATE 3: Cho Hyun-Ah has now been arrested for endangering fight safety.