A Forensic Study of Daewoo's Corporate Governance: Does Responsibility Solely Lie With the Chaebol and Korea?

Abstract

In 1999, the Daewoo Group, one of the largest conglomerates in the world, collapsed, committing a staggering $15.3 billion in accounting fraud in the process. Daewoo's problems, however, did not remain a case isolated to a Korean chaebol. Daewoo's demise foreshadowed the corporate scandals that recently ravaged confidence in financial markets around the world. Leading financial institutions, investment banks, securities analysts, accounting firms, and credit agencies failed to monitor and detect Daewoo's problems. Despite warnings from the Daewoo case, policy discussion focusing on the importance of reputational intermediaries and gatekeepers in particular has only recently emerged. This forensic study analyzes the history of Daewoo, one of Korea's major chaebols, focusing on these vast corporate governance failures. It surveys Daewoo's internal corporate governance, particularly its controlling shareholder, boards of directors, officers, employees, and auditors. Furthermore, the external corporate governance landscape and the failure of key stakeholders, reputational intermediaries, gatekeepers, and public institutions are explored. By analyzing a conglomerate from a leading emerging market, this study also contributes to the comparative corporate governance literature regarding the potential for convergence, and the importance of formal law and enforcement. It describes how Korean companies have converged toward a more shareholder-oriented and stakeholder-oriented corporate governance model from a state-oriented model. It explains the ineffective corporate governance system in place at the time of Asian financial crisis and the background behind the legal reforms that followed. Finally, this study highlights the emergence of functional substitutes to formal corporate law that have been critical to legal enforcement and creating corporate governance discipline.

Keywords: Corporate Governance Chaebol Korea Daewoo

JEL Classification: G30, G34, K14, K22, K33, L52, M10, M14, M40