Most of the largest Korean corporations are controlled by chaebols —family-controlled business conglomerate groups.⁸ The chaebol has been the primary driver of the nation’s economic growth over the past half-century, and remains the dominant large business form in Korea . In fact, “the top thirty chaebols currently account for roughly forty-five percent of total corporate assets, forty percent of total sales, and twenty percent of total employment in Korea.”⁹ The Korean economy has developed within “a chaebol-driven or chaebol-centered system”; arguably, therefore, “the efficiency and soundness of the Korean economy as a whole depends primarily on the efficiency and soundness of the current chaebol system.”¹⁰

Among these chaebols, the Samsung Group is the largest. As of 2012, the Group accounted for more than 28 % of all South Korean exports.¹¹ The Samsung Group has undeniably contributed to the growth of Korean industry, maintaining numerous subsidiaries across a multitude of business sectors. Samsung affiliates range from Samsung Electronics, the world’s largest electronics company, and Samsung Heavy Industries, the world’s second-largest shipbuilder, to Samsung Life Insurance, the predominant financial company in Korea.¹² Among its dozens of affiliated companies, Samsung Electronics ranked as the world’s 13th-largest company with annual revenue in 2013 of USD 209 billion.¹³

In contrast to Samsung’s significant contributions to the Korean national economy, corruption scandals reveal the serious problems generally afflicting or spawned by the chaebols, such as “economic concentration, market dominance, authoritarian leadership, corruption, and threats to democracy.”¹⁴ Most of these problems are rooted in the typical corporate governance structure of chaebols, i.e., a family-dominated and circular ownership system , which is a typical feature of emerging economies.¹⁵ Incredible as it may seem, a handful of individuals and families do indeed control nearly all of the major Korean corporations via the form of the chaebol.¹⁶

How is it possible for giant publically held corporations to be dominated by a few families? Typically, chaebols wield control over their corporate empires while holding less than a 5 % stake in their respective groups.¹⁷ This is made possible by the circular ownership of affiliated companies under the control of the same group within a pyramidal system.¹⁸ Professor Ok-Rial Song has explained the complex workings of the circular-shareholding structure with the hypothetical example below:

…suppose that the [S chaebol] Group comprises companies A, B, and C, and the controlling family owns 10  percent of the shares of each company (in other words, 10  percent of the shares of the [S chaebol] Group). Furthermore, suppose that company A holds 30  percent of the shares of company B. In this case, company B may not cross-hold the shares of company A under the Korean antitrust law. Moreover, even if this law may, in fact, be hard to enforce, the voting rights attached to the cross-held shares may be removed by corporate law. Therefore, even if company B holds 30  percent of the shares of company A, such shares are of no use in terms of corporate control. In this case, however, the purpose of cross-shareholding can be achieved by company B’s holding 30  percent of the shares of company C and company C’s holding 30  percent of the shares of company A, instead of company B’s holding 30  percent of the shares of company A directly. Technically, such arrangements do not violate corporate… or antitrust law, and no shares are deprived of their voting rights. As a result, the family owns 40  percent of voting rights over company A, B, and C.¹⁹

This circular ownership has allowed Korean chaebols to control affiliated corporations, despite owning only a small fraction of the total cash flow rights (10 % in the hypothetical example above).²⁰ The headquarters of the chaebol group control each affiliated corporation (which is legally independent) as “a large single firm with multiple divisions spread across a variety of industries.”²¹

Indeed, this convoluted structure of chaebol ownership causes particular social problems in regard to the incentives of controlling shareholders in Korea. The dominant controlling person or family of a chaebol has “great incentive for value diversion at the expense of non-controlling shareholders.”²² In this sense, chaebol families (as well as the general Korean public) are used to viewing those chaebol groups and their affiliated corporations as “the personal property of a certain controlling family.”²³

Among the many problems caused by the unique ownership structure of chaebols, “tunneling” is one of the most serious troubles spawned by the abovementioned recognition of corporations as the property of a controlling family.²⁴ The term is used to describe the transfer of assets and profits out of companies for the benefit of the controllers.²⁵ Indeed, the controlling family of a chaebol controls the headquarters of its group, which in turn controls the boards of affiliated corporations, since “appointments of board members are almost entirely at the hands of the families in control of the groups.”²⁶ Thus, a controlling family holds a virtually “imperial” or “dictatorial” prerogative to make arbitrary business decisions affecting all affiliated corporations.²⁷ Additionally, tunneling is more likely to occur in the chaebol system than in other business structures because chaebol families hold only a small proportion of shares and have less interest in maximizing the value of their affiliated corporations.²⁸

However, noncontrolling shareholders cannot effectively protect themselves due to the circular ownership structure of the chaebol.²⁹ Despite this all-encompassing control of the family over the entire business group, Korean corporate law contains no explicit provisions addressing chaebols’ responsibility for management abuses.³⁰ Thus, chaebol families have aggressively attempted to channel corporate wealth into their own pockets via self-dealing transactions. “As the chaebol continued to grow, the families felt comfortable accessing the burgeoning equity markets as long as their control over these firms was guaranteed—easily done, of course, through the use of pyramid structures and circular shareholdings.”³¹ In the face of the overwhelming power of the controlling family, the board of directors is severely limited in its ability to protect noncontrolling minority shareholders.³² The fallout from this phenomenon is further exacerbated in that chaebol tunneling has expropriated vast stores of the wealth of noncontrolling minority shareholders , who actually comprise the majority investors in chaebols.³³

Tunneling has proven to be the most exploited tactic for transferring the control of chaebol groups to chaebol offspring. The Everland case represents perhaps the most significant jurisprudential consideration of this shadowy process of corporate inheritance. Because Samsung Everland Inc. (Everland) , which operated a theme park, golf course, and clothing firm, was the de facto holding company for the Samsung Group, controlling it meant controlling the entire group.³⁴ To facilitate this expropriation, Samsung chairman Lee did not list Everland on the Korea Stock Exchange.³⁵ Instead, Lee allegedly held sway over all 26 shareholders of Everland .

At the time of the meeting, Her and Park were, respectively, the former and incumbent heads of Everland . Under the Korean Commercial Act ,³⁷ as directors³⁸ of Everland, the two men were obliged to properly conduct procedures in board meetings. The Act also stipulates that board resolutions could only be adopted by a quorum of a majority of directors and a majority of votes.³⁹ Only 8 of 17 directors attended the October meeting, but Her and Park nevertheless allowed the adoption of a resolution⁴⁰ that issued Everland CBs to shareholders for a mere USD 7 per share. The real value per share at that time was over USD 223.⁴¹ If Everland shareholders did not subscribe to the bonds, any third party could acquire those bonds for USD 7 a share by an additional resolution of the board.

Although the CBs were incredibly cheaper than the market price, only 1 of 26 shareholders subscribed for the bonds.⁴² As a result, Her and Park declared that an additional board resolution would allow outside third persons to acquire the remaining CBs.⁴³ On December 3, 1996, without achieving the required quorum, Her and Park convened the board meeting to issue CBs to a third person, Samsung heir apparent Jae-yong Lee.⁴⁴ Subsequently, the board adopted a resolution to issue CBs to the younger Lee at the rate of USD 7 per share,⁴⁵ rendering him the controlling shareholder in Everland with 64 % of shares.⁴⁶

In September 2003, just before the statute of limitations expired, prosecutors indicted Her and Park for breach of trust by violating their duty as directors.⁴⁸ In 2005, the Seoul Central District Court found them guilty of approving the 1996 sale of Everland CBs to Jay-yong Lee at a huge discount based on invalid board decisions.⁴⁹ It handed down prison sentences of 3 years for Her and 2 years for Park, who both appealed the decision.⁵⁰

In 2007, the Seoul High Court upheld the lower court’s decision to nullify the Everland board resolution to sell CBs below market price, as the resolution had been approved without the participation of a majority of board members.⁵¹ The appellate court found that Everland had sold nearly a hundred million dollars worth of CBs to Jay-yong, which gave him the right to buy the corporation’s common stock for USD 7 per share.⁵² The court held that Everland suffered damages to the extent of the difference between the market value of shares and the cost of the bonds issued due to the directors’ violation of their duty.⁵³ It added that the resolution of the board was invalid and that the board’s action was a clear breach of trust.⁵⁴ The illicit deal was estimated by the court to have cost Everland roughly USD 89 million in losses.⁵⁵ Everland did not need an additional fund, and there was evidence of conspiracy between directors and Lee to allow him to acquire the controlling shares.⁵⁶ The court found that the men had pressured the shareholders not to subscribe for the CBs.⁵⁷ At the time, it appeared that securities dealing could no longer be used as a tactic for backroom transfers of control within the chaebols. Subsequently, Her and Park again appealed the decision.

Five months after the appellate court judgment, the press convened for a surprise news conference. Whistleblower Yong-chul Kim, the former top officer of Samsung’s legal department, alleged that group leader Lee had employed a slush fund and that Kim had bribed prosecutors on Lee’s instructions.⁵⁸ According to Kim’s disclosure, government officials kept silent on the murky Everland deal in exchange for bribes.⁵⁹ These new allegations led to an investigation of Samsung by a special prosecutor.⁶⁰ On April 17, 2008, Lee was charged of evading capital gains taxes stemming from the proceeds of covert stock trading using “borrowed-name” bank accounts and from the issuance of the Everland CBs.⁶¹ Five days after the indictment, Lee issued a public apology and resigned from his post in the Samsung Group.⁶² Meanwhile, the special prosecutor found a list of 1200 false-name accounts related to the Samsung scandal ,⁶³ and sought a 7-year prison term and a USD 350 million fine for Lee on charges of tax evasion and breach of trust .⁶⁴  The prosecution, however, concluded that there was insufficient evidence to pursue a charge of bribery .⁶⁵ Even though the appellate court decided that the board resolution for the CBs deal was invalid and sentenced Her and Park to prison for breach of trust, the ruling did not directly affect Lee. It was the special prosecutor who went after the group chair and brought him to court for the CBs deal. It seemed to herald a major step toward stricter regulation of the chaebol in Korea.

Chaebol corruption scandals represent serious social problems in Korea, yet the courts have only exacerbated matters with their consistent hesitation to punish corporate crime. Following Lee’s indictment, several prominent figures, including former US president George H. W. Bush and ex-International Olympic Committee president Juan Antonio Samaranch, sent petitions to the Seoul Central District Court calling for leniency for Lee.⁶⁶ “According to the court, [Bush] said Lee had dedicated himself to developing the global economy and has become a role model to many business leaders around the world.”⁶⁷ In July 2008, the Seoul Central District Court cleared Lee of the charges related to the CBs deal that would have transferred control of the nation’s top conglomerate from father to son.⁶⁸ The court sentenced Lee to 3 years in prison for tax evasion, suspended for 5 years, thus allowing him to remain a free man as long as he avoided further legal missteps.⁶⁹

On October 10, 2008, the Seoul High Court upheld the decision of the lower court and reaffirmed the guilty verdict, the suspended prison sentence, and the finding that Lee was not guilty for the issuing of the Everland CBs.⁷⁰ The special prosecutor appealed the decision.

First, in general, the issuance of shares, including bonds for raising corporate funds , is under the protection of the “business judgment rule .”⁷³ Second, a transfer of controlling shares to an outside third party does not undermine the profit of shareholders when they agree to the transfer.⁷⁴ In this case, 25 shareholders agreed to the transfer of control to Jae-yong Lee.⁷⁵ The difference between the market value per share and the price of the bond issued was the damage that shareholders had already agreed to.⁷⁶ Third, a corporation is a mere object of control, which control is exerted by those who own shares of the corporation.⁷⁷ Therefore, a transfer of control over itself does not damage a corporation.⁷⁸ Fourth, a director of a corporation is an agent who is engaged in business on behalf of a corporation, but not on behalf of shareholders directly.⁷⁹

At the same time, the Supreme Court affirmed the appellate court’s decision that Lee was not guilty of breach of trust in the Everland CBs deal.⁸⁰ The court’s decision concerning Lee was influenced by the En Banc decision on Her and Park. In the end, on August 27, 2009, the decade-long cases in the Everland CBs deal were concluded by the ruling of the Seoul High Court.⁸¹ The court cleared Her and Park of the charges, based on the Supreme Court En Banc decision.⁸²

The Everland case reveals how the ownership structure of chaebols generates serious social problems by allowing the controlling person or family to manipulate the structure of the chaebol group to the disadvantage of outside noncontrolling minority shareholders—the actual majority investors. Andrei Shleifer and Robert W. Vishny, in their comprehensive and influential surveys of corporate governance, have characterized the Korean chaebol structure as the least investor-protective system in the world by pointing out that it significantly dilutes the wealth of a large number of minority shareholders.⁸³ Korean legislative means, however, have been “ineffective in aligning the interests of dominant shareholders with those of outside shareholders.”⁸⁴ In particular, they are “not sufficient to effectively respond to the controlling shareholder’s tunneling in the chaebol.”⁸⁵ Indeed, the Supreme Court decision in Everland actually exacerbated this problem by sanctioning an act of chaebol tunneling that entailed a vast dilution of public shareholder wealth.

The Supreme Court decided that the transfer of control through the CBs deal did not damage Everland , and that there was no breach of trust by way of a violation of fiduciary duties by the directors.⁸⁶ Then who shoulders the USD 89 million loss from the Everland scandal? The rationale of the court was based on the assumption that a corporation is a mere asset of its shareholders. This recognition subscribes to the supposed norm concerning the traditional relationship between shareholders and managers in the United States.⁸⁷ However, this traditional view is arguably not a norm, even in American corporate law.⁸⁸

It is possible that the court’s equating of a corporation’s nature with that of a mere asset of shareholders might be based on some consideration to protect particular corporations or managers. “Korean judges have repeatedly shown leniency in high-profile corporate cases, refusing to send tycoons to prison for fears of the effect it would have on the country’s economy.”⁸⁹ The presiding judge of the appellate court in the case against Lee said that “while it would be impossible to legally punish the company, such acts are prone to public criticism, which is why this court calls on Lee to devote himself to the nation.”⁹⁰ Can the public truly be expected to support corporations when the nation’s economic situation is faltering, even if, for the sake of argument, corporations are mere assets of shareholders?

Such jurisprudential thinking might pave the way for other tycoons to illegally bequeath their wealth to their children.⁹¹ Everland could not claim for any damages in the CBs deal because the court decided that any loss from a Board decision consented to by shareholders is not a loss protected under corporate law . All Korean laws related to this claim require a loss to the corporation because the director is an agent for the corporation.⁹² Therefore, the Supreme Court effectively rendered it impossible to seek corporate liability for losses due to managerial decisions such as the CBs deal. Professor Nohyun Gwack admonished the court ruling, saying it had “killed Korean corporate law.”⁹³ Samsung now had the proverbial green light for tunneling to bequeath the control of the group to younger members of the founding family.⁹⁴ A major question here is whether and how Korean corporate law might stop other chaebols from misappropriating corporate assets for the purpose of chaebol owners transferring control to their children.

Historically, the Korean government has steered the nation’s industrialization by aggressively supporting large corporations. This policy has greatly enlarged the corporate role in Korean society. The critical role of corporations, however, has not necessarily elicited a corresponding level of corporate responsibility. Rather, Korean courts have shown repeated leniency in high-profile corporate cases, such as the Supreme Court’s refusal to protect the noncontrolling shareholders of the Samsung Group in the Everland case. Such juridical tolerance of malfeasance invariably devalues the concept of corporate societal responsibility.⁹⁵ The familiar spectacle of court-issued exoneration of tycoons is based on fears of the potential fallout that a juridical blow to a major corporation might cause to the country’s economy. Moreover, some scholars have supported this judicial leniency by interpreting only the plain language of statutes, thus sidestepping the soul-searching that a comprehensive analysis of corporate governance theory would entail.⁹⁶ This conservative legal practice has largely overlooked corporate malfeasance , which remains a most serious problem in Korean society. Korea now faces increasing demand for legal reforms , both legislative and academic, regarding corporate responsibility to society.

On July 21, 2010, President Obama signed into law a federal financial regulation, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 (hereinafter Dodd-Frank Act) ,⁹⁷ which expands federal oversight into more financial companies and derivatives contracts and promotes consumer protection.⁹⁸ This legislation came in direct response to the financial crisis that triggered the American recession in 2007.⁹⁹

Federal Reserve chairman Ben Bernanke stated that “this financial crisis, the worst since the Great Depression, has severely affected the cost and availability of credit to both households and businesses.”¹⁰⁰ President Obama also stressed that “one of the most significant contributors to this recession was a financial crisis as dire as any we’ve known in generations—at least since the ’30s.”¹⁰¹

Financial assets invested in real estate drove financial institutions into bankruptcy once real estate prices started to fall due to the bursting of the housing bubble ¹⁰⁴ in 2007.¹⁰⁵ When the liquidity crisis hit, Wall Street institutions relying on short-term borrowing could not roll over their liabilities at reasonable costs.¹⁰⁶ Banks started to doubt the financial stability of each other; eventually, the liquidity shortfall collapsed large financial institutions.¹⁰⁷ When Lehman Brothers went into bankruptcy in 2008, it was the culmination of a wave of financial crises.¹⁰⁸

In the years following this recession, the most pressing policy issue has been “to restore the health of the core financial institutions.”¹¹³ Wall Street institutions, however, apparently did not exert their best efforts to rebuild their stability, even as American taxpayers bailed them out of the mess they had got themselves into .

In 2008, the Federal Reserve granted American International Group (AIG) a USD 182 billion rescue package—the biggest federal bailout in US history.¹¹⁴ On March 2009, it was publicly disclosed that USD 165 million of that money went toward bonuses to employees of the Group’s financial services division—the very people who had triggered AIG’s capital shortage.¹¹⁵ The AIG Bailout and Bonus Scandal demonstrated that the government would compel taxpayers to “pay any price and bear any burden to prevent the collapse of America’s largest financial institutions.”¹¹⁶

On April 2010, Americans were shocked again when the US Securities and Exchange Commission (SEC) accused the Goldman Sachs Group of securities “fraud in structuring and marketing of [Collateralized Debt Obligation (CDO)]¹¹⁷ tied to subprime mortgages.”¹¹⁸ In early 2007, with the housing market at the edge of the precipice, Goldman Sachs allegedly structured and sold subprime¹¹⁹ mortgage-backed CDOs that were secretly intended to fail.¹²⁰

Enduring dire financial crises and corporate scandals, the US government embarked upon Wall Street reform to minimize the moral hazard¹²¹ triggered by the new dogma of Too-Big-To-Fail.¹²² President Obama emphasized that this financial crisis “was born of a failure of responsibility… that brought down many of the world’s largest financial firms and nearly dragged our economy into a second Great Depression.”¹²³ Upon signing the Dodd-Frank Act , Mr. Obama said, “the American people will never again be asked to foot the bill for Wall Street’s mistakes… There will be no more taxpayer-funded bailouts.”¹²⁴

The first and foremost responsibility of business is economic in nature.¹⁵¹ Business’s economic responsibility is to maximize profits . Indeed, the notion of maximum profits has proven to be an enduring value.¹⁵² This is because business units are basically economic entities that provide goods and services for social needs.¹⁵³ Business has been a major economic institution since the industrial revolution: producing goods and services; providing jobs; seeking out raw materials; discovering new resources, technological improvements, and products; paying taxes for public needs; generating the necessary investment capital; earning profits for owners and serving as an investment opportunity .¹⁵⁴

Specifically, economic CSR, according to Carroll, requires business to maximize earnings per share, to commit to being as profitable as possible, to maintain a strong competitive position and a high level of operating efficiency and to succeed in being consistently profitable.¹⁵⁵

In this sense, the John F. Kennedy School of Government’s CSR Initiative defines CSR with an economic view focusing on corporate conduct.¹⁵⁶ Its view on CSR starts from an economic responsibility and extends to the profit-making conduct of businesses. It assumes the major responsibility of companies as that of making profits, and addresses further responsibilities related to how such gains are made .¹⁵⁷

The next facet of CSR is a legal responsibility to “comply with the laws and regulations promulgated by federal, state, and local governments as the ground rules under which business must operate .”¹⁵⁸ A corporation has this legal responsibility because it is not only an entity operating according to the profit motive but also a member of the “social contract” pledging the pursuit of “economic missions within the framework of the law.”¹⁵⁹ In other words, legal CSR is equivalent to “codified ethics” in society.¹⁶⁰

In particular, Carroll suggests the legal components of CSR as follows: (i) to perform in compliance with government and law; (ii) to comply with federal, state, and local regulations; (iii) to be a corporate citizen adhering to the law; (iv) to fulfill legal obligations as a successful firm; and (v) to provide goods and services with minimum legal requirements.¹⁶¹

Unlike the economic or legal aspects of CSR, other perspectives tend to understand CSR as a corporation’s commitment to contributing to society. Carroll categorizes these aspects of CSR as ethical and philanthropic responsibilities.

Ethical responsibilities embody moral standards, norms, or expectations vis-à-vis society, even those not codified into law.¹⁶² Corporate ethical responsibilities reflect “a concern for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders’ moral rights.”¹⁶³ For example, a corporation can meet its ethical responsibilities by performing according to social expectations of ethical norms while recognizing corporate ethical integrity as an ethos or action beyond mere compliance with codified laws.¹⁶⁴

Philanthropic responsibility occurs when a business, as a good corporate citizen, contributes resources to promote human welfare or goodwill.¹⁶⁵ This responsibility is distinguished from ethical responsibility in that it does not fulfill an ethical or moral prerogative, but rather involves discretionary or voluntary commitments.¹⁶⁶ For example, a corporation fulfills its philanthropic responsibility by performing in accordance with charitable expectations of society, such as assistance to educational institutions and other projects enhancing a community’s quality of life.¹⁶⁷

Many international or regional authorities seem to understand CSR as an ethical and/or philanthropic responsibility. The International Organization for Standardization,¹⁶⁸ the world’s largest developer and publisher of international standards, released ISO 26000 ¹⁶⁹to provide guidelines on CSR; therein it defines Social Responsibility as an ethical and philanthropic commitment.¹⁷⁰ The leading international organization for sustainability, the World Business Council for Sustainable Development ,¹⁷¹ defines CSR as a philanthropic commitment as well.¹⁷² These approaches call for a corporate discretionary contribution to society, rather than a monolithic obligation.

Unlike other international authorities’ approaches, the United Nations’ Innovation Briefs ¹⁷³ categorize CSR as comprising three different standards based on corporate conduct types, which structure is similar to Carroll’s CSR categorization.¹⁷⁴ The United Nations’ Innovation Briefs set a minimum standard for CSR as a legal obligation. A median approach centers on philanthropic commitments: businesses’ contributions to sustainable development vis-à-vis their social and environmental impacts, and social or community investments beyond basic compliance. A maximum standard is the active arrangement of an internal business objective with externally set societal goals. This maximum standard can be read as an extension of Carroll’s economic CSR.¹⁷⁵