Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Asia-PacificNovember 1 2011

South Korea makes life difficult for foreign investors

From drawn-out court cases to labour union strikes, the trials and tribulations of the multinational banks that have tried to invest in South Korea have left many observers with the impression that the country is hostile to foreign capital. 
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
South Korea makes life difficult for foreign investors

Lengthy court battles and labour union strikes have been among the problems that foreign investors in South Korea have had to face in the past. In recent months these problems have resurfaced, leading the international community to question the country's willingness to accommodate foreign investments. 

Standard Chartered, a large investor in the South Korean financial services industry, had a public relations nightmare on its hands in July, when the labour union of its South Korean unit, SC First Bank, called a strike that lasted nearly eight weeks. The dispute’s origins could be attributed to the clash of cultures that resulted from Standard Chartered's acquisition of a domestic South Korean bank back in 2005. Standard Chartered bought Korea First Bank from private equity firm Newbridge Capital for approximately $3.3bn. 

Lone Star's isolation

One private equity firm that has not been able to exit from its investment so easily has been Lone Star Funds, which has been at the centre of a number of court battles.

Following the Asian financial crisis in 1997 and 1998, private equity investment became a feature of South Korea’s banking market, and is still a contentious issue. On one side the populist press has portrayed private equity firms as opportunist vultures, while the international community cites this kind of sentiment as proof that South Korea is hostile to foreign investment.

Lone Star bought a majority stake in Korea Exchange Bank (KEB) in 2003 and still is involved in legal wrangling related to the initial sale. In early October 2011, the former head of the South Korean unit of Lone Star was sentenced to three years in prison for stock manipulation – which pushed down the sale price of KEB – and Lone Star Funds was fined Won25bn ($21m). 

But the saga is still far from over, as the South Korean regulator must still decide whether the private equity firm is legally allowed to hold the majority stake in KEB. When Lone Star tried to sell the stake to Kookmin Bank in 2006 there was a public backlash after it was reported that the firm could make a pre-tax profit of approximately $3bn on the sale. This was exacerbated when the news detailed how Lone Star had registered its investment vehicle in Belgium, which had a tax treaty with South Korea.

After the deal with Kookmin Bank fell through, HSBC Holdings made a bid for KEB, but that deal collapsed in 2008 when it failed to get regulatory approval because of the unresolved issue regarding Lone Star’s ownership of the stake. Now it is Hana Financial that is playing a waiting game over whether it can proceed with its bid to buy the stake in KEB.

Cracking the market

KEB is an attractive takeover target, especially for a foreign investor, as it represents one of the last opportunities to enter the South Korean retail banking market, offering a platform to one of the largest economies in Asia.

While HSBC Holdings does have some retail presence in South Korea – via its 11 branches – there have been press reports that the UK-headquartered bank is considering withdrawing from the South Korean retail market altogether. When asked to respond to this, a spokesperson for HSBC Holdings would only say that the bank does not comment on rumour or speculation.

In 2005 HSBC tried to enter the South Korean retail market by bidding for Korea First Bank, but it lost out to Standard Chartered. The year before, Citi was able to gain a foothold in the South Korean market by buying KorAm from the private equity firm Carlyle Group.

We placed an immediate priority on working closely with legacy KorAm management team and employees – represented by the union – to understand how we could work together as one team

Yung-Ku Ha

Merging Citi’s corporate culture with that of the local South Korean bank was not easy, and Citibank Korea suffered union-instigated strike action. At the time it was the longest strike action in the South Korean financial services industry. The strike by SC First Bank, which lasted more than 50 days, has since broken that record.

Yung-Ku Ha, CEO of Citibank Korea, says of his bank's merger in the country: “It was at times a tough process to overcome the differences in the system and culture between the two legacies, but we solved the problems by having a continuous conversation and listening to each other. We placed an immediate priority on working closely with legacy KorAm management team and employees – represented by the union – to understand how we could work together as one team.”

Drawn out

Unlike Citi’s problems with labour unions, which were apparent soon after the acquisition of KorAm, Standard Chartered’s labour dispute took a lot longer to manifest itself.

SC First Bank’s management suffered a dispute with the union in July 2011, when it announced that it would be introducing performance-based pay, overturning the system whereby all workers receive the same rate of increase. Kim Jae-Youl, chairman of SC First Bank’s union, says that under the existing system all the workers would receive a 4% pay increase, for example, but under the new system the rate would be different for each individual based on a performance appraisal.

Union representatives argue that when Standard Chartered took over in 2005 the union was promised that the new management would continue with many of the practices of Korea First Bank, and that the staff would continue to receive the same wage increases each year.

A press release issued by the Korean Financial Industry Union says: “It is... certain that the bank has been hiding its real intentions, deceiving its employees and all the press.” Mr Kim and the union leaders also accuse the bank’s management of pursuing a short-termist policy.

Richard Hill, president and CEO of Standard Chartered Korea, says that the bank has been very sensitive to South Korean practices, however, and that the introduction of the performance-based pay is part of the evolution that needs to occur in order for SC First Bank to grow. He adds that the changes are not unusual by South Korean commercial standards or by the standards in other markets around the world.

When asked if the dispute between Standard Chartered and the labour union is a case of the management not understanding South Korean culture, Mr Hill responds: “Culture is not part of it. We are experiencing a generational change.” He adds that South Korea has experienced rapid economic growth and the banking industry still needs to make a number of changes to catch up with the country's commercial sector, and its Western banking peers.

Old ways

Many of the most prominent members of South Korea's unions tend to also be the most senior in age. Some industry observers claim that, in such a hierarchical society, these workers – who have the most to lose through the working culture changes being introduced by foreign companies – are the ones who tend to lead the opposition to any new practices and are behind the movements towards strike action.

Mr Hill argues that the performance culture Standard Chartered is introducing to South Korea is fairly mild by Western standards, and that the management is wanting to introduce a meritocracy to the bank. The decision was made a number of years after the initial acquisition of Korea First Bank, says Mr Hill, so that the management had adequate time to review the bank’s practices and assess what changes were needed. “It was the Korean management that were saying that we needed to do this – it was not an imposition from London,” says Mr Hill.  

The strike over the changes continued for eight weeks in mid-2011, and was called off at the end of August. Mr Hill says that matters are beginning to normalise at the bank, although at the time of writing an agreement with the union had not been signed.

The strike was a public relations headache for Standard Chartered, especially as representatives of the union staged a protest at the bank’s London head office and aroused the interest of the international press.

However, in the eyes of some members of the international business community, this case – and that of Lone Star Funds – is an example of how such activities do little to entice foreign investors looking for a base in the increasingly lucrative Asian market.

Was this article helpful?

Thank you for your feedback!

Read more about:  Asia-Pacific , Asia-Pacific , South Korea