Korean
Air's Cho family faces call for outside managers at chaebol
Activist fund pushes for asset sales and debt reduction at Hanjin
Korean Air Lines Chairman
Cho Yang-ho arrives at a court in Seoul in July last year. © Reuters
SEOUL -- A South Korean activist fund is taking on the scandal-ridden Cho
family, which controls Korean Air, with calls for the parent company to set up
an independent committee to appoint top management.
Korea Corporate Governance Improvement is also pushing the Hanjin Group to sell
its underperforming hotel chain and cut debt in a bid to drive value for
investors.
The fund late last year became the first South Korean activist to challenge the
country's powerful chaebol, the family-owned conglomerates that control vast
tracts of the country's economy, when it took a significant stake in Hanjin
KAL, the holding entity that owns the airline.
The fund has now requested the formation of a committee of independent
directors to elect the CEO and other executives. Hanjin KAL's management is
dominated by the Cho family.
"We believe that professional executives with expertise and integrity
should push for cleaning up the group, to avoid repetition of the owning
family's illegal and abusive practices," the fund said in a statement,
The Cho family hit global headlines in 2014 when Cho Hyun-ah, the daughter of
chairman Cho Yang-ho and a vice president of Korean Air, forced a plane to
return to its departure gate because she was upset at the way her nuts had been
served. She was later charged with obstructing aviation safety and jailed. More
recently, family members, including the chairman, have been caught up in
scandals involving allegations of bribery, embezzlement and smuggling.
Founded only last year, KCGI is run by former credit analyst and corporate
governance advocate Kang Sung-Bu, previously the CEO of Korean asset manager LK
Investment Partners. It claims to have invested some 160 billion won ($142
million), although it does not disclose the source of its funds.
KCGI on Jan. 21 asked Hanjin KAL to consider selling its loss-making hotel
business, which includes the Wilshire Grand Hotel in Los Angeles and the Waikiki
Resort Hotel in Hawaii. Hanjin KAL is the holding company of Hanjin Group, and
controls Korean Air, Jin Air, Hanjin Transportation and KAL Hotel Network.
"Excessive expansion of the hotel business worsened the company's
profitability and financial soundness. It will face more serious financial
problems if it does not improve its poor risk management system," KCGI's
statement read.
The statement comes two months after KCGI announced that it had become Hanjin
KAL's second-largest shareholder, with a 9% stake. The fund later expanded its
holding to 10.81% and bought an 8.03% stake in Hanjin Transportation. The Cho
family is the largest shareholder with 28.95% in Hanjin KAL.
People take part in a
protest against the abuse of power by Korean Air Lines' chairman and relatives
in Seoul last May. © Reuters
KCGI also warned that Korean Air's high debt ratio raised liquidity risks. The
company's debt to equity ratio reached 559% last year, eclipsing those of Asian
peers Singapore Airlines, with 88%, and Cathay Pacific, with 207%.
"Korean Air could face a liquidity crisis if oil prices rise and foreign
exchange rates change drastically. That could lead to crisis at Hanjin
Group," said KCGI.
Hanjin shareholders are beginning voice concerns about the Cho family's
management of the company. Chairman Cho Yang-ho was last year indicted on a
charge of allegedly embezzling corporate funds, while his daughter Cho Hyun-min
was investigated for verbally abusing an employee of an advertising agency.
More recently, the chairman's wife and daughters have been investigated by
customs officials for allegedly smuggling luxury goods. The family denies all
the allegations.
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