Do Leaders matter: The Hyundai test case

February 5, 2007

The Hyundai company may become an unwilling test case for understanding the impact of a disgraced leader on the fortunes of a global organization.

Update 2

January 2nd 2008

Update 1

Hyundai continues to face industrial unrest. Strike calls this week [Sept 3rd 2007] occur at a time when Chung Mong-Koo’s sentence approaches a review [Original post follows].

According to sociologist Richard Whitley, capitalism comes in various forms. The Korean economic miracle was closely associated with the success of its conglomerate system of Chaebol. These institutions typically are dynastic, with leadership power passed from father to son.

But the chaebol system came under increased scrutiny for its ethical grounding, as well as its economic practices, as the one-time Asian tigers turned toothless during the late 1990s global downturn.

The current case hitting the highlights is that of the Hyundai corporation, and its leader Chung Mong Koo who faces sentence this week on assorted corruption charges.

The charges are around what in the west has become known as creative accounting, as a means of transferring assets to the next generation of a dynasty. As an agency report put it:

In one recent case, a Seoul court convicted two executives of Samsung, Korea’s largest chaebol, of creating “a breach of trust” for helping the children of chairman Lee Kun-hee buy a controlling stake in one of the firm’s affiliates at a fraction of its market value .. At the center of the Hyundai case is Glovis Co., a company set up by the two Chungs in 2001 and given exclusive rights to deliver Hyundai and Kia vehicles to customers worldwide. While the father and son invested just over $5 million to establish the firm, profits last year reached $82 million and they have earned more than $1 billion in “share gains” since 2001

Do leaders matter?

There is a debate on the impact of a leader on a corporation’s actions and fortunes. Initial reactions around the world on his arrest last summer suggested that this would severely damage Hyundai in the short and medium term. This can be attributed to a well-known initial reaction to uncertainty by financial traders.

In the six months of uncertainties after the arrest, Hyundai seems to have avoided obvious melt-down.

To outsiders, his arrival as chairman in 1999 was the inevitable consequence of the succession passing from father to son. Chung Mong Koo had been more diligent than dynamic in his over twenty years in charge of the corporation’s after-sales operation.

From hero to zero

Business Week likes to run items on best and worse leaders. Hagiography can be a dangerous business, bestowing the accolade as one of the world’s best leaders on Chung in 2004.

Few gave Chung Mong Koo much of a chance when he took the helm of South Korea’s largest carmaker, Hyundai Motor Co., in 1999. After all, in his 24 years running Hyundai’s after-sales service unit, the bland son of founder Chung Ju Yung didn’t express any grand vision for the auto business. Turns out, he had been trained to deliver what the company needed most: better quality.

Turns out he faces the fate of other leaders who were found wanting and has delivered a trickly set of issues for his successor to deal with.

Breaking News

Chung is sentenced to three years for embezzlement and breach of trust. Shares dropped over 2%. The court was responding to political pressures following internal and external criticisms of its leniency in earlier cases of corporate wrong-doings.