Transformation of Korean HRM Based on Confucian Values - Assignment Example

The Korean society, based on the Confucian teachings has always been family-centered and family-dominated. In this society the paternalistic ity relations regulates family order. Confucianism was deep-rooted into the Koreans’ minds, their ideas and customs. The elements of a “good” society meant charity, property, wisdom and deep respect. The families are governed by the three fundamental principles and the five moral disciplines in human relations. The basic Confucian ideology is the “Hyo” concept, meaning “filial piety” which implies admiration and appreciation for one’s parents (Choi, 2004). The son is expected even after his marriage to show regards and serve the father along with his wife. The son is expected to obey the father with absoluteness and in exchange the father too is expected to protect the son and support the entire family. This relationship of protection-loyalty is found in the organizations and the corporations that have come up in Korea but Hyundai, initially founded on these principles started developing problems. The Hyundai Group, basically a family unit was started by the founder Chung Ju-yung in 1947 and was torn by a family feud by 2000. The founder was in a dilemma as to which of his sons should run the family business. The large conglomerate networks in Korea are known as chaebols. These are usually family-owned and kinship based, and they recruit from certain clans and regions. Hyundai is one such chaebol that maintained close relationships with the government but clan-based tensions usually arise between chaebol groupings (Morden & Bowles, 1998). The chaebols emerged as a consequence of the rapid industrialization programs in Korea and the characteristic was that the business operations and governance was under direct control of the family (Kwon, 1997). The Group had started with the construction business and they believed in vertically integrated related business areas to gain competitive advantage. The motor division was started in 1968 with the same strategy to augment the heavy construction equipment capacity when its construction division demanded greater use of heavy equipments. Until the mid 1950s, the management at Hyundai was typical of a small scale single family business employing less than 100 workers. They had an informal managerial structure based on the founder’s kinship, his friendship with business associates and engineering experts. It was an authoritative style where Chung gave instruction to his managers and they were to be followed. The organization structure evolved as business grew. Each essential subsidiary was managed by a member of the family and this enabled Chung to maintain central control over the entire business. In 1970 they adopted the Open Recruitment System and internally employees were promoted. This professionalization of management led to significant gains in the scope and quality of decision making. As work expanded direct supervision of operations was transferred to the developing professional management class. The Vietnam War led to the end of the economic boom and Hyundai faced insolvency. Hyundai was also hit by the second oil price hike and it could recover from this only with the assistance of the industrial restructuring policies of the new government which granted monopoly in producing small-sized passenger cars (Kwon, 1997). The Group had all through been following the ‘one-set’ approach where the concentration of ownership allowed the founder to be involved in every aspect of the management of Hyundai subsidiaries. Based on the kinship structure, Chung’s brothers were placed on the top management positions of the most important subsidiaries under his own central authority. As the second generation of family emerged in the 1980s, the kinship structure was expanded. All his sons were initially trained at the construction division to be senior executives at other Hyundai companies. Macro-economic factors brought about changes in the way they did business and Hyundai had to make changes to accommodate these factors. There were changes in the in the international supply and price levels of natural resources and the various changes undermined its low cost market approach. The increasing cost of labor, a sharp decline in its Middle East construction contracts and outdated construction technologies limited its expansion. Behind the exteriors of corporate behemoths, the familistic interiors at Hyundai slowly started changing. They introduced professional management, public ownership, and an impersonal, hierarchical corporate form of management. The founder of Hyundai, Chung Ju-yung wanted to avoid a family fight over the empire after his death. He hence decided to divide it among several of his sons and nephews by transferring his stock in most of Hyundai Group’s 45 companies to them. This decision in 1998 was expected to lead to creation of smaller and decentralized groups within Hyundai and that would amount to a confederation of allied companies. For long the government had been urging them to abandon their marginal businesses and concentrate on a limited number of industrial sectors which would help improve their competence and global competitiveness. The founder’s decision to divide the empire among his sons and nephews would ensure that these goals were achieved but the Group was held together by a complex web of cross-holdings. Under the circumstances that the Group broke up into smaller units, they would not be able to support unprofitable activities as they would have limitations. At the same time, family solidarity was preventing the company from breaking up. Then, since the government imposed limitations on cross-holdings, the ties eventually weakened. This was an effort to reduce the economic dominance of the chaebols in Korea and also in response to the conditions of IMF support for the country’s economic recovery. By early 1980s, the founder’s sons took over the key decision-making positions in the main subsidiaries of Hyundai. Chung’s second son was appointed Group Chairman in 1996 but even then Chung continued to have indirect control as the Honorary Chairman through his kinship hierarchy (Kwon, 1997). The professionals also held top managerial positions. To maintain central authority of the family top management, the governing structure had to be modified and was changed from informal patriarchal control by the founder to a combination of professional management and family kinship. As the second generation emerged into positions of responsibility this combination became important. In 1992 a mishap proved disastrous as it broke down the notion of the family spirit where everyone worked together for a common good. There was a week-long occupation by the workers which ended when 15,000 riot police stormed the factory. Significant amount of strikes and labor unrest occurred during 1996 and 1997 (Morden & Bowles, 1998). These were triggered by OECD and ILO requests for significant reduction in trade union activities. In 1996 the government asked Hyundai to merge their electronics and automotive interests which would encourage competition and foster small business activities. The Hyundai Group came under fresh pressure when its creditors gave it just a few days to publish its blueprint for reform. Their construction unit was at the brink of insolvency while the motor division reported record profits. This occurred as Asia recovered from recession, Hyundai’s sales of vehicles increased. The company’s motor division made a profit of $277m in the first half of 2000 which was three times the amount made in the same period last year (BBC News, 2000). The Group was facing cash crunch and suggestion were made from all fronts. The government suggested that they reduce the stake in the auto unit to 3% from the existing 9.1% and the creditors suggested that they employ family wealth to ease cash problems. The main creditors, the Korean Exchange Bank also demanded that they should step down and make way for professional managers. The Group had initially agreed to this proposal but they continue to run the show. When it was finally decided to split the group into five smaller units, it was expected that this could slash the group debts by $28.3 billion (Skyenet, 2004). The smaller groups will run independently with only the core companies staying. Hyundai also reduced its affiliates through mergers and sales. Hyundai sensed a problem that they were losing business and instead of eliminating jobs they split their company to reduce debts and formed mergers. The restructuring of Koreas family-dominated chaebols has been painfully slow. The Hyundai Engineering and Construction (HEC), part of the Hyundai Group suffered three liquidity crises in the year 2000 made worse by the inf0fighting between the three sons of the ageing founder (Crane, 2000). After the Asian crisis, the government officials did take interest in reforms, but individual members of the government see such private commercial sector as a part of their future career. Research suggests that former government and state enterprise officials work as outside directors for leading conglomerates that were one under their supervision (Crane, 2000). They also receive huge stock option offers from the local banks to work as outside directors for banks they are supposed to supervise. The family drama led to loss of confidence by investors and destabilized the stock market. The foreign investors backed out from situation and the conglomerate had to turn to Korean Exchange Bank for emergency liquidity loans. The government had been urging the chaebols to reduce their debt-equity ratio to 200 percent (Aric, 2000). Following clashes with the government and Chung family, and intra-family power struggles, the government managed to push through a restructuring plan in August 2000. The two affiliates - Hyundai Motor and Hyundai Heavy Industries were separated from the chaebol and thus ceased to subsidize the loss making units. They were thus protected from debt-crisis. The Hyundai Group, the country’s largest conglomerate, required restructuring and the creditors agreed to support it. The market had become apprehensive about the Group’s financial health and at this juncture Hyundai decided to sell assets and spin off to two profitable affiliates in response to growing pressure from creditors. As soon as the restructuring plan was announced, the Korea composite stock price index rose 1.53 percent (NYTimes, 2000). The investors reacted favorably that the company was addressing the problems more aggressively. The main creditors were the Korean Exchange Bank and they agreed to buy 6.1% stake in Hyundai Motors from the founder. They also agreed to extend the maturity dates of commercial paper and corporate bonds of another unit - Hyundai Engineering and Construction unit – which too had come into trouble. The company expected to secure 1.52 trillion won ($1.36 billion) through sales of real estate and securities. Another major affiliate, Hyundai Heavy Industries, was also spun off. The foreign investors were concerned about the long-term effect that such a strategy would have. Most of the major firms in Korea are family run and the holdings are also within the family, which means most often the shares are interlocked and the loan guarantees too are provided by the family members. The events at Hyundai suggest that regulatory governance to guarantee sound corporate governance is still incomplete. References: Aric (2000), Republic of Korea Update. Accessed 06 April 2008.Available: http://aric.adb.org/pdf/external/arr2000/kor_oct.pdf BBC News, (2000), Hyundai under pressure. Accessed 06 April 2008.Available: http://news.bbc.co.uk/2/hi/business/871006.stm Choi, J., (2004), Transformation of Korean HRM based on Confucian Values. Seoul Journal of Business Volume 10, Number 1 (June 2004) Crane, S., (2000). UNALIGNED INTERESTS. Accessed 06 April 2008. Available: http://www.cfoasia.com/archives/200011-24.htm Kwon, S., (1997), HISTORICAL DEVELOPMENTS OF KOREAN CAPITALISM. The Hyundai Business Group, 1940s-1990s, Accessed 06 April 2008.Available: http://wwwdocs.fce.unsw.edu.au/orgmanagement/WorkingPapers/wp115.pdf Morden, T., & Bowles, B., (1998), Management in South Korea: a review. Management Decision 36/5 [1998] 316–330 NYTimes (2000). INTERNATIONAL BUSINESS; Hyundais Proposal on Debt Receives Creditors Approval. The New York Times. Accessed 06 April 2008. Available: http://query.nytimes.com/gst/fullpage.html?res=9F0DE4DF113FF936A2575BC0A9669C8B63 Skyenet (2004), WHY STUDY ORGANIZATION BEHAVIOR. Chapter 1, Accessed 06 April 2008.Available: http://www.ehcweb.ehc.edu/faculty/ljcumbo/downfiles/WhyStudyOB.pdf Read More