The economic and political systems of South Korea are roiling with accusations of corruption and influence-peddling encompassing every major industry, rising all the way to the office of the president. These accusations are the latest public outcry against South Korea’s particular brand of business conglomerate, the chaebol, which are large groups of interconnected companies controlled by select families, dominating the South Korean economy. The nearest U.S. comparison is the historic “trust” structure as it was originally implemented by John D. Rockefeller. The Gilded Age in the U.S. (1870-1920) and “The Miracle on the Han” in South Korea (1970-Present) have fascinating parallels which yield insights into these two business structures and perhaps their inevitable difficulties. Examining the Gilded Age and eventual fate of the Standard Oil Trust provides insight to the possible fate of the chaebol system in South Korea.
The Gilded Age came out of the horrors of the American Civil War, when unprecedented cooperation between major industrialists and the Federal Government bolstered the successful efforts of the northern states. Post-war, these industrialists disproportionately benefited from the rebuilding effort, which coincided with westward expansion and the transformation of America from an agricultural to industrial power.
In the late 1800s, five of the ten greatest fortunes in American history were amassed, a concentration of wealth the US has never seen before or after. Resentment began simmering across the growing nation. Cartoons depicting Rockefeller as an emperor, unchecked by laws and untouched by politicians became common fodder. In 1882, John D. Rockefeller established the Standard Oil Trust, a corporation which owned other corporations, a business structure largely unknown before that time. The trust, technically run by fourteen trustees, was practically under control of one man – John D. Rockefeller. His concentrated power provided the perfect public target, and the simmering resentment boiled over around a remarkable piece of investigative journalism and a seminal Supreme Court case.
The Miracle on the Han follows a strikingly similar pattern, named for the economic boon in Seoul, the capital of South Korea located on the Han River. This modern miracle has grown from the tragedy of Korea’s own civil war in the early 1950s. A combination of government protectionism and economic coordination rebuilt the southern half of the country after it split in 1953. The rebuilding of the country coincided with a massive exportation of Asian produced goods, and the transformation of the country from primarily rural to stunningly urban.
A select set of family-owned companies was in place to take advantage of economic opportunities. By the late 1990s, nearly two-thirds of South Korea’s manufacturing base was controlled by family-owned conglomerates, a system known as the “chaebol.” The word is derived from two characters meaning, “rich” and “clan.” Many of these family-controlled firms are recognized worldwide, with brand names such as Samsung, Hyundai and LG.
Family control is exercised by ownership of a small controlling share of a corporation, which in turn holds controlling interest in the many other corporations under the umbrella of ownership. While many recognize the critical role these chaebols have played in the rebuilding of South Korea, there are increasing calls for reform to transition the economy to greater diversity of ownership. The history of the Standard Oil Trust suggests the transition may have to be forced, and recent events may be echoing the events which lead to that critical moment.
In 1904, Ida Tarbell published a scathing exposé – The History of Standard Oil Company. Tarbell, an accomplished journalist, was also the daughter of Frank Tarbell, a small businessman from Ohio who tried in vain to compete against a young John D. Rockefeller as he consolidated the industry. Influenced by watching her father’s struggles, her tenacious investigative journalism found Standard Oil cornered the market through a pattern of collusion, kickbacks and deceit. Rockefeller defiantly denied wrong-doing, but the public began viewing him less as an accomplished businessman and more as a Machiavellian manipulator. In 1911 the Supreme Court decided Standard Oil Trust, though technically owned in small part by one man, unfairly restricted free market competition. The company was subsequently broken up into 22 competing companies, some of which still operate today.
The accusations in the past few months against Lee Jae-yong, the vice chairman of Samsung, seem to fit a similar pattern. In December of 2016, the many heads of the South Korean chaebol were called in for a parliamentary hearing on corruption. The allegation was influence peddling through a key associate of Park Geun-hye, who has just been removed as South Korean President in connection with the scandal. She is the daughter of former President Park Chung-hee, who was largely responsible for creating the chaebol system beginning in the 1960s. The recent arrest and charges made against Lee Jae-yong, the heir apparent to the Samsung corporate empire, have widened public resentment of the concentration of economic power in the hands of so few.
When ruling in the Apex Hosiery Co. v. Leader case in 1940, the U.S. Supreme Court communicated the public sentiment behind the passage of the Sherman Antitrust Act: “The goal was to prevent restraints of free competition in business and commercial transactions which tended to restrict production, raise prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services, all of which had come to be regarded as a special form of public injury.” It remains to be seen if the sentiment in South Korea has turned from viewing the chaebol system as a public good to a form of “public injury.” Passage of national laws restricting the concentration of corporate power would be a clear sign of such a shift.
If U.S. history provides any insight, such a law may be in the offing. It should be of some consolation to the families of the chaebol system that the names of the U.S. Gilded Age – Carnegie, Mellon, Astor and Rockefeller, have become revered once again for the work they do for the public good through their charitable efforts in later generations. A deft pivot to public philanthropy might allow them to save both reputation for today and legacy for the future.