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Failure of Daewoo Motor Company
Transcript of Failure of Daewoo Motor Company
Company 1989 heavy losses "Chaebol" Second largest conglomerate Shipbuilding Era
Founder Kim Woo Jung Globalization errors Lack of cultural diversity Korean unions Behavioral Change Traditional work ethics lost
long hours and low wages thing
of the past.... Traditional leadership resisted worker
Daewoo ended with 20% wage increase
Daewoo motor company began to
collapse..... 1999 Korean govt dissolved
Daewoo Chaebols 1986 Zymos
semi conductors Cross cultural divide Failure to Market properly Daewoo the Auto Maker
1982 Daewoo Motor Company
Global mind shift
"Technology" Six companies under Daewoo Electronics
Commercial vehicle Daewoo Motor Company Korea's largest chaebol including all subsidiaries of Daewoo towards the end prior to collapse
Chaebol is a company which is of government interest
also known as "family dynasties" or "too big to fail" companies
Chaebols would received preferential treatment from the Korean Government
Priority Loans with low interest rates
lenient labor laws
Received financial assistance from Korean Government Daewoo's global venture Started in the auto industry in 1955 with Shinjin Motor Co.
leading domestic import Co. to Korea
by manufacture and assembly Daewoo Motor continued Ventured with General Motors in 1972 in a 50/50 split in Korean production
builder for several models in GM:
lasted for 21 years (1993) Daewoo ended joint partnership with GM in 1993 after other Korean auto companies (Hyundai and Kia) were becoming international producers in automobiles.
Daewoo purchased GM's shares
Aggressively pursued auto industry
Created three models after six months of being an independent car company
Laganza Daewoo targeted Eastern Europe, Africa, and Southeast Asia
Germany, Romania, Vietnam, Poland
Purchased largest Polish auto maker FSO in 1995
Made major purchases in short time of 12 production plants in 11 countries
Employed over 26,000 employees for vehicle plants
Projected to make 200,000 vehicles in ea. plant per year Daewoo Success By 1997, Daewoo became the 2nd largest domestic manufacture in Korea next to Hyundai
Predicted to be in the top ten automobile manufacturers of the world by 2000 Daewoo began to target U.S. market
Projected 100,000 vehicles sold by 2001
Marketing towards college students via the internet
Could offer low cost vehicle
New method of advertisement Southeast Financial Crisis 1997-1998 Southeast Asia was facing a recession
Production plants in Asia faced major cuts due to recession
30% decrease in sales
Started the peel back of Daewoo's real financial situation Financial institutions requested re-payment of debts from Daewoo
Daewoo could not re-pay due to over 17 Billion dollars in debt covered by altered financial statements Prior to the full truth of what Daewoo was doing, CEO Kim fled Korea to avoid charges
6 years later Kim was brought back to Korea after being found in France Organizational behavior is concerned with the study of what people do in an organization and how their behavior affects the organization’s performance.
Daewoo, for example, would engage in country-wide projects in which the entire conglomerate would participate.
The ability of Daewoo directors might have been affected more than other conglomerates, because so many hailed from a particular school-Kyunggi High School-which was considered Korea's elite secondary school and required a separate entrance
Daewoo made grave misjudgments-condoned by the government
Which sealed its fate.
First, it pursued a counterstrategy of expansion with particular focus on the automobile industry that proved too ambitious.
Daewoo then over-leveraged itself with $20 billion in debt to try to meet its financial burdens during the crisis.
Its management did not appreciate the seriousness of the situation, offering restructuring plans to resurrect the conglomerate only when it was too late. Management and Leadership Issues
After Daewoo’s accounting fraud came to light, regulators
sent shockwaves throughout the industry when they suspended .
Chong-Un and San Tong from receiving new business, the most severe sanctions in history.
Chong-Un received a one-month suspension of all new business during March and April of 1999, while the FSS issued a twelve-month suspension of new business against San Tong.
In addition, two San Tong accountants received the ultimate punishment when their licenses were terminated. Daewoo Accounting Oversight: Chong-Un and San Tong Daewoo’s accounting troubles were dismissed as Korean problems that arose out of a combination of ineffective regulatory supervision, a lack of accountability, conflicts of interest and weak self-regulation.
Although accounting firms claimed that they did not know of the accounting fraud because of Daewoo’s concealment, many other factors contributed to their inability to function properly.
First, tolerance to accounting misstatements and opaqueness prevailed.
Failure to comply with accounting or auditing standards such as omitting important matters from audit reports or making false statements led to criminal sanctions or civil liability in theory only. Accounting Oversight: Chong-Un and San Tong
Corporate governance was unobserved. He did not heed warnings to retract and instead chose to expand through unprecedented accounting and loan fraud.
In the end, ultimate responsibility for the catastrophe lies with him.
First and foremost, chaebol maintained a patriarchic, management style that revolved around controlling shareholder domination.
Excessive concentration of power became the source of most corporate governance problems.
Chairmen, serving as both controlling shareholder and founder, reigned as moguls over empires of companies. Corporate Governance Landscape primary responsibility of Daewoo’s own problems and Korea’s underdeveloped corporate governance framework, other market players, particularly leading international ones, cannot escape derivative responsibility.
internal corporate governance of Daewoo, particularly through its board of directors, officers, shareholders and banks.
The external corporate governance landscape will be described through the failure of reputational intermediaries, gatekeepers and public institutions. Corporate Governance Landscape A case study of Daewoo within the context of comparative corporate governance also sheds light on the efficacy of formal law, the importance of enforcement and the potential for convergence among governance systems.
The tale of Daewoo, in particular, serves as one of the earliest warning signs of the corporate governance breakdowns that later plagued leading companies around the world.
It was predated Enron, WorldCom, and Tyco, scandals that devastated confidence in global markets. Chaebol adhered to a too-big-to-fail doctrine Around the world, corporate governance has emerged
as a focal point in the reform of companies.
In Asia, a consensus exists that failure of corporate
governance played a pivotal role in precipitating the
Much debate exists as to the exact amount of the
accounting fraud and how to calculate it.
corruption spread largely as a result of inherent
weaknesses of conglomerates and banks; for Korea, for
instance, problems with family-dominated chaebol
provoked its collapse. Chaebol adhered to a too-big-to-fail doctrine Certified Public Accountants Act, (1999) Law No. 1797 of 1966 art. 48 (as amended Law No. 6994 of 2003); Implementing Decree, Decree No. 18352 of 2004 art. 30. See Section IV.C. Press Release, Certified Public Accountant’s Disciplinary Commission, Mar. 18, 1999.
HITT, M. A., DACIN, M. T., TYLER, B. B. and PARK, D. (1997), UNDERSTANDING THE DIFFERENCES IN KOREAN AND U.S. EXECUTIVES’ STRATEGIC ORIENTATIONS. Start. Mgmt. J., 18: 159–167. doi: 10.1002/(SICI)1097- 0266(199702)18:2<159::AID-SMJ870>3.0.CO;2-X
Oh, D., Choi, C. J., & Choi, E. (1998). The globalization strategy of Daewoo motor company. Asia Pacific Journal of Management, 15(2), 185-203.
Stephen Choi, (2002) Law, Finance and Path Dependence: Developing Strong Securities Markets, 80 Tex. L. R. 657 (2002). Yonhap News, supra note 202.
The firms implicated included Anjin & Co., Ahn Kwon & Co. and San Tong and Daewoo executives were co- defendants in the actions. Daewoo Executives CaIV.D.use W 4.26 ril. in Losses, Korea Times, Sept. 25, 2002. See Section The firms implicated included
U.S. Corporate Governance: What Went Wrong and Can It Be Fixed?
http://www0.gsb.columbia.edu/faculty/fedwards/papers/U.S.%2520Corporate%2520Governance% 252 References The Congressional Subcommittee on “The Role of the Board of Directors in Enron’s Collapse” concluded that there was a fiduciary failure of the board (a breach of its duties of care, loyalty, and candor?) because it allowed Enron to engage in high risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, inappropriate public disclosure, and excessive compensation.
12 And the Powers Report concluded that “The board cannot be faulted for failing to act on information that was withheld, but it can be faulted for the limited scrutiny it gave to many transactions, such as those between Enron and the LJM partnerships.” (p. 148)
he Daewoo case offers a variety of lessons for corporate governance specialists of emerging markets. Only through a comprehensive internal and external framework can companies shed the perception of opacity to receive competitive valuations. Corporate scandals continue to erupt demonstrating that transparency and accountability must be vigilantly pursued within such a framework. In particular, local laws, markets and institutions do not bear sole responsibility, but international market participants must be properly enlisted into the process. Korean and U.S. organizations organizations exist in institutional contexts with very different values and norms. These differences are reflected in the strategic orientations of executives from these two countries.
Korean communitarians largely the result of the Confucian philosophy and has dominated Korean thought and philosophy.
Other attributes of the Korean ideology that have affected its development are a preference for hierarchical order, authoritarianism, preference for formality, low information sharing and self-control, and less emphasis on rights than on duty.
Corporate governance in the United States is comprised of multifaceted legal and
institutional mechanisms designed to safeguard the interests of corporate shareholders and to reduce the agency costs that derive from the separation of ownership (shareholders) from control (managers and/or controlling shareholders).
Some of these mechanisms seek to increase the information available to shareholders so that shareholders can monitor corporate managers and enhance market discipline.
Others seek to protect shareholders by imposing liability on the agents of shareholders (managers and directors) and penalizing them for engaging in activities counter to the interests of shareholders. Korean and U.S. organizations
While pursuing its expansion strategy through excessive borrowing, Daewoo chose to commit an unprecedented fraud, particularly by manipulating its overseas account.
The "biggest accounting fraud in history" occurred as Daewoo's companies inflated
assets by a total 22.9 trillion won ($19.1 billion).
Daewoo Corp., Daewoo Motor, and Daewoo Electronics together accounted for 90% of the conglomerate's impaired capital. In perpetrating the fraud, Daewoo Corp., which was responsible for 14.6 trillion won ($12.2 billion) in fraud, used its trading and management departments and its accounts in London.
On the domestic side, most of the fraud stemmed from reduction of debts, manipulation of export returns, and utilization of affiliates. Some of the largest violations involved 15 trillion won ($ 12.5 billion) in off-balance sheet liabilities.
Woo Choong Kim, for instance, was convicted several times, yet he never served prison time until recently.
The presidents routinely granted pardons to convicted controlling shareholders and executives of large .
Before his most recent pardon in December 2007, Woo Choong Kim, for example, received separate presidential pardons in 1995 and 1997 for two previous convictions for bribery. Accounting Fraud and the British Finance Corporation Only individual accountants were suspended and not firms. The sanctions served as death knells for the firms, which collapsed shortly thereafter.
The lead among claimants against accountants. After announcing that thirty-five accountants from four accounting firms collaborated with Daewoo executives to commit 2.81 trillion won ($2.34 billion) in accounting fraud, KDIC compelled banks to bring civil actions to hold them responsible.
The court found that the company and accountant’s collusive relationship indicated intimate awareness Accounting Oversight: Chong-Un and San Tong Accounting Oversight: Chong-Un and San To Tong
The accounting firms believed they could not afford to offend the chaebol, their dominant revenue-generating clients
A structural dependency developed because firms relied on chaebol business that pressured them into overlooking questionable accounting treatments.
A group of accountants from San Tong apparently debated on whether to publicly expose Daewoo’s accounting problems.
San Tong was apparently informed that issuance of over 15 trillion won ($16.7 billion) in commercial paper was based upon false records.
accounting firms developed their own moral hazard because they presumed that their stature made them so important they could not be allowed to fail. Daewoo Corp. primarily acted as a trading and financial company for products and services.
Daewoo received the lowest market valuations and had to pay the highest interest rates among the chaebol.
Daewoo cannot be separated from its legendary founder, Woo Choong Kim.
He not only established it, but determined its course, dominated decision-making and handpicked executives.
Fundamentally, Kim failed to follow basic legal and managerial principles such as accounting, internal controls and financial discipline, placing too much emphasis upon generating sales and marketing. Corporate Governance Landscape The company engaged in 346.6 billion won ($231 million) of accounting fraud in 1997 and 477.9 billion won ($341 million), statements and not conducting a proper audit of Daewoo Motor .
Through the Daewoo saga, for the first time, serious accountant and auditor liability has been established.
Enforcement discipline has had a rippling effect because accounting firms finally have a strong disincentive not to relent to corporate pressure to approve misrepresentations.
They can now point to the dire consequences of failing to comply with the law. Accounting Oversight: Chong-Un and San Tong