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Governance at center of Lotte crisis

Watchdog zeroes in on Lotte’s governance structure

Aug. 5, 2015 - 19:12 By 배지숙
Lotte Group is facing the biggest challenge in its 67 years of history as the government is gearing up to take issue with its alleged unfair business practices after its founding family’s feuds erupted last week.

The Fair Trade Commission on Wednesday said that its commissioner Jeong Jae-chan has investigated into the governance structure of Lotte Group both at home and abroad, and that he will share the results with the ruling Saenuri Party on Thursday.

“Because Lotte has a structure of having a single person control scores of Korean companies through several foreign affiliates, we had the authority to look into both sectors,” an official said.

The report is expected to fuel the political discussion over whether to dissolve Lotte’s cyclical shareholding structure that is known to be the most complicated in the country.

According to an FTC report, Lotte Group has a total of 416 cyclical shareholding structures, about 91 percent of the total 459 cases in the corporate sector. It outnumbers that of Samsung with 10 cases and Hyundai Motor Group’s six. 

“Currently the law binds conglomerates to refrain from making any additional cyclical shareholding structure. But if needed we will consider a law revision to dissolve the existing structures,” said ruling Saenuri Party chief policymaker Rep. Kim Jung-hoon.

Rep. Shin Hak-yong of the opposition New Politics Alliance for Democracy proposed a bill to the National Assembly restricting Lotte from establishing foreign affiliates. “These foreign affiliates are sometimes the loopholes of the cyclical shareholding practices,” Shin said.

Lotte is also expected to tackle substantial damage as the Korea Customs Service is reportedly mulling stripping its license to operate two urban duty-free stores later this year.

Because the duty-free stores in Jamsil and Sogong-dong in Seoul account for the lion’s share of the entire 4 trillion won sales in posted by Lotte Duty Store in 2014 -- which again takes up 84 percent of the 4.7 trillion won sales of the mother company Hotel Lotte -- the loss of the license will be fatal to the operation of the entire group, observers said. Hotel Lotte is the holding company of the group in Korea.

“There is no reason to grant such a cash cow to Lotte at this point. The government should reflect this family drama to the evaluation process for the reissuance of the license,” said Rep. Shim Jae-chul of the ruling party.

The National Tax Services also increased its pressure on Lotte by expanding the investigation on its advertising affiliate to other firms. “There are suspicions whether the company with so many secrets and opaque managerial structure could have paid the right amount of taxes,” an insider said. 

A total of 19 leaders of Lotte labor union on Wednesday announced their support for the second son and Lotte chairman Shin Dong-bin.(Yonhap)

Meanwhile, the fraternal spat over who will take the helm of the 90 trillion won-business empire encompassing Asia and the U.S. took a new turn on the day as the second son and Lotte chairman Shin Dong-bin won the support from not only 37 CEOs of the Korean affiliates but also the labor unions.

A total of 19 leaders of Lotte labor unions also announced their support on Wednesday. “We trust chairman Shin Dong-bin and his managerial aptitude that led Lotte to where it is. We will put all our efforts in normalizing our business operations,” the unionists said in their statement.

Added with the full-support from the Lotte units in Japan represented by Lotte Holdings CEO Tsukuda Takayuki on Tuesday, Dong-bin is seeking to settle the public fury over the tantrum. He has visited the affiliates, construction sites and even training centers to assuage the anxiety surrounding his regime.

Such moves came after the Financial Consumer Agency and several other civic groups launched a full-scale boycott of Lotte and its products. “Now that Shin Dong-bin has found some confidence, he is striving to regain public favor to keep his business going,” an insider was quoted as saying.

By Bae Ji-sook (