Corporate governance in Korea is characterized by the circular structure of cross holdings among affiliates of a large business group. Take the Hyundai Motor Group for example. Hyundai Motor owns stock in Kia Motors, which owns stock in Hyundai Mobis. The cross-holding structure comes full circle with Hyundai Mobis owning stock in Hyundai Motor.

This circular structure of cross holdings among chaebol affiliates is the target of an attack from the ruling Saenuri Party and the main opposition Democratic United Party. Ahead of the December presidential election, the rival parties are attempting to restrict such cross holdings and, by doing so, rein in mighty business conglomerates in the name of “economic democratization.”

The main opposition party’s desire to dismantle the stock-ownership pattern is understandable, given that it has long championed opposition to the control of large business groups by a select few families, with support from anti-chaebol activist groups. The party has been denouncing the families for exercising far more voting rights than warranted by the small portions of stock they hold.

In a perplexing about-face, the ruling party has abandoned its long-held pro-business policy and vowed to ban new investments in circular cross holdings and restrict the voting rights of the controlling families. A group of lawmakers from the ruling party has recently submitted a bill, which is written to that end, to the National Assembly. Nothing better explains the change in policy than the forthcoming presidential election.

Chaebol will have to prepare for the onslaught. They cannot live in the cocoon of protection any longer. Among the most vulnerable is Hyundai Motor Group, whose chairman, Chung Mong-koo, holds no more than 7 percent of Hyundai Motor’s stock.

Some of the chaebol have legitimate complaints about the move to regulate their circular cross holdings and restrict the voting rights of their controlling families. They demand due credit be given to them for taking over insolvent companies in the wake of the 1997-98 Asian financial meltdown and succeeding in turning them around. One case in point is Hyundai Motor’s acquisition of Kia Motors.

In writing new rules on cross holdings by chaebol, the rival parties will have to seriously consider whether new restrictions will lay the foundations for creative destruction or kill the geese that lay the golden eggs. Moreover, they will do well to give them enough time to adjust to the proposed change in the rules.