Third-generation succession of a founding family has become a big issue for family-run South Korean conglomerates after Samsung Group faced a governance crisis in the wake of the sudden hospitalization of chairman Lee Kun-hee in early May.

The nation’s top conglomerate, however, regained stability faster than expected by moving quickly and smoothly toward succession. The tech giant announced in May it would list IT solutions affiliate Samsung SDS on the main bourse within the year, which is expected to help cover the multi-billion-dollar succession costs.

Now, attention is turning to possible changes in the ownership structure of Hyundai Motor Group, the nation’s second-largest conglomerate after Samsung.

The heir-apparent to the automotive group, run by its charismatic chairman Chung Mong-koo for the past 15 years, is his only son Chung Eui-sun, who is vice chairman of Hyundai Motor. The senior Chung inherited the business from his father, the late Chung Ju-yung, founder of the Hyundai empire. 

Unlike many other third generation members of founding families, the junior Chung has built a good reputation within Hyundai, having proved his management abilities over the past decade.

“He is well respected within the group not only because of his competitive managerial skills but also because he is diligent and has a humble personality,” a corporate insider said.

While he served as chief executive at Kia Motors ― a unit under Hyundai Motor Group ― from 2005 to 2009, he pulled the carmaker into the black in 2008 by adopting design as a key growth strategy. One of his key achievements at the time was getting former Audi chief designer Peter Schreyer to join Kia Motors.

Based on the good reviews he garnered at Kia, Eui-sun was promoted to vice chairman in 2009.

It seems to be only a matter of time before vice chairman Chung advances into the top post.

“The word ‘succession’ has long been taboo at Hyundai Motor under the charismatic leadership, but the company cannot afford to delay the process any longer considering that the chairman turned 76 this March,’’ industy sources said.


Isolation in the ownership structure

In reality, however, it will take some time before managerial control can be handed over to the younger Chung, mainly due to the stock isolation of the vice chairman in the current ownership structure of the group, analysts forecast.

Like other family-run South Korean conglomerates, the governance of Hyundai Motor Group is based on cross-shareholdings in key three affiliates ― Hyundai Mobis, Hyundai Motor and Kia Motors.

“For ownership in the group, it is key to secure controlling shares in Hyundai Mobis, the car parts maker of the group,’’ Lee Sang-hun, a stock analyst at Hi Investment & Securities, said.

Hyundai Mobis, which is the de facto holding company for Hyundai Motor Group, controls Hyundai Motor with a 20.78 percent stake, while chairman Chung controls the group with his 6.96 percent stake in Hyundai Mobis.

At the same time, Hyundai Motor controls its affiliate Kia Motors with a 33.88 percent stake. Kia Motors then completes the cyclical ownership structure with its 16.88 percent stake in Hyundai Mobis.

The problem is, Eui-sun has no stake in Hyundai Mobis and very little in Hyundai Motor and Kia Motors.

He needs the 16.88 percent stake Kia holds in Hyundai Mobis, but he would have to raise billions of dollars in order to buy the stocks.

Another option would be for the younger Chung to inherit his father’s stake in Hyundai Mobis, but this creates a tax issue, for South Korea levies a 50 percent taxation on wealth transfer. This means Eui-sun would need more than 1 trillion won ($989 billion) just for the taxes given Hyundai Mobis’ price of 281,500 won per share as of July 4.

Corporate governance experts mostly advocate gaining Kia’s shares in Hyundai Mobis, which would give the group a holding company structure that is regarded as a more advanced form of governance.

The only problem is money.


Securing the succession funds

To secure the funds for covering the multi-billion-dollar succession costs, market watchers say the younger Chung has no choice but to sell his shares in other affiliates.

While he has a weak hold over the three key firms, Chung controls six others including Hyundai Glovis, the logistics arm of the group, and Hyundai Engineering, a construction unit, which he holds a 31.9 percent stake and 11.7 stake in, respectively.

“This is why Hyundai Glovis stocks were catapulted to the spotlight last month when management succession became a keyword for making investment decisions in the wake of the situation at Samsung,’’ said Huh Joo, a stock trader at Woori Investment and Securities.

The stock price of Hyundai Glovis hit a record high on June 3, based on growing hope that the company, in which Hyundai Motor Group vice chairman Chung Eui-sun holds a 31.9 percent stake, will play a key role in covering the succession cost.

Hyundai Glovis is currently the main source of Chung’s wealth. The value of Chung’s shareholdings in Hyundai Glovis amounts to 3.1 trillion won ($3 billion).

There are now lingering rumors that Hyundai Engineering will soon become listed on the stock market to help Chung secure additional funds for his succession. Hyundai Engineering officials denied the speculation, saying that a listing has not been discussed yet.

Along with a flood of scenarios for Hyundai Motor’s succession plans, concerns over possible irregularities in the succession process are growing as well.

“The top management of the group must put priority on shareholders as they navigate to find the best course for transferring control over to Chung Eui-sun,’’ Park Kyung-suh, chairman of Korea Corporate Governance Service, said, urging the automotive group to prioritize advanced practices of corporate governance during the succession, rather than the transfer itself.

By Seo Jee-yeon (jyseo@heraldcorp.com)