A Little Nut Rage Is Good

How an infamous incident and its fallout may finally change South Korea’s relationship to its family-run conglomerates

Late last year, in an episode since immortalized as “Nut Rage,” a Korean Air executive brutally berated an unsuspecting flight attendant for daring to serve macadamia nuts from the bag instead of a porcelain dish during pre-flight snack in the first-class cabin. According to witnesses, the executive “snarled like a ‘wild beast’” and struck him with a tablet computer before ordering the pilots to return to the gate at JFK Airport in New York so he could be forcibly deplaned. The fallout has continued months later. Just this week, the flight attendant sued the company and the offending executive, Cho (“Heather”) Hyun-ah, who is already serving a yearlong prison term over the incident.

Cho is the 40-year-old heiress of the Hanjin Group, which owns Korean Air and is one of South Korea's massive family-controlled conglomerates or chaebol—literally, “money clan.” The scion’s bad behavior not only flouted the country’s aviation laws by “threatening the safety of the flight and causing confusion in law and order,” but also fed into the worst stereotypes of capitalist privilege.

Still, her prison sentence and the retaliatory lawsuit would have been unthinkable even a few short years ago. For most of the last half-century, the families controlling South Korea’s 100 or so chaebol were broadly respected or at the very least tolerated for the role they played in the country’s economic development. Recently, though, public opinion has become increasingly critical, and a bill to deal with gabjil or “high-handedness” among the rich and powerful is now gaining momentum in the National Assembly. If passed, it would ban members of South Korea’s elite families from returning to work at their companies within five years of being convicted of a crime.

When viewed through a contemporary lens, South Koreans’ hostility toward the chaebol may seem justified. In a year when Thomas Piketty’s textbook on the economics of inequality became an unlikely bestseller, perhaps it wasn’t surprising to hear indignation over stories about “high-handed” South Korean shoppers slapping lowly sales clerks and chaebol billionaires receiving presidential pardons for embezzlement convictions, or to see references to chaebol elitists invade popular culture and spawn bestselling exposes. However, if the discontent turns into a movement to break up the chaebol entirely, this latest corporate scandal could threaten the future of South Korea’s wildly successful economic model.

In response to the “nut rage” backlash, the head of a leading South Korean investment bank summarized the country’s intractable economic dilemma: "People have always felt this frustration, but the previous perspective was you can't discipline the chaebol because we can't survive and thrive without them." A professor at Pusan University captured the zeitgeist with far less reserve: “The chaebol are rapacious, politics-corrupting, consumer-punishing, reverse-engineering oligopolists who’d have been broken up long ago anywhere in the West.” While dramatic structural change may not be likely in the near term, Koreans and their lawmakers are now openly debating a shift in the historically symbiotic relationship between the state and the chaebol’s controlling owners.

That relationship began in the 1960s under the autocratic leadership of President Park Chung Hee, a peasant-turned-officer who rose quickly through the army’s ranks and eventually seized power after a military-backed coup in 1961. Park’s plan for Korean prosperity rested on two main pillars: protection of key domestic industries and export-oriented industrialization. To achieve this, he formed an alliance with a small group of entrepreneurial families, providing the young chaebol with cheap financing via subsidies and low-interest loans, protection from foreign competition, privileged access to the nation’s highest political office, and favorable treatment from regulators and the judiciary.

In the half-century since, South Korea’s chaebol helped fuel an astounding 21-fold increase in per capita output. To put that growth in context, in 1965 the country was poorer than Bolivia and Mozambique—even North Korean per capita income was three times greater. Today, South Korea is richer than Saudi Arabia and generates nearly four times more output per person than China. During this miraculous economic ascent, chaebol policy was rarely questioned, and with good reason. South Korea’s top 10 family conglomerates have become some of the world’s most successful and admired brands—household names like Samsung, Hyundai, and LG—and account for roughly 80 percent of the country’s GDP. Without them, South Korea would look more like emerging Vietnam than developed Japan, the only other Asian country to join the Organization for Economic Cooperation and Development’s club of “developed” economies.

It wasn’t until the 1990s that critics began to point out some of the trade-offs associated with the country’s unflinching commitment to the chaebol. The most forceful claims focused on inequality—in terms of rising wealth differentials as well as unfair competition between traditional small businesses and family-run conglomerates. In financial markets, foreign investors also began to take notice. The term “Korea discount” was coined to describe the phenomenon of South Korean companies trading at roughly half the price of their Japanese peers. Market analysts have identified several possible reasons for this, many of which are a direct commentary on the chaebol: opaque governance, higher leverage, flagrant self-dealing (the use of privilege for profit), and rampant nepotism.

The 1997 Asian financial crisis only compounded fears that these closely held oligopolies had borrowed too much, expanded too quickly, operated too esoterically, and were now “too big to fail.” But chaebol policy remained firmly entrenched, and it would take more than a decade, a global financial crisis, and a string of high-profile corruption scandals for politicians to finally revisit the state’s unconditional support for its national champions.

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During presidential elections in 2012, the chaebol and their controlling families were targeted for their starring role in the country’s latest economic drama: twin plagues of slower growth and rising inequality. Voters produced popular bumper stickers claiming, “It’s the chaebol, stupid.” Media outlets fanned the flames with talk of “economic democratization” and “chaebol-bashing.” Each of the three leading candidates formulated anti-chaebol platforms, including harsher sentences for convicted executives and new restrictions on the convoluted legal structures that families used to maintain control of their companies. In the weeks after the election of moderate Park Geun-hye, the new president appeared to keep her eye on the political prize, stating her belief that "the management goal of conglomerates should not remain maximizing profit but should involve pursuing coexistence with the larger community."

A renegotiation of the fundamental relationship between the chaebol and South Korean society now seems inevitable, particularly in light of the Korean Air incident. But it’s difficult to see Park as a bona fide agent of change, given that her father Park Chung Hee was the progenitor of chaebol policy in the first place. Her earliest efforts to promote smaller businesses and jumpstart a “creative economy” were broadly praised, though largely ineffective. It is also difficult for policymakers to conceive of growing the country’s economy and its global influence without their franchise players.

Which raises the question: Is it even possible to achieve lofty development goals without explicit state sponsorship for a privileged class of entrepreneurs? Based on our experience studying and advising family businesses around the world, the evidence is strongly affirmative. Large family-run enterprises have fueled economic development in countries like India, Colombia, and Lebanon in the absence of explicit state support. Perhaps more telling, they are often able to survive and even thrive in the face of intense political and economic pressure in places like Venezuela, Libya, and Syria.

Family-controlled companies can outperform their non-family counterparts for many of the same reasons that South Korea was able to outmaneuver its regional peers during the first 40 years of chaebol-driven growth. They are more likely to pursue longer-term strategies that go well beyond the bottom line—often, for example, providing their communities with new roads, bridges, schools, affordable housing, hospitals, and even telecommunications networks.

These companies are also associated with higher standards of quality, since the products and services they generate are a reflection of their owners’ familial identity. As Toyota’s Akio Toyoda said when testifying in Congress over his own company’s recent public safety debacle: “My name is on every car. You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.” Heather Cho's father echoed this sense of personal responsibility in the wake of her arrest: "I apologize to the people of [South Korea] as chairman of Korean Air and as a father for the trouble caused by my daughter's foolish conduct. Please blame me; it's my fault. I failed to raise her properly."

In short, while the evidence from South Korea and other emerging markets suggests that explicit state support of family companies can be helpful in advancing a development agenda, it is by no means essential. In fact, these firms are often more resilient than their peers. Survival—and community—is in their DNA. Perhaps it’s not surprising that McKinsey now expects family-controlled businesses in emerging markets to “represent nearly 40 percent of the world’s large enterprises by 2025, up from roughly 15 percent in 2010.” As such, these firms are destined to be among the principal drivers of economic growth and wealth accumulation over the next decade, and likely beyond.

Curiously, as the developing world rushes to create this new class of family-run economic champions, Korean policymakers seem to be drifting in the opposite direction. Greater regulation, prosecution, and competition might help avoid embarrassing outbursts from spoiled princelings, but should reforms go too far, the country risks throwing the kimchi out with the brine-water. Vitriolic comments from opposition leaders describing the chaebol as "the poison in the Korean economy" are not particularly constructive, though neither are insensitive outbursts by petulant family heirs or violent attacks with metal pipes by chaebol chairmen.

But South Korea still needs its manufacturing heavyweights as well as its small- and medium-sized businesses, and family-controlled companies will continue to help drive South Korea’s development just as they have since the elder Park’s administration. Ironically, while his daughter has made little progress with the chaebol domestically as president, for several years the South Korean government has supported training workshops for family-owned companies organized by multilateral agencies. Core to these efforts has been instilling the sense of institutional stewardship and accountability that seems to be so lacking among the chaebol and yet so vital to their international peers. Critically, programs like these emphasize educating the next generation to become more enlightened owners and assume the profound responsibilities that come with great wealth and privilege—a lesson that would have served Cho well on the runway last December.

In the meantime, the words of former South Korean Prime Minister Chung Woon-chan continue to resonate in both political and social circles in his country: “No matter how huge the chaebol profits become, those profits do not trickle down to small- and medium-sized enterprises or the public. ... The economic concentration of chaebol results in a serious polarization." He made this observation in 2012, long before the nut-rage backlash. But as the inequality narrative has continued to gain momentum in the years since, Korea’s economic model now looks more vulnerable than ever.