LAST month, when South Korean officials announced that they were investigating a mid-sized conglomerate for corporate malfeasance, the news took many observers by surprise. Reports of poor corporate governance have become increasingly uncommon in South Korea in recent years.

Indeed, some observers were beginning to believe that tightened regulation in the wake of the 1997-98 Asian financial crisis really had produced improved corporate governance in family-run conglomerates.

The Central Investigation Division (CID) of the Supreme Prosecutors’ Office said it was investigating the Taekwang Group, a local conglomerate active in the textile, electronics, petrochemicals, media and finance industries.

The allegations against the conglomerate are depressingly similar to those that bedevilled the country’s major chaebols in the late 1990s. Taekwang Group chairman Lee Ho Jin is suspected of creating a secret slush fund, manipulating stock prices to transfer wealth to his son and lobbying influential figures to get business favours. In addition, the labour union of Heungkuk Life Insurance, a Taekwang affiliate, has accused the Lee family of insurance fraud.

The group’s management also allegedly inflicted losses on minority shareholders estimated at 80 billion won (S$90.7 million).

The case could be an exception, of course. But it is interesting to note that it came to light only after the conglomerate became involved in a power struggle between rival media groups.

At the heart of the media ruckus is a recent government decision to hand out fresh cable television licences. Since cross-ownership of television and newspapers is no longer banned, several of the nation’s major dailies have shown strong interest in the new cable TV licences. Newspapers like the Chosun, the JoongAng and Dong-A Ilbo are vying to establish comprehensive channels offering news, entertainment, sports and documentaries. The Yonhap News, Seoul Daily and the Herald Business are among those eyeing the news-only channels.

With such backers, the new channels could present existing players with strong competition. However, observers say that Taekwang, through its ownership of T-Broad, the nation’s largest cable television operator, has the ability to limit the success of the new broadcasters. It can do this by refusing to allocate the newcomers channel numbers in the lower double digits, and favouring its own associated channels instead.

Tension between the government and cable operators has been growing for months. When the Korea Communications Commission recently suggested that it might issue an administrative order to prevent cable system operators like T-Broad from favouring related companies, the cable operators retorted that they would respond by taking the government to the Constitutional Court.

Given this background, the criminal investigation into Taekwang can be seen as the result of intense behind-the-scenes lobbying by newspaper moguls demanding that T-Broad behave. But there is another way of looking at things. The nation may be about to witness a wave of similar CID investigations. And the key motivating force will be politics rather than corporate rivalry.

Until the announcement that it was investigating Taekwang, the CID had adopted a low profile since May last year. That was the month that former president Roh Moo Hyun committed suicide after the organisation questioned him regarding a S$7.8 million bribery scandal involving members of his family. Many South Koreans blamed the CID for humiliating the former leader to the point where he took his own life.

The idea that the Taekwang investigation may be the first in a series of similar probes is supported by more recent reports that two other minor conglomerates are also under scrutiny.

In South Korea, politics is never very far from the surface when it comes to such investigations. The fact that all three conglomerates experienced major expansion in the 10 years under former presidents Kim Dae Jung and Roh means that the CID move could be little more than a disguised attempt to target politicians in the opposition Democratic Party. The party’s leaders are believed to be especially concerned about rumours that several former and incumbent lawmakers from the south-western region had received kickbacks from these conglomerates.

The nation’s major chaebols have so far remained untouched. The extent to which this is the result of improved corporate practices, however, is unclear.

Politically, the time seems ripe for a fresh wave of high-profile prosecutions. President Lee is known to be disappointed with the lack of enthusiasm many large companies have displayed towards his “fair society” programme. A recent parliamentary report showed that chaebols such as Samsung, Hyundai and LG, which had previously pledged to raise funds to support cash-strapped smaller firms, have been reluctant to fulfil their commitments.

If the tighter regulatory regime really has failed, it may not be long before the South Korean public finds out about it.

Copyright © 2011 Singapore Press Holdings Ltd