26 Corporate Finance
Moral standards, that is, may change as society evolves. The executive is an agent serving the interests of his
principal. When executives start spending money for social purpose they become, in effect, public servants
even as they remain employees of the organization.
Corporate Growth
Emerging markets like India and Korea are dominated by business conglomerates some of which control as
many as 90 (group) companies. Big businesses in Korea, the chaebol, typically own 30—50 companies in all
key business areas; and the big five—Daewoo, Samsung, Hyundai, LG, and SK—account for 20 percent of
all borrowing and contribute to almost 50 percent of GDP. Debt ratios at the top 30 chaebol are in the range
of 550 percent; they suck up a major portion of the available credit and drive out smaller businesses. The
chaebol understand only one language: borrow to the hilt; focus on size and not profit; focus on growth and
not productivity; invest aggressively and acquire companies. Productivity in South Korea is about half that
of US levels. When earnings fall due to recession, competition, or some such thing, these companies will de-
fault on borrowings. If these companies default, the banks that have lent them money go bust. These banks
will then have to find a way to bail them out because the banks do not want a hole in their balance sheet. So
the financial supervisory commission in Korea has set out to straighten these businessmen.^1
Everything about the business groups in Korea or India is not bad. In these countries, it appears, there are
certain important benefits from being a part of a business house not available to other stand-alone companies.^2
Illiquid capital markets, scarce managerial talent and poor judicial system characterize emerging markets.
These business groups often perform several useful institutional roles not available in the country. For instance,
they act as venture capitalists to start up ventures within the group; solve information problems to customers
by attaching their group brand name to products manufactured by the group companies (i.e., assure a certain
level of quality); act as business school by providing high quality management education to managers, etc.
In other words, for shareholders, business groups that act as proxy market institutions create greater value
than the more focused, unaffiliated companies. Given this benefit, it is probably not prudent to dismantle them.
Despite this benefit several business groups create little or no value. This is probably due to the fact that lib-
eralization of the economy has induced intense competition in most businesses. So, what was unique to these
business groups is no longer their domain. For instance, capital is more freely available to profitable companies.
They may source capital from abroad if necessary. Likewise, the number of business schools has gone up
from a few tens to a few hundred in the last 20 years.
To summarize, growth, though important, need not necessarily lead to an increase in shareholder value.
WHY NOT PURSUE MULTIPLE OBJECTIVES?
One of the advocates of this view was Peter Drucker: To manage a business is to balance a variety of needs
and goals. This requires judgment. The search for one objective is essentially a search for the magic formula
(^1) At the time of writing, Daewoo was undergoing a massive restructuring and many of them have been forced to downsize.
(^2) Khanna, Tarun and Krishna Palepu (1997). ‘Why Focused Strategies May be Wrong for Emerging Markets’, Harvard
Business Review, July–Aug.
——— (1999). ‘The Right Way to Restructure in Emerging Markets’, Harvard Business Review, July–Aug.