Presentation of International Experience with ESOP & Capturing of New Ideas

South Korea

COG strategy Meeting 6^th-8^th of May, 2001 Cleveland, Ohio

Jay Choi

Project Director

Korea Desk

Union Network International

1. Historical Background of Korean ESOP

The first Korean ESOP was implemented in October 1958 at Yoohan Corporation which provided special contribution stocks to senior management and allowed employees to purchase company stocks on voluntary base In 1968 the Korean government regulated 10% preference stocks to employees stipulated at “Capital Market Promotion Act” In the wake of the first oil shock in 1973 the Korean companies faced bad shape of financial structure, as the foreign investment was dramatically reduced in the world economic recession. As a means of response to this downward capitals the government announced a presidential special decree on “Company Listing and Sound Corporation Promotion” which was to popularize the stock market . This measure was followed by the Ministry of Economy and Finance’s “Implementation Plan for Expanding Korean ESOP” in July, 1974.

The most growing part of Korean ESOP was started from 1987 thanks to stock market boom and companies listings which brought into establishment of Woorisaju cooperation eventually. This new phenomena reflected the employees’ strong desire for welfare accumulations, participation in distribution of company growth and new need for industrial relations from the confrontational to cooperative. In 1988 the Korena ESOP(Woorisaju coop) was regulated and upgraded the preference stocks for employees up to 20% allocation as well as expanded tax benefits and financing.

Even though it was born in good will to help workers’ welfare and harmonious industrial relations, employees were divided into two, for happy about the stock price up and sad about the stock price down, as Korean stock price showed a great scale of volatility during the decade. The government responded to these complaints from employees by reduction the obligatory deposit period to 7 years in 1993, and to 1 year in 1999..

2. Methods of Korean ESOP

Korean ESOP, Woorisaju Coop is controlled by a supervision of Korea Securities & Finance Co under the Ministry of Economy and Finance. The Coop handles preference stock allocation and management of stock purchased in the market, deposit & withdrawal of acquired stocks and management of Coop fund. Korean Securities & Finance Co, as the supervisory agency, deals with general administration of shareholdings and financing including regulations of shareholding etc.

The Coop should be a legal entity to be qualified for establishment and application for procurement and bidding. As financing vehicle of company stock purchase there are three channels such as individual employees loan to be paid back from payroll, company loan and leveraged loan from financial institutions.

In terms of acquisition of company stocks the most popular method is preference allocation for employees up to 20%. On the other hand the major shareholder can transfer stocks to employees, purchasing from the market, purchasing from the Coop members and purchasing from the Coop.

Distribution of stocks is based on low income employees and seniority of tenure. The Coop should take a collective deposit to Korea Securities & Finance Co within 1 month from the purchasing date.

Exercise of voting rights and rights to decision is diversified upon situation, for example the head of the Coop can take a delegation power by the members’ endorsement Power delegation is another way to exercise rights to vote.

Coming to tax benefits supports, there are many ways to extend tax exemption to the members, companies etc. This frame also covers to recognize loss for bonus or incentives.

The financing is limited only by two ways at the moment; the company supports which the company management provides a loan to employees and members of the Coop without interest rate. The second is based on institutional finance up to 30Million Korean Won per person from Deposit Stock Guarantee Loan.

3. Number of Woorisaju companies and employees

The number of Woorisaju company reached to 1,546 in 2000, which is a great increase from 958 companies in 1995. The total number of employees in ESOP companies recorded 1,163,000, while only 909,000 employees are participating in ESOP in 2000. About 78.2% of employees are participated in ESOP amongst ESOP companies.

4. Number of ESOP stocks

From 752 Woorisaju on deposit the total number of shares is 421,176,000, which is declined from 455,604,000 in 1999. The total amount on deposit also declined by 35,972billion Won from 44,871 billion Won.

5. complexities

President Kim Daejoong announced to implement ESOP in the beginning of new regime and the Ministry of Economy & Finance conducted a research and presented project report in 1998. regretfully the core element of the report and recommendation by the ministry was to link between ESOP and Corporate Pension. In fact there is a danger for workers and unions that the current corporate retirement compensation which is in the frame of legitimacy will be replaced by ESOP. After IMF financial crisis many cases in the small and medium sized companies suffered deferred wages and no retirement compensation, as the employers of bankruptcy were not be able to pay for. In addition to this the retirement compensation was excluded the legal right for the first creditor position through The Supreme Court ruling , when the company failed in business .

Having said that the unions immediately rejected the government’s recommendation, the subject was passed to the hands of the Ministry of Labor. The Ministry of Labor taking the issue drafted a bill on revision of Workers Welfare Promotion Act by including provisions for support of take over by employees through ESOP. This was done by a lots of efforts from small group of academians and experts who are desperately interested in ESOP as alternative structure in the process of restructuring and a kind of third way policy to contest the negative impacts of global economy.

The bill holding in the National Assembly seems to have wide supports from the two political parties. Recently the Ministry of Economy & Finance announced that ESOP linkage with corporate pension scheme will be introduced by the end of this year. In fact the ministry already formed a new task force to develop this scheme. At the same time the employers association also expressed inconfidence, because most of companies utilize the retirement money for the internal operation cost which is illegal. If the current retirement compensation could be replaced by ESOP, there is high probability for employers and companies to welcome new ESOP scheme.

On the other hand it is quite clear that Korean unions would not accept this idea for giving up the retirement compensation which is characterized as a nature of deferred salary. The reason why Korean unions and workers are vigorously opposing the connection with corporate pension was rooted in the comprehensive doubts about the existing national pension system and national medical insurance system of which fund are either broke or to be in trouble soon.

On top of that we confront more complexities to move forward ESOP. By in large Korean unions are very skeptical about ESOP and employees’ take over the company when they face risk of job cuts and bankruptcy. The worrisome is arising warning that workers will lose class-consciousness by participation in management and stepping into capitalistic framework. Imagine the worst scenario is that the employees should take all burdens in emergency of business or business loss and debts etc.

The opposite side of views about ESOP take a little bit different position that ESOP should be refined to suit the changing environment. The classical ideology over labor and capitals should be redefined through redigesting the contemporary economic conditions and norms. It must be a choice between job threats and survival, as long as workers are concerned about the company business

In spite of these complexity the demand for government supports for employees to take over the company is creasing steadily, as more spin-offs and privatization are under development. It would cover both private sector and public sector in terms of implementation of new ESOP and supports to take over, I would dare to say.

Contrary to the rising demands for new ESOP and legislation for supporting take over by employees the public opinions and government’ bureaucrats responded very negatively to the fact that employees can own the company by purchasing company stocks.

Minority shareholders campaign initiated by civic group attracted the public opinions that the campaign can cure lots of problems of moral hazards and illegal stock transactions by the major shareholders etc. The campaign invited a certain level of good results to improve transparency , but lack of strong vehicle for improving corporate governance.

Instead most of Korean people are very marginal to show sympathy to workers and unions as an alternative group for rebuilding economic and social justice. Given that situation the unions choices are very limited. The unions’ long-lasting demand to dismantle Chaebol, conglomerates, can be solved through activation of ESOP, if the democratic management of ESOP is proven in the workplace.

6. successes

Only a very few cases are shown as a success. One of the example is Dacom Trade union which built up a collective power balance through ESOP for contesting the major shareholders’ control of management in which management direction was misled. As of December 2000 Dacom company represents 1,964 employees on ESOP and 23,943,000 shares.

Samsung Electronics, one of blue chip as a leading company in semiconductor industry maintains 27,082 employees on ESOP with 175,125,286 shares. However Samsung Electronics without union organization does not have any collective power to challenge the management. It is just based on individual investment for the purpose of gains from stock investment.

SK Telecom, another blue chip in telecom industry, carries 2,963 employees on ESOP with 89,152,670 shares. Now they have got 46,576 shares deposit in Korean Securities & Finance. Co.

Above two cases of Samsung and SK Telecom were able to carry gains to employees on ESOP not because of good management of ESOP but because of good stock price for good business.

Therefore we do not have concrete case of successful story on ESOP unless workers never give up participation in workplace management and representation to directors of board of the company.

. 7. Failures

Subject to the Korean stock market volatility majority of employees on ESOP

lost money, even though the obligatory holding period shortened to 1 year. In

particular when the government reduced capitals in the troubled banks such as

The Seoul Bank and Korea First Bank including 5 small banks to exit from the

market, all shares in these banks were victimized through reduction of capitals.

So painful experiences of ESOP bears in mind that no scheme can be welcomed by workers and to cure all harms.

8. Obstacles

As briefly described the fundamental concept of exiting Korean ESOP turned out very disappointing for workers who lost money from ESOP scheme. The most critical factor to bring failures and hindrances to expand was the fact that no independent ESOP was exist at all.

ESOP implemented by the government not by the workers and employers in the front stage lost the ground for guarantee the democracy and independency of ESOP management. To make it worse it is very hard to find any evidence that ESOP contributed to development of harmonious industrial relations

Yet we have small number of cases in successful story for employees’ take over the company in business crisis. However these are normally not organized unions and no theoretical architecture for pursuit of social and economic justice was embedded. Rather the workers choice to take over through concession of wages and equity swap was born with self-rescue or survival strategy from the bottom of workers.

In this sense the mainstream of organized unions are not that much prepared to take strong initiatives to expand ESOP at this stage, while numerous cases of small and medium sized companies and public sector companies will bring up a big agenda of employees take over and ESOP scheme which will lay the groundwork for supporting employees participation in management with various levels and contents.

In summery divided union movement over ESOP is foreseen at this juncture by generating hot debates on ESOP. This is not only case for union movement but also employers and academic circles.