The lesson from Hyundai’s grand folly is clear: if you make big mistakes you can expect people to start looking for more.
The family-owned south Korean auto-maker angered and bewildered its shareholders when it splashed out $10bn on a piece of land in the Gangnam area of Seoul. Poor recent results – profits fell 28% year-on-year in the third quarter – added insult to injury.
Hyundai’s share-price has fallen by about a third since the debacle, and the country’s entire stock-market lost almost 10% after the deal was announced as investors became wary of the family-dominated chaebols, the firms that have huge power in the country and which include Samsung and LG. (Hyundai’s share price has since rebounded a little.)
Hyundai’s CEO tried to placate shareholders by hinting at higher dividends to keep them sweet. “In order to carry out more shareholder-friendly policies, we will consider a wide range of measures, including increasing our dividend and possibly issuing interim dividends next year,” said Lee Won-hee. It might not be enough.
South Korea corporates are notorious for their low dividends, and the government is trying to force firms to hoard less and pay out more. This is in addition to policies designed to promote small and medium-sized enterprises, which traditionally have found it hard to compete with the chaebols. These policies are bearing fruit. Add weak exports, and you’d have thought that Hyundai wouldn’t be doing spectacularly daft things like splurging on things that add no value for shareholders.
The real problem is that Hyundai has proved that its family owners, the Chungs, don’t have the interests of shareholders at heart. That should come as no surprise to investors, but having it underlined in such a spectacular way is deeply concerning.
The weakness for glitzy vanity projects is symptomatic of a deeper malaise, namely that the family feels that it doesn’t have to listen to cooler heads in the business, or perhaps doesn’t even consult them. The Chungs are about to realise that if you don’t welcome scrutiny internally, you get it from a far less forgiving place: the market.