Legal and Governance Risks in South Korean Conglomerates: A Looming Threat to Corporate Stability and Shareholder Value

The South Korean chaebol system, long a cornerstone of the nation's economic dominance, is increasingly under scrutiny for its opaque governance structures and legal vulnerabilities. While conglomerates like Samsung, Hyundai, and LG have driven decades of growth, their reliance on family-controlled cross-shareholdings and political entanglements has created systemic risks that threaten corporate stability and shareholder value. Recent reforms and high-profile legal cases underscore a critical juncture for these firms-and for investors navigating a market still grappling with the "Korea discount."

Structural Weaknesses and Legal Entanglements

South Korean chaebols have historically prioritized family control over transparency, using pyramidal ownership structures to consolidate power with minimal capital investment, according to a Bruin Political Review article. This model, while effective for rapid expansion, has bred governance failures. For instance, Samsung's 2016 merger of Samsung C&T and Cheil Industries, orchestrated by then-CEO Jay Y. Lee, sparked a decade-long legal battle over allegations of accounting fraud and stock price manipulation. Despite a 2025 acquittal, the prolonged uncertainty eroded investor confidence, contributing to a sharp decline in Samsung's return on equity (ROE), from 23.89% in 2005 to 7.80% in 2025, according to FinanceCharts' ROE data. Similarly, Hyundai and LG have faced regulatory probes tied to executive misconduct, further amplifying risks for minority shareholders, as reported by The Korea Times.

The political dimension of these risks cannot be ignored. Former President Yoon Suk Yeol's 2024 martial law declaration, widely seen as an attempt to pressure chaebols into aligning with government priorities, exposed the fragile balance between state power and corporate autonomy, as argued in a Capital Thinking analysis. Such interventions, while framed as efforts to curb corruption, often deepen mistrust and create regulatory unpredictability.

Governance Reforms: Progress and Pitfalls

In response to growing criticism, South Korea has launched the "Value-Up Program" (2024), a corporate governance initiative inspired by Japan's stricter regulatory framework. Key measures include mandatory cumulative voting for large firms, expanded audit committees, and incentives for disclosing financial metrics like ROE and PBR, as noted by Wellington. However, the program's voluntary nature and lack of "name and shame" mechanisms have limited its impact. For example, despite reforms, Samsung's PBR in 2025 stood at 0.93, indicating a market value below its book value, per FinanceCharts' metrics.

Legislative efforts, such as the 2025 bill expanding directors' fiduciary duties to shareholders, have also faced political headwinds. Acting President Choi Sang-mok's potential veto of the bill highlights the challenges of enacting structural changes in a system where chaebol-aligned factions retain significant influence, as reported by Yahoo Finance.

Shareholder Activism and Market Reactions

Activist shareholders have emerged as a counterbalance to chaebol dominance. In 2025, campaigns targeting firms like HPO and T-Flex led to the appointment of activist-backed board members, triggering immediate stock price increases, according to Business Korea. These cases suggest that investor pressure can drive transparency, but they also reveal tensions between short-term gains and long-term stability. For instance, demands for higher dividends or stock buybacks risk undermining reinvestment in innovation, a critical concern for tech-driven chaebols like Samsung.

Financial data underscores these dynamics. Samsung's stock price, while volatile, has shown a 18.08% decline in 2025 compared to the previous year, reflecting ongoing governance concerns, according to Samsung's stock-price history. Meanwhile, Hyundai's ROE has stagnated below 8% since 2022, a stark contrast to its 2010s peak of 15%, as noted in a Devdiscourse report.

Implications for Investors

For investors, the risks and opportunities in South Korean chaebols are intertwined. On one hand, governance reforms and shareholder activism signal a shift toward accountability. On the other, the slow pace of change and entrenched power structures mean legal and political risks remain elevated. The "Korea discount"-where chaebols trade at valuations 30-40% lower than global peers-reflects persistent doubts about capital efficiency and transparency, according to Glass Lewis.

A would illustrate the divergence between corporate performance and market sentiment. Similarly, a would highlight valuation gaps.

Conclusion

South Korea's chaebols stand at a crossroads. While governance reforms and shareholder activism offer pathways to improved stability and value creation, the legacy of family control and political entanglement poses enduring challenges. For investors, the key lies in balancing optimism about incremental progress with caution regarding systemic risks. As the government grapples with implementing the Value-Up Program and addressing the Korea discount, the coming years will test whether chaebols can evolve from symbols of economic might to models of sustainable governance.