By Yena Lee

Last week, the daughter of Korean Air’s chairman created an international scandal after forcibly delaying a flight because of her capricious behavior. A flight attendant had given her nuts in a bag, not on a plate, which reportedly infuriated the frequent flyer. After news of the incident quickly spread to the media, Heather Cho, who was also incidentally a Korean Air executive, resigned from all her posts. Monday, Korean daily The Hankyoreh ran an article with the headline « ‘Nut rage’ shows the shortcomings of third-generation chaebol leaders », highlighting the public’s discontent regarding chaebol families’ perceived incompetence and impunity.

Chaebols, or family conglomerates, have been at the core of Korean economy since independence and have contributed to bringing the war-torn country out of poverty and into the G20 in a few decades. Their controversial business-model has been praised for daring to invest in costly long-term investments despite low returns. As chaebols are family businesses, they are less restricted by the usual profit-oriented demands of shareholders.

But, as these conglomerates enter their third generation of executives from the same family, chaebols are increasingly under scrutiny for their aggressive behavior – encroaching upon small and medium-sized businesses – ,for their non-meritocratic practices and their complex cross-holding structures.

The future of the chaebol model will be put to the test when Jay Lee will take over his father’s role as chairman of Samsung, Korea’s most powerful conglomerate. His father, Lee Kun-hee, 72, has been hospitalized since May. The son of Samsung’s founder succeeded in developing the company beyond expectations, overtaking Japanese giant Sony in the process. At its height, the conglomerate contributed to 20% of the country’s GDP, resulting in Korea being dubbed as the Republic of Samsung. Under his leadership the group became a household name worldwide.

The third Lee, 46, is the current vice-chairman of Samsung Electronics. Untested and relatively unknown, the FT says that Koreans mostly remember him for a botched internet venture called e-Samsung. For a while, insiders speculated on the rise of his sister Lee Boo-jin, head of Shilla Hotels, another subsidiary. Known for her business acumen, she was Jay Lee’s only real competition. It has since been made clear that the son will have the first shot at chairmanship.

Korean and international observers wonder if Jay Lee is capable of taking over the group, which has recently suffered from fall in sales. Investors are keen to see if he can successfully transform the corporate structure of the group.

Hanbo Steel collapsed at the start of the Asian financial crisis. Daewoo is non-existent today after a spectacular crash in 1999 and a 10 year prison sentence handed to its founder.

If Samsung is still alive and kicking, it is, at least in part, due to the considerable reforms it put in place at the end of the crisis. Inspired by IMF measures, the chaebol economy moved away from the state’s heavy-handed presence, restructured its debt-equity ratios and promoted more transparency, in the name of liberalization. Surviving chaebols and newcomers adapted to this new economic climate in Korea.

Seventeen years have passed and critics are asking for changes again, demanding that leaders in the economy to modify their methods in the name of fairer competition. Korean media point out that chaebols do not give small businesses the chance to flourish in the same way they don’t allow deserving executives to become chairmen unless they are a member of the family.

So far, the passing of power from father-to-son has gone surprisingly smoothly but as third-generation offspring enter chairmanship there is a lingering doubt about their capacities to oversee difficult decisions.

Despite the pressure of his father’s legacy and a $5 billion inheritance tax bill, the “crown prince” of Samsung is poised to take over the empire. Needless to say, a bulk of the responsibility to spark a small revolution in Korea’s chaebol economy lies on his shoulders.

Featured image credit: Steve Boland, Flickr CC. License available here.