Case Study

  

Oil Refining

January 2003, Korea
Legatum Capital

In 2003, Sovereign became the largest shareholder in SK Corp by acquiring 14.9% of the company.

SK Corp, A World Scale Business

SK Corp is the holding company for the SK Group which comprises Korea's largest oil refinery, supplying 35% of the Korean petroleum market, as well as a controlling 20% interest in the country's largest telecommunications company, SK Telecom.

A Culture of Corruption

In early 2003, SK Corp Chief Executive, Chey Tae-won was convicted, along with nine other executives, for his part in a USD 1.2 billion fraud at SK Global. Sovereign acquired its holding with the intention of assisting SK Corp's management in transforming SK Corp into Asia's leading energy company.

Communicating Principles

However, Chey was released from prison after a few months and returned to run the same group he was convicted of defrauding. Sovereign worked unsuccessfully for almost three years to communicate the benefits of corporate governance. This included leading a campaign to bar convicted criminals from serving as directors as well as seeking to introduce an independent Board to SK Corp.

Refining Margins Rebound

After losing almost USD 2 billion in 2002 as a result of the SK Global fraud, SK Corp recorded a net profit of almost USD 1.2 billion in 2003 and USD 1.5 billion in 2004. This resulted in a dramatic increase in the price of SK Corp's stock.

However, the failure of SK Corp's Board to implement effective corporate governance change during this time, combined with the continued leadership of a Chief Executive who had been convicted of fraud against the company, left Sovereign with no assurance that past abuses would not be repeated again. Accordingly, Sovereign was left with no alternative but to divest its holding, which it did in July 2005.

Background

SK Group is the fourth largest conglomerate (Jaebeol) in South Korea. The SK Group is composed of 92 subsidiary and affiliate companies that share the SK brand and culture. In 2007, SK Group recorded combined revenues of USD 88 billion, with exports contributing USD 26 billion of that total. SK Group has more than 30,000 employees who work from 113 offices worldwide.

As with many other Jaebeols, SK Group's chairmanship was 'inherited' from father to son; from its founder, the late Chey John-hyun, to its present chairman Chey Tae-won (eldest son). SK Group began when the current founders acquired Sunkyong Textiles in 1953. In 1958, the company manufactured Korea's first polyester fiber on company grounds. It established Sunkyong Fibers Ltd. in July 1969, and started to produce original yarn. In 1973, SK then established Sunkyong Oil, beginning a vertical integration strategy to manage production, "From Petroleum to Fibers”.

In 1980, SK purchased privately-run Korea National Oil, making it Korea’s fifth largest conglomerate. In June 1994, SK entered Korea’s telecommunications business by becoming Korea Mobile Telecommunication Service's largest shareholder and in 1996, SK Telecom launched Korea’s first commercial CDMA cellular phone service in Incheon and Bucheon.

SK’s core businesses are energy and telecommunications. Eight SK companies are listed on the Korea Stock Exchange: SK Holdings, SK Energy, SK Telecom, SK Chemical, SKC&C, SK Networks, SK Gas, and SK Securities.