[비즈한국] Companies sometimes make decisions that are difficult to explain based solely on financial logic. Knowing the underlying laws or systems can help you understand the finer details. "Useful Business Tips (Al-Ssul-Bi-Beop)" introduces clues to help you understand the flow of business.
In management theory, there is a concept called the "Principal-Agent Problem." It refers to problems that arise due to conflicts of interest between the principal (the owner) and the agent (the professional manager). There is no single "correct" answer regarding whether it is more efficient to entrust key management decisions to an owner or a professional manager. Both owner-management and professional management have their own pros and cons. The most efficient method depends on the company's size, specific circumstances, and social customs.
I have heard enough about the harms of "fleet-style management" (chaebol-style conglomerates) and family-run businesses in Korea. For a while, I believed that professional management was the superior method, but recently, seeing the frequent failure of professional management has been intriguing. Through experience with various cases, I have learned that for companies that are not large or are in the early stages of their founding, the passion and dedication of the owner are crucial. Even if parts of the management are entrusted to professional managers, the owner's oversight and control remain absolutely necessary.
In this article, we will examine cases where professional managers or employees (department heads, team leaders, etc.) exploit the indifference or complacency of owners or major shareholders to siphon off company assets for personal gain, and review court rulings related to such matters.
One common way professional managers and others easily exploit the company for personal gain is by hiring relatives or acquaintances as employees. They hire them even when they are not needed just to provide benefits like salaries; in some extreme cases, they create the formality of employment without those individuals actually performing any work at all.
In this regard, the Ulsan District Court ruling 2012Godan2234 recognized the defendant, a site manager, as guilty of professional malpractice and sentenced him to six months in prison. A summary of the case and the judgment on the violation of law are as follows:
· The defendant, a construction site manager, claimed labor costs as if his wife had worked at the site even though she had not. Additionally, he claimed labor costs for his brother, cousin, and other acquaintances as if they were day laborers, despite them having already received salaries, receiving a total of 11.57 million won from the construction company.
· Such actions by the defendant violated his duty as a site manager to faithfully recruit and manage personnel for the company, causing financial damage to the construction firm.
Another easy way for professional managers to gain personal profit is by signing fake service contracts to pay "service fees" to clients and then receiving kickbacks from them. A fake service contract refers to either fabricating a contract for services that are never provided, or inflating the costs of services that were actually provided.
This is also a common occurrence. In the Seoul High Court ruling 2022No2233, the defendant was sentenced to 5 years in prison for professional embezzlement and other criminal charges, having signed a fake consulting service contract and paying hundreds of millions of won to a client despite no services being rendered.
There are even more brazen ways to use company property. A widely used method is the "gift card racket." By using a corporate credit card to purchase department store gift cards and then selling them to ticket brokers for cash, managers can use the funds for personal purposes. When asked by other staff members about the whereabouts of the gift cards, they often deflect by claiming they were given as holiday gifts to business partners, adding that they cannot disclose exactly when or to whom for reasons of professional discretion. There are also cases of using corporate cards for personal entertainment. While there is a common practice of viewing corporate card usage as a benefit similar to welfare or salary, if the business relevance cannot be verified, it is considered embezzlement in principle.
The cases mentioned so far are instances where the individual blatantly abuses authority for personal gain or uses company assets, resulting in criminal offenses under the Penal Code. Even without reaching that level, it is entirely possible to pursue personal interests while managing a company. For example, funneling work to vendors in which they have a personal stake, making investments that do not benefit the company but serve to boost their own reputation, setting their own salaries excessively high, or neglecting company work to focus on their personal businesses.
However, because professional managers hold a certain degree of authority and discretion under the "Business Judgment Rule," it is often difficult to judge whether such pursuit of personal gain constitutes a criminal offense or a violation of commercial law, internal regulations, or fiduciary duty.
Nevertheless, the pursuit of personal interest often reveals itself when looking at the broader context. There are cases where professional managers invest in vendors to acquire stakes. Sometimes, they repeatedly provide economic benefits to those vendors while in their management roles, leak trade secrets, sales organizations, or distribution networks to those vendors, and eventually join those companies. Since corporate registries usually only show officer appointments and not stakeholdings in other companies, it is difficult to detect beforehand whether a professional manager has invested in another firm.
It happens quite often that major shareholders or owners realize too late—only after a professional manager quits and becomes the head of a vendor—that such activities were occurring, leaving them in a situation where they are stuck between laughter and tears. When this happens, owners suffer not only from economic losses but also from the shock of betrayal by someone they trusted.
Business is difficult. Among the many challenges, trusting and employing people is the hardest. I believe that when people collaborate, they create synergy by filling in each other's shortcomings. However, having experienced these events firsthand or handled related cases, I often advise those in business to properly manage and control their professional managers and operational staff from the start.