Kakao to replace K-pop pioneer SM execs over poor governance

Kakao Corp. is set to replace executives of SM Entertainment Co., who ousted its founder Lee Soo-man when the South Korean mobile giant acquired the K-pop pioneer, over their poor corporate governance.

Kakao has reportedly decided to fire SM’s current executives including Chief Executive Officer Jang Cheol-hyuk, Chief A&R Officer (CAO) Lee Sung-soo, Chief Creative Officer Park Jun-young and Executive Director/Chief Operating Officer Tak Young-jun, establishing new leadership of the label behind the girl band aespa, according to industry sources on Sunday.

The decision, about 10 months after Kakao secured a 39.87% stake in SM for about $1 billion defeating the BTS label HYBE Co., comes as The Korea Economic Daily reported that SM executives made opaque investments in companies close to them without consulting their top shareholder.

Those top SM managers are the ones who expelled the SM founder, saying they would seek better corporate governance in partnership with local activist fund Align Partners Capital Management.

Kakao is concerned that potential issues caused by those SM executives’ dubious acquisitions and investments may hurt its consolidated earnings, industry sources said. That would result in criminal punishments on Kakao management for breach of trust and other charges if they do nothing after discovering the executives' misconduct. 

The mobile giant is already embroiled in multiple scandals, facing the toughest time in its history.

INSPECTIONS ON DEALS

Kakao launched a special inspection of SM’s financial statement and executives by Kim & Chang, South Korea’s top law firm. The online behemoth reportedly found various issues in its audit.

SM executives were suspected of paying excessive premiums when the entertainment agency acquired 10x Entertainment, owned by directors who contributed to ousting the SM founder, and The HUB, a music distributor operated by the CAO’s acquaintances.

SM spent 2.2 billion won on the takeover of 10x Entertainment, which has only one artist Kim Woo Jin, a former member of the boy band Stray Kids, and cash of 3.1 million won. SM executives did not consult with its parent Kakao nor conduct due diligence with external accounting firms for the deal.

Kakao and SM were known to have been in conflict over SM’s acquisition of Studio Clon in April last year. SM bought the metaverse content producer through its subsidiary Studio Kwangya Co. for 4 billion won. Jang Jae-Ho, SM’s former chief strategy officer (CSO), and CAO did not consult with Kakao on the deal.

Furthermore, SM invested in a startup in which one executive is a shareholder and director through the label’s venture capitalist SM Culture Partners.

“Kakao believes that problems are serious enough to sack the current executives, given continuous whistleblowing on various issues in addition to the reported investments in 10x and the startup,” said a source familiar with the matter.

Jang left SM in November last year, while CAO Lee sold his entire SM stake in the market.

HINDERED SHAREHOLDER ACTIVISM

The current SM executives’ investments are seen to have damaged shareholder activism in South Korea, which has just started growing.

The executives, along with Align, had vowed to improve SM’s governance, criticizing allegedly unfair business practices of hundreds of millions of dollars flowing between the label and the founder’s Like Production studio.

Those top managers and Align CEO Lee Chang-hwan appointed five new external directors to improve SM’s corporate governance. Lee also joined the company’s board of directors as a non-executive director.

“It was the first case in South Korea for the head of an activist fund to join a board of directors,” Lee said. “It will be remembered as a symbolic case for the development of the capital market in the future.”

Those directors failed to contain SM executives’ decision-making, however.

That caused artists and employees to leave the company. Some members of Super Junior – a boy band contributing to the global success of K-pop in the early stages – including Kyuhyun, Donghae and Eunhyuk, moved to other labels.

“There were reports that some employees received hundreds of thousands of dollars at SM’s overseas units without any work but this was covered up as they were close to CAO Lee,” an industry source said.

“Many experienced staff left the company as some who damaged the label were selected to key posts because they were close to C-level executives.”

Write to Jun-Ho Cha at chacha@hankyung.com
 
Jongwoo Cheon edited this article.