[Initial Moment]'Trust Capital' and 'Osstem Implant'

Trust is capital. Trust reduces transaction costs, but conversely, loss of trust entails enormous costs. Just like the boy who cried wolf repeatedly with lies and failed to protect his most valuable asset, the sheep, from the wolf.

Trustworthiness is evaluated based on 'ability' and 'willingness.' Whether in commerce or financial markets, both requirements of the counterparty must be assessed. Does the counterparty have the ability to fulfill the contract as agreed, and do they have the willingness to do so? If both are sufficient, transactions proceed smoothly. If either is lacking, another trust mechanism is needed to complete the transaction. If ability is insufficient, a guarantee from a capable third party is obtained; if willingness is lacking, a written pledge is made.

Even if the counterparty’s ability fluctuates somewhat, if their past record proves their good faith, transactions can occur easily. When transactions based on trust are repeated, the process flows smoothly. Repeated trust creates credit and capital, generating wealth for the participants.

The capital market is a representative system operated on trust capital. Companies with high trustworthiness in terms of ability and willingness can borrow money easily and attract investments, but the opposite is true otherwise. For this reason, companies seeking to utilize the capital market strive to present favorable financial figures (ability) and continuously communicate with the market to enhance the level and quality of trust relationships.

There is debate over which is more important between ability and willingness. However, generally, if ability is somewhat lacking, opportunities for recovery are given, but if qualitative trust relationships are severely and repeatedly damaged, recovery is often impossible. This has become the general consensus in the market. Those who lack ability but do not even make efforts to improve are more disliked.

From this perspective, Osstem Implant has repeatedly lost qualitative trust in the market. The company’s founder and largest shareholder, Chairman Choi Gyu-ok, and executives were investigated by prosecutors in 2014 on charges of embezzlement and breach of trust related to illegal rebates. As evaluations emerged that illegal rebates were the foundation of the company’s growth, the stock price plummeted. Chairman Choi was sentenced to three years in prison with a four-year suspended sentence by the Supreme Court in 2019.

Three years earlier, in 2017, Chairman Choi, executives, and affiliate representatives were also booked without detention on charges including violations of the Medical Device Act. They were accused of selling used medical devices as new since 2008 and improperly supporting foreign corporations with approximately 9.7 billion won of company funds.

Although Chairman Choi stepped down from the company’s CEO position and transitioned to a professional management system, a large-scale embezzlement case worth 190 billion won occurred again two years after the Supreme Court’s final ruling on Chairman Choi. The company strongly insists it was due to an individual employee’s misconduct, but the market seems no longer to trust Osstem Implant’s narrative. It is hard to believe that a team leader alone embezzled 190 billion won, and the situation inevitably invites connections to the previously repeated incidents. If truly no one knew, the company’s internal control deficiencies must be suspected.

The company’s response to the incident has further eroded market trust. Although the CEO issued an apology, there has been no apology from Chairman Choi, the actual owner. Even as executives try to explain the efforts and process of resolving the situation to the market and seek understanding, the IR team leader responsible for practical work sent a message declaring a halt to communication with the market.

The CEO stated that despite the embezzlement amount, there is no problem with company management and the damage to equity capital is not severe. This implies sufficient ability, but it seems considerable time will be needed to restore qualitative trust. This may be the third strike, making recovery difficult.

Lim Jeong-su, Deputy Head of Corporate Analysis Department

This content was produced with the assistance of AI translation services.