SEOUL – As Korean corporate announcements go, it was a bombshell of atomic proportions. In a televised press announcement on May 6, Lee Jae-yong, vice chairman and de facto leader of Samsung Electronics, the global mega-brand and crown jewel of the Korean economy, said that he would not pass the company’s leadership down to his children. The vow marks a massive break with the past and raises huge questions about Samsung’s future – and indeed for all the family-run firms that make up Korea Inc. Lee’s public apology – a common tactic for Korean business leaders who transgress – was suggested by a Samsung compliance committee following the company’s involvement in a scandal that overthrew a national president and saw Lee himself jailed. But
TO READ THE FULL STORY

Or subscribe to Asia Times for
$100 per year or $10 per month.

Special discount rates apply for students and academics.

Already a subscriber to Asia Times? Sign in.
TO READ THE FULL STORY

Or subscribe to Asia Times for
$100 per year or $10 per month.

Special discount rates apply for students and academics.

Already a subscriber to Asia Times? Sign in.

SEOUL – As Korean corporate announcements go, it was a bombshell of atomic proportions.

In a televised press announcement on May 6, Lee Jae-yong, vice chairman and de facto leader of Samsung Electronics, the global mega-brand and crown jewel of the Korean economy, said that he would not pass the company’s leadership down to his children.

The vow marks a massive break with the past and raises huge questions about Samsung’s future – and indeed for all the family-run firms that make up Korea Inc.

Lee’s public apology – a common tactic for Korean business leaders who transgress – was suggested by a Samsung compliance committee following the company’s involvement in a scandal that overthrew a national president and saw Lee himself jailed.

But Lee’s contrition may not assuage those who insist the powerful family must move away from management and enable a more transparent and shareholder-friendly structure at the national champion.

Indeed, not all are convinced that Lee will be the last of his generation to lead the corporate giant. Since its foundation in 1938, Samsung, or “three stars” in the Korean language, has been run by the Lees.

It is the ne plus ultra of the chaebol, the family-controlled conglomerates that ignited South Korea’s industrialization in the 1960s, emerged as export powerhouses by the 1980s, won global brand status in the 2000s and dominate the local economy and many global markets today.

But while hugely admired for value creation, not least as a cutting edge smartphone innovator, Samsung has also epitomizd opacity and power abuse.

Lee, the third-generation scion known as “Jay”, or “JY”, has no official claim in terms of ownership, board membership or even a job title. It is also murky just how he manages the vast archipelago of Samsung companies.

His legal woes, which like those of his father have tainted Samsung’s brand and led many to ask whether the company is managed for the benefit of its shareholders or the Lees, are far from over.

A higher court overturned his earlier release on a suspended sentence for bribery, and on June 4 prosecutors sought a warrant for his arrest. That means his trial is back on and that arguably the most powerful tycoon in Korea could yet return to jail.

Lee Jae-yong, arrives at Seoul Central District Court to hear a bribery scandal verdict on August 25, 2017 in Seoul, South Korea. Photo: AFP Forum via NurPhoto/Seung-il Ryu/NurPhoto

Koreans sometimes jokingly call their land “The Republic of Samsung.” Indeed, Samsung does it all, from chips (Samsung Electronics) to ships (Samsung Heavy Industries) and everything in between.

Yet, contrary to popular belief, “Samsung Group” does not exist – at least not officially.

Samsung Group ended when Lee’s father, Lee Kun-hee, resigned from the chairmanship of that corporate entity amid a 2008 tax evasion scandal. After being pardoned, he returned as chairman of group flagship, Samsung Electronics, in 2010.

The younger Lee assumed the throne in 2014, after his father suffered a debilitating stroke. The senior Lee is now in a coma in a Samsung hospital and is not expected to recover, but retains the title of “chairman.” Yet that title confers no official authority over the company.

“The chairman of Samsung is kind of honorary, there are no legal grounds for it,” said Park Sang-in, a professor of public administration at the elite Seoul National University. “Even though Lee Keun-hee is called ‘chairman,’…he has no authority or responsibility.” 

The only legalities surrounding the title, Park said, lie in anti-trust law. Moreover, Samsung group – yes, the small “g” is correct – has no board. Samsung Electronics does, but JY is not on it. Membership has legal ramifications, and he resigned his seat last October.

Confusingly, the “official” chairman of Samsung Electronics’ board, a title he shares with the comatose Lee Senior, is outside director and former finance minister Park Jae-wan, appointed in February.

But JY is clearly Samsung’s top dog. That was clear to see when he travelled to China on May 18-19 to discuss the possible establishment of new Samsung semiconductor plants with senior Chinese Communist Party officials

Moreover, in his June 6 announcement, Lee apologized for Samsung’s historic refusal to admit unions and laid out challenges facing the firm, as well as revealing that he would not pass down leadership to his offspring.

These, observers say, were all unvarnished leader statements. To be sure, his control is contentious, a fact he seemed to recognize with his apology – which included three contrite bows.

Lee Jae-yong’s declaration is more like a lie,” stormed the PSPD’s Ji-yoo Lee. “It’s a trick to avoid the current situation and get a lesser sentence from the court.”

Other critics note that Lee does not even hold a controlling stake in Samsung Electronics.

“We have a very strange situation that the leader is there as a matter of tradition, he owns a minuscule amount [of shares],” said an overseas academic and former Samsung employee who spoke on condition of anonymity. 

“In any reputable global business, a 3% shareholder is not going to be king, but here there is a cultural inclination to follow the king even if he does not have actual authority.”

South Korean protesters hold placards demanding punishment of Samsung heir Lee Jae-Yong outside the Seoul Central District Court, August 25, 2017. Photo: AFP/Jung Yeon-Je

To understand how JY maintains control, look no further than his current legal problem, which relates to the common chaebol practice of controlling group companies through affiliate shareholdings.

The chaebol were incubated under a system in which government, finance and business worked in a cozy trio. 

Samsung has faced storms of criticism not just for allegedly putting the Lee’s interests before those of shareholders, but also for corrupting the highest levels of government.  

In 2017, then-president Park Geun-hye was impeached for abuse of power and corruption related to her crony-advisor, Choi Soon-shil.

Choi’s daughter, a dressage athlete, had been gifted a horse and financial favors worth over $3 million from Samsung.

In return, a questionable $8 billion Samsung internal merger won a regulatory green light from Park’s government.

According to legal findings, Samsung connived in price fixing the values of Samsung firms C&T Corp and Cheil Industries Inc in 2015, granting Lee and Cheil an advantageous ratio.

While activist investors including Elliot Management cried foul, Lee won a sweet deal for C&T, a de facto holding company with strategic stakes in Samsung Electronics and related firms in the group.

Samsung’s bribery provided judges a convenient hook upon which to hang Park, dethroning a president who millions of Koreans believed had empowered Choi to exercise state power despite having no official position.

The result: A 33-year compound jail sentence for Park; 20 years for Choi; and five years for Lee.

Samsung, however, boasts a weapons-grade legal team. Lee served less than a year behind bars before walking free in February 2018, his sentence suspended via an appeal which argued that he had been pressured by the president to offer bribes.

Still, his conviction stuck, and in August 2019 a high court demanded a retrial. Lee has since attended multiple hearings, including two in May, when he was summoned by prosecutors for hours of interrogations.

The legal brouhaha has led to the creation of an internal compliance committee and the dissolution of Samsung’s “Corporate Strategy Office”, also known as the “Future Strategy Office”, in 2017 amid intense public criticism.  One of two powerful executives for whom prosecutors are seeking arrest warrants, alongside Lee, is is Choi Gee-sung, who formerly headed the office.

Samsung Electronics wars on display during the Korea Electronics Grand Fair at an exhibition hall in Seoul on October 27, 2016. Photo: AFP/Jung Yeon-Je

The office was the secretariat via which the Lees had controlled their vast empire by overseeing strategy and appointing group-wide CEOs. It was also a key factor in Samsung’s success, enabling cross-group efficiencies and long-term planning.  

“Centralized management has an advantage as it allows coordination; I don’t think it hampers innovation, but it does speed execution,” said Mark Newman, a senior analyst at Bernstein and a former executive in Samsung’s CSO. 

“It stops people questioning things, versus western companies where you tend to have disagreement. The chairman makes the decision – ‘We are going to do this!’ – then everyone does that because he is boss. There’s a lot of benefit.”

Its replacement is the “Business Support Organization”, a Samsung spokesperson told Asia Times. The body “… oversees coordination of investment, M&As and other strategic issues for the key businesses of Samsung Electronics and its tech affiliates,” she said.

Park, of Seoul National University, is unconvinced anything has changed. “It is the same organization on a smaller scale and a close aide to JY is head of it; it is still the control tower of Samsung,” he said.

“It has two main tasks: The first is to appoint the CEOs of affiliate companies, and the second task is the organization of the business group – the shareholding structure like M&As,” added the academic.

Civil society, meanwhile, demands board empowerment. “For Samsung to reform, the board must reform: For Korean chaebol, boards function like rubber stamps,” said the PSPD’s Lee. “It is imperative to normalize that.”

Perhaps, but for now Samsung as a “group” is still held together by the Lees, working through a semi-formal control tower while Samsung Electronics is controlled via a web of affiliate ownerships.

This suggests managerial nous counts for little. While many credit Samsung’s first two generations of Lees with business vision, it is difficult to discern any sharp corporate acumen from the third, they say.

JY’s first management role was “E-Samsung” which started in the dotcom boom and ended, despite powerful backing, in the dotcom bust.

He was subsequently named a “relationship manager” just before Apple’s Steve Jobs declared war on Samsung in a billion-dollar legal suit over intellectual property.

Critics say Lee Jae-Yong has yet to prove his managerial mettle at Samsung. Photo: AFP/Jung Yeon-Je

Moreover, Samsung Electronics prospered under professional management of the kind the company has raised internally and that has effectively run the company’s operations even as the Lee’s make strategic decisions – and while JY was jailed.

“Samsung Electronics’ stock price hit its highest [level] when Lee Jae-yong was in prison: Samsung works well without him,” said the PSPD’s Lee. “It doesn’t make sense if it cannot work without Lee Jae-yong.”

But others argue that Lee was in jail at a time when the semiconductor super-cycle was rising, hence Samsung’s good fortune at the time had much to do with the external environment.

Lee has made clear his long-term interests, and deserves a chance to prove his managerial mettle, some say.

“Jay is interested in biotech and medical devices, and has been making progress, but it is not long enough to say ‘This is Jay’s accomplishment,’” said Newman. “He is not revered yet, but he has not had the time or the chance.”

Internal company attitudes grant him every chance to succeed.

“In Samsung, the culture is, ‘Just look at JY Lee’ – his decisions, his attitudes toward the business and his mind,” said Lee Chang-min, a chaebol watcher at Hanyang University. “That is the big problem, they’re not looking at the profits of the firm, they are looking at JY Lee. That has to be changed.”

Samsung has faced decades of legal pressure from successive governments. Some aver this is undermining a national champ.

“I think the current government has it in for Samsung because of the previous presidential scandal,” said Newman. “It is a shame, it is an extremely dominant tech leader globally…Apple, Huawei and Micron are going to be the beneficiaries.”

Yet Samsung’s legal firepower has so far kept it ahead of regulators’ game.

“For the past 25 years, Samsung has been maneuvering to get Lee onto the throne and the Korean government has been behind them closing off loopholes,” said Geoffrey Cain, author of Samsung Rising. “It is fascinating to see how Samsung has stayed head of regulators.”

Even so, the corporate and share-holding structures that enabled 3rd generation family control will not extend to the 4th generation, and that was the real reason behind JY’s May 6 declaration, opines Cain.

“I think that the announcement that he was not going to pass the empire to his children was inevitable,” Cain said. “The government has sewn up the legal loopholes.”

Samsung has become a major global brand as it struts the world stage. Photo: Handout

Given that JY is only 50, this is a long-term game. Some believe control could still feasibly be passed to JY’s 20-something son, about whom little is known, or his daughter, believed to be in her late teens.

“I don’t believe the [May 6] announcement has any commitment value,” said Park. “He can say in 20 years, ‘I am sorry, I can’t keep my promise, things have changed.’ Nobody can force him to keep his word.”

But JY’s own succession is still incomplete, particularly if he returns to jail. His comatose father retains significant shares in Samsung Electronics and Samsung Life, another key company with strategic shareholdings across the group.

If he were to acquire his ailing father’s stock, JY would have to pay some of the world’s highest inheritance taxes which, Park estimates, could be up to 60%.

One way to bypass that would be for Samsung to hand some of the senior Lee’s assets to Samsung foundations, potentially allowing him to avoid taxes.

Park agrees that a typical succession ploy – to engineer control via an affiliate that is central to the group – is no longer legally feasible.

New cross shareholdings and new circular shareholdings were banned respectively in 1986 and 2014. But Park believes chaebol including Samsung are already strategizing ways to enable 4th generation leadership.

Ironically, incumbent President Moon Jae-in’s government, always eager to empower startups, could unwittingly provide the vehicles, he said.

The administration seeks to permit dual-class shares with different voting rights, and has also enabled non-financial capital to acquire online banks, a previously banned practice.

Both moves may provide chaebol with backdoors and loopholes, Park said. But the key task must first be for the third-generation Lee to prove his relevance.

“This is a huge challenge for Lee. The big question is how he can exert authority,” Cain said. “He is not on the board and the family is at risk of being obsolescent. He might end up like the royal family of the UK, who don’t actually rule.”