SEOUL – Lee Kun-hee, the second-generation head of South Korean powerhouse and global superbrand Samsung, passed away on October 25 after spending six years in a coma. He was 78.
A business titan who took over Samsung from his father, he managed a colossus and became the richest man in South Korea. He was lauded for upgrading Samsung’s quality, navigating the conglomerate through the storms of the 1997-98 Asian financial crisis and focusing on electronics, a sector in which it today leads the world.
However, his legacy is double-edged. He took managerial opacity to an extreme, oversaw the creation of a militaristic corporate culture and had a fraught relationship with the law.
No immediate change is anticipated in the trajectory of flagship Samsung Electronics, given that only son Lee Jay-yong (also known as Jay Lee) has been in de facto control since his father’s hospitalization following a heart attack in 2014.
However, there could be changes in the broader Samsung group of companies, which range from shipbuilding to finance. It is not known if the senior Lee left a will, and it is far from clear how his family, namely his wife and three children, will divvy up his shares in such key affiliates as Samsung Electronics, Samsung C&T (a construction arm) and Samsung Life Insurance.
If the last Samsung inheritance epic is any example, things could get seismic. Following the death of Samsung founder Lee Byung-chul in 1987, three major companies would spin off from the mother group, all headed by different siblings.
Today, among Samsung’s fiendishly complex web of shareholdings, experts advise keeping eyes on its main financial arm, Samsung Life Insurance, rather than the better known Samsung Electronics.
Lee the legend
Samsung was one of the key locomotives driving South Korea’s turbo-charged national development in the 1960s. Then, under the authoritarian rule of the ex-general Park Chung-hee, favored family-run business groups – known as chaebol – were harnessed to national development.
Samsung (“Three Stars”) rose to the top.
The company was founded by Lee Byung-chul in 1938 as a fruit and vegetable vendor. By the time “BC” died in 1987, Samsung – mirroring South Korea’s rise as a nation – was a “chips-to-ships” conglomerate with sales across the world.
Following Bung-chul’s death, his conglomerate would split into four companies controlled by different Lee siblings. The rump Samsung Group; Shinsegae, which is today Korea’s largest retailer; CJ, which does food services and media/entertainment; and Hansol Paper, which does paper, logistics and chemicals.
Taking over the managerial reigns at Samsung Group, which oversaw, among others, electronics, shipbuilding and construction arms, Kun-hee took an extraordinarily aggressive approach to quality control.
He famously harangued executives at a conference in Frankfurt to “Change everything but your wife and children!” Executives would later be compelled to watch a bonfire of Samsung products that did not meet Lee’s exacting standards go up in flames. He also fostered an ambiance of “eternal crisis” in the company, urging nobody to rest on their laurels.
His main achievement, however, may have been keeping Samsung largely intact through the shock of the 1997-8 Asian financial crisis.
Korea’s conglomerates had, since the Park era of the 1960s, enjoyed cozy relationships with national banks. Thanks to those relationships they were massively over-leveraged, prompting a run on both banks and the won currency. South Korea was bought to its knees.
Lee prudently followed government and IMF dictates and dutifully sold off non-core assets – including his pet affiliate, Samsung’s auto arm, to Renault. Conversely, Daewoo founder Kim Woo-chung defied government dictates to deleverage – with the result that his giant group imploded in the world’s then-biggest bankruptcy. Meanwhile, Hyundai Group split into three key groups, each headed by a son of the founder.
Samsung emerged from the crisis still under Lee family control, with a new managerial focus on electronics as its core competency. That brand rose to become the world’s largest company in the sector, churning out a nose-to-tail line of both B2B and B2C products: chips, displays, smartphones, TVs and computers.
But Kun-hee’s legacy is mixed.
After a bad experience when a South Korean newspaper broke faith and reported off-the-record comments, he turned his back on media. Retreating behind the walls of his compound on the slopes of Seoul’s Mt. Namsan, he became a virtual recluse and earned – like second-generation North Korean leader Kim Jong-il – the title “Hermit King.” The opacity contributed to his mystique; when he occasionally appeared among Samsung staff, he was treated as virtual royalty.
This lofty approach was a major contrast that of his father and other first-generation chaebol heads – all charismatic, public figures. But with Samsung the ne plus alpha of chaebol, other second-generation chairmen followed his lead. As a result, Korean conglomerates became notorious for their non-transparency – a practice that continues to this day and contributes to the “Korean Discount” on share prices.
He would face jail after a 2008 financial scandal designed to pass controlling shareholdings down to his only son, Jay. Though he was pardoned by presidential decree, his reputation was tarnished. And his scheme was not successful – with the result that Jay would also fall afoul of the law due to a 2015 scheme to take control of the group.
One expert view Kun-hee’s legacy through two prisms.
“Lee Kun-hee is the visionary who built Samsung – and South Korea – from a third-rate manufacturer of microwaves and TVs to a global powerhouse in smartphones, semiconductors and displays,” said Geoff Cain, author of the recent business biography Samsung Rising.
But he was also “living evidence that ‘culture eats strategy for breakfast” the author continued.
“He globalized Samsung while maintaining a demanding ‘kill-or-be-killed, military-like corporate culture, suppressed unions and propped up a troubled system of family inheritance,” Cain said. “He was the clash of the modern and the traditional.”
Who gets what?
Kun-hee was the richest man in South Korea and his shareholdings in various Samsung companies are estimated to be worth up to 20 trillion won ($17.7 billion). As of end-June according to South Korean media, he held 4.18% of Samsung Electronics’ stock, 2.86% of Samsung C&T and 20.76% of Samsung Life Insurance.
The over-riding question now is how these shares will be divided between his family: Wife Hong Hee-ra and his three children
Of his children, Jay is vice chairman – an unofficial position – of Samsung Electronics. His sister Boo-jin – who many observers say may have the best business brain of the three junior Lees – leads Samsung’s hotel arm, Hotel Shilla Co. The other sister, Seo-hyun, runs the Samsung Welfare Foundation.
Queries hover both over the leadership of Jay at Electronics, and his shareholdings in it and related companies.
“Lee Kun-hee had a very distinct vision and philosophy that he confided through his speeches and through his famous book, ‘New Management” which was distributed to all executives,” said a former Samsung executive whose career bestrode both the Kun-hee and Jay eras at the conglomerate. “My sense with Jay was that there is no unified vision that could be identified – he was just there.”
Jay may well need to take over his deceased father’s shares in Electronics.
“Jay-yong has significant stakes in Samsung C&T, but almost no direct shares in Samsung Electronics,” said Park Sang-in, a chaebol watcher at Seoul National, Korea’s most prestigious university. “Inheriting further shares in Electronics is very critical for Jay-yong.”
Still, Park does not anticipate major changes at the group flagship.
Noting that the senior Lee has been hospitalized for six years, “there is a possibility that the Lee family reached an agreement on how they will divide the wealth, and who will control what companies,” Park said.
Another issue is inheritance tax on the assets. South Korea has some of the highest inheritance taxes on earth – a key factor in the financial shenanigans chaebol chairmen customarily engage in. South Korean newswire Yonhap estimates the tax burden on Lee Kun-hee’s assets to be around 10 trillion won (almost $8 billion).
However, loopholes exist – such as passing the shares on to a non-profit foundation, Park said. If the Lees choose to pay the taxes, they can spread the amount out over five or six years, or even borrow cash from banks, using the shares as collateral, he explained.
Some expect that taxes to be paid with no dodgy deals involved, given Jay’s ticklish legal position.
A questionable 2015 merger of two Samsung companies, Samsung C&T Corp and Cheil Industries Inc granted Jay control over key shareholdings, but escalated into a bribery scandal that contributed to the downfall of then-President Park Geun-hee.
It also landed Jay in jail in August 2017 for five years. He was released in February 2018 on appeal and given a two-and-a-half-year suspended sentence. However, investigations into the case were this year reopened, and Lee, in a possible sop to public anger, has vowed not to pass down family control to a fourth generation.
“It’s a complicated chessboard and the wrong move could set off more scandals and investigations into Jay Lee,” said author Cain. “Paying the inheritance tax and securing enough shares [in Samsung Electronics] will be key in the coming weeks and months.”
Samsung is no longer an official group (on paper, at least), but its companies remain linked by cross-shareholdings.
If there is a breakup – meaning, essentially, change in ownership structures with the three siblings taking different chunks of the Samsung family empire, as happened after Lee Byung-chul’s death – it may not necessarily be along sound business lines.
“If there is some transaction, it will be some kind of financial maneuvering,” said the former Samsung executive. “I can’t see any vision, and that would imply no strategy.”
Park advises investors to keep eyes on Samsung’s powerful financial arm, Life Insurance, which if it does break away from the group shareholding structure could add value.