Samsung chief Lee Jae-yong is officially in charge. Photo: Jung Yeon-Je / AFP

SEOUL – It’s back to jail for Samsung heir Lee Jae-yong after a Seoul appellate court sentenced him to two and a half years in prison in the climax of the retrial of a seismic bribery case that shook South Korea.

After today’s Seoul High Court decision, “Jay” Lee , 52, was whisked off to prison, which he had previously left in February 2018.

Though Lee’s official title is vice chairman of Korea Inc’s flagship blue chip Samsung Electronics, he has been the group’s de facto leader since his father, chairman Lee Keun-hee, fell into a coma after a stroke in 2014 and passed away in October 2020.

Samsung stock closed down 3.41% on the KOSPI on Monday.

The “above-the-law” privileges routinely enjoyed by Korea Inc’s business elite have long been a simmering issue. In his annual press conference, earlier the same day, President Moon Jae-in referenced the “fair economy” but was vague on reforms of chaebol, or family-run conglomerates. Moon preferred instead to speak about improving labor rights.

However, the verdict is not expected to damage the electronics giant’s performance significantly, if at all. Experts note that the last time Lee was incarcerated, the company saw its stock and profits hit record highs.

Korean tycoons have customarily been able to maintain control of their companies from behind bars.

The mother of all scandals

The case Lee was re-convicted in was a component of arguably the biggest political scandal in South Korean history. It expanded outwards from a crony of then-president Park Geun-hye to bring down a vast swath of Korea’s most powerful.

In late 2016, Korea was shocked to discover that Choi Soon-sil, a nondescript, matronly figure who had no official title in Park’s administration, was advising the president as a close confidante, writing some of her speeches and managing two multi-million dollar foundations.

Koreans were alarmed both by the quasi-religious influence Choi – whose late father had been a charismatic preacher and counselor to Park in her youth – appeared to have over the president and by allegations that Choi was using her influence to profit massively from multiple players and sources.  

South Korea has endured countless corruption scandals, but the anger building up against Park soon flew off all previous scales.

A man walks past the Samsung logo at the company’s showroom in Seoul. Experts say the jailing of its chief should not affect business.
Photo: Jung Yeon-je/AFP

The public were arguably weary after nearly a decade of conservative rule, and younger Koreans were increasingly intolerant of high-level corruption. More concretely, Park was widely blamed for ineffective leadership during the 2014 Sewol ferry disaster that killed more than 300 people, mainly school children.

Media probes exposed an ever-wider range of issues: the privileged university status of Choi’s daughter; a Park-approved blacklist of hugely popular figures in the arts; and revelations that Park was leading a hermit-like existence in the presidential residence, rarely meeting even her close advisors.

Allegations of government-business collusion soon surfaced, with the Japanese-Korean Lotte Group being implicated.

Lee was sucked into the widening vortex when it was alleged that Samsung had paid bribes to ensure that the National Pension Service, a strategic stockholder, would greenlight a controversial 2015 merger of Samsung affiliates – Samsung C&T and Cheil Industries. Though shareholders cried foul, that deal – designed to expand Lee’s control over the vast conglomerate – went through with NPS backing.

As revelations snowballed, the emotional barometer rose. People-power protests erupted, flooding downtown Seoul. Choi was jailed for corruption. Then it was Park’s turn.

Ousted South Korean leader Park Geun-hye arrives at a court hearing in Seoul in April. Photo: AFP
Ousted South Korean leader Park Geun-hye arrives at a court hearing in Seoul. Photo: AFP

Deserted by her party, Korea’s only female president was impeached and removed from office in 2017. She was subsequently tried and found guilty of corruption and abuse of power. She is currently serving a 33-year compound prison term.

Courts also found that Lee had paid 8.9 billion won ($8 million) to support the equestrian ambitions of Choi’s daughter. He was jailed for five years in August 2017. He did not serve his full term.

In February 2018, an appeals court released him with a two-and-a-half-year suspended sentence. The court also downgraded the amount of bribes Lee had paid to 3.6 billion won.

But his legal tribulations did not end. In August 2019, the nation’s top court sent the case to retrial, resulting in Monday’s sentence.

Does it matter?

Samsung is Korea’s biggest blue chip, a pillar of the local stock exchange, and the biggest manufacturer of Korea’s leading export, semiconductors. All this makes it a cornerstone of the national economy.

Experts, however, were not alarmed by the commercial or economic implications of the verdict.

“I think the market is over-reacting,” Daniel Kim, head of research at the Seoul branch of  investment bank Macquarie, said of Samsung’s stock dive. “This is not the first time the head of a Korean conglomerate was in prison, and when Lee was in prison three years ago, Samsung posted record-high profits.”

Park Sang-in, an academic who watches the chaebol from his office at the elite Seoul National University, agrees.

“There will be no substantive changes at all, either positive of negative,” he told Asia Times. “We already have experience of him in jail and there was no real change at Samsung. So, it is status quo.”

Park does not expect Lee to do his full term. He expects time served to be taken into account and considers a presidential pardon – such as that awarded to other disgraced tycoons, including Lee’s late father – likely.

All told, Park does not anticipate Lee serving more than a year behind bars.

And questions hang over Lee’s managerial abilities. His first leadership role at the family business, E-samsung, imploded under $20 million debts.

His second, loosely-defined role as Samsung’s “relationship manager” was hardly a success after Apple head Steve Jobs famously took Samsung to court in a billion-dollar lawsuit, alleging that it had copied the iPhone.

Lee failed to impress the Korean public with his poise when he faced televised questioning in the National Assembly over the Park scandal.

However, he helped Samsung navigate through its 2016-17 Galaxy Note 7 exploding phone disaster, and is widely credited with masterminding Samsung’s expansion from its dominant position in the cyclical memory chip market to the higher value-added sector of system semiconductors.

FILE PHOTO - Samsung Group chief, Jay Y. Lee, leaves after attending a court hearing to review a detention warrant request against him at the Seoul Central District Court in Seoul, South Korea, January 18, 2017.   REUTERS/Kim Hong-Ji/File Photo
Samsung Group chief, Jay Y.Lee, leaves after attending a court hearing to review a detention warrant request against him at the Seoul Central District Court in Seoul, South Korea, January 18, 2017. Photo: Agencies

That ongoing strategy is being positively assessed: It grants Samsung multi-billion dollar earnings potential at both ends of the semiconductor market.

Chips are facing a global shortage due to data center upgrades amid Covid-19 lockdowns  and also to rising demand for silicon-heavy 5G smartphones. This factor, and resulting high chip prices, are expected to provide Samsung with a bonanza in 2021 after an already impressive 2020.

But regardless of Lee’s business skills (or lack thereof), the management of Samsung is unlikely to suffer given that family owners in Korean conglomerates are not hands-on, day-to-day managers. In chaebol, these duties are fulfilled by professional executives.

Executive suites with bars

“Typically for a controller of a Korean chaebol there are two major issues: one is long-term strategy, and the other is personnel – who will be what CEO of what affiliate,” Park said.

“Those are important decisions, but even in prison, the controller of a chaebol can make them effectively, as they are supported by personnel of the company while in jail, and everyday operations are done by professional managers.”

Park explained that while jailed chaebol heads may sleep in their cells they spend their days in prison “meeting rooms” interacting with lawyers and senior executives.

This is the arrangement that has allowed the jailed heads of conglomerates including SK, Hanwha and Samsung to keep their fingers on their corporates’ pulses while they serve sentences for white collar crimes.

Macquarie’s Kim notes that while corporate lawyers and conservative newspaper editors have customarily sought to warn against the jailing of chairmen to avoid damaging the national economy, these warnings lack substance.

“There have been these threats to Korean politicians and courts – ‘If our chairman goes to prison, it is a big negative’ – but statistically it is proven that the imprisonment of chairmen does not have an impact on the business,” he said.

Samsung is making a big play to dominate the emerging logic chip market. Image: AFP

According to the Joongang Ilbo, a newspaper that was formerly part of the Samsung empire, Lee had asked for leniency on the grounds that Samsung had emplaced a  compliance committee to ensure there was no repeat of the bribery scandal.

Moreover, the company has vowed to scrap its anti-union policy – a promise likely to appeal to the labor-friendly Moon administration – and Lee has said he will not pass control of Samsung to his children. 

Given that prosecutors had demanded a nine-year term for Lee, opinion may be divided over whether Lee’s appeals worked or not.

But one observer, Seoul National University’s Park, who argues for improved corporate governance in Korea Inc, was disappointed at the low sentence.

In a country where some allege the “the law of public opinion” influences judges, the verdict appeared engineered to satisfy multiple stakeholders: the public would be appeased, the judiciary would be shown to have acted and Samsung would not be endangered.

“I am disappointed,” the academic said. “I think the judge was being very opportunistic, to avoid any criticism.”