By Henry M. Seggerman
Samsung Electronics currently trades at a price-to-earnings (PE) ratio of 14. Sony, by contrast, trades at a PE ratio of 38. If investors valued Samsung the way they value Sony, its share price would rise to 1.9 million won. Given changes last week, Samsung now has the potential to rise to at least 1 million won.
Sony's corporate governance is not perfect. However, it is actually controlled by the owners of the company, who are the shareholders ― all of them. Sony's shareholders actually elect the company's board of directors, whose job is to appoint the company's management. Because Sony's shareholders actually control the company, they elected Howard Stringer chairman of the board. Stringer is not owned and operated by a controlling family; he is a real chairman of the board.
Samsung Electronics has never been controlled by its actual owners, the shareholders. A founding family has controlled Samsung. Last week, The Wall Street Journal stated that Lee Kun-hee ``will retain significant influence as [Samsung's] largest individual shareholder.'' This is not correct. Lee only owns 2.6 percent of Samsung Electronics voting stock. Lee's influence at no time derived from his individual shareholdings.
Lee's influence instead derived in great part from his control of Samsung's largest shareholder, Samsung Life, which is controlled by Samsung Everland's 35 percent stake in it. Both Samsung Life and Samsung Everland are unlisted companies. The Korean government can only complete Samsung's reform process if it follows through in two extremely important tasks relating to Samsung Life and Samsung Everland.
First, it must finally permit Samsung Life to be listed, which will dilute Everland's control of it. Leaden-eyed Korean bureaucrats have effectively blocked the listing of Samsung Life with nearly a decade of red tape and bickering. Enough of this already.
Second, the Korean government must nullify the patently fraudulent transaction, which gave Lee Jae-yong a controlling stake in Samsung Everland. The clearly-established motive for each every crime committed in the Samsung scandal was to reinforce and protect this fraudulent transaction. Indictments, convictions, fines, and sentences will have no value whatsoever unless the fraudulent transaction itself is nullified. Failure to follow through on this important step would be like jailing a bank robber, but letting his family keep spending the loot from the robbery.
Lee's resignation as chairman of the Samsung Group is meaningless, because Samsung Group is not a legal entity of any sort, nor is its Strategic Planning Office. No shareholding relationship has ever existed between ``Samsung Group'' and Samsung Electronics. The expenses paid by Samsung affiliates for Samsung Group expenses, such as Strategic Planning Office (SPO) salaries, were never in fact legitimate. The only legitimate transactions going forward should be Samsung Life, Lee Kun-hee, and all the other shareholders getting their regular dividends.
The resignation of Lee Kun-hee and his deputies from the Boards of Samsung Electronics and 14 other listed affiliates is more significant than the Samsung Group resignation. However, these board seats never constituted a majority, and many other board members have been beholden to the Lee family, even some who are officially designated as ``independent.''
Unless Emergency General Meetings (EGMs) are called, it remains to be seen if the new board slates proposed by the residual boards early next year for the Annual General Meetings (AGMs) will truly represent all the shareholders, rather than the Lee family. These proposed slates early next year will be the best litmus test for any true reform at Samsung.
The irony in all this is that Samsung's huge discount to Sony is due to weak-willed corporate governance caused by the perpetuation of founding family control, and not due to any actual recent poor management decisions. Since the disposal of Samsung Motors, Samsung Electronics has in fact managed its business wisely. It has re-invested its earnings for the most part in ways that led to further earnings, resulting in share price appreciation.
One exception to this has been Samsung's dismal dividend policy. If the new board represents the shareholders rather than the founding family, it will boost Samsung's dividend yield, which is currently 50 percent below the market average. Samsung's new board should look to the example set by blue-chip companies SK Telecom, Kookmin Bank, and KT Corp, whose dividend yields exceed 4 percent.
Lee's marionette-like influence also derived in part from the Samsung Investor Relations (IR) Department's hugely effective annual pre-AGM road trip to heavy hitters Capital Research, Franklin Templeton, Fidelity, and other large foreign institutional investors. No Korean IR department communicates with the skill and finesse of Samsung. They did this in part because they had to. Lee ``pere et fils'' plus Samsung Life only add up to 10 percent of Samsung Electronics' voting stock. Had these numerous large foreign holders ever ganged up on the founding family, it could have been game over for the Lees.
These three companies, plus POSCO, KEPCO, Shinhan Bank, Woori Bank, and of course Sony, are all listed on the New York Stock Exchange. The real key to Samsung reaching 1 million won is being listed on the New York Stock Exchange (NYSE). How is it that Korea's finest company, a world-class company like Samsung, cannot be listed on the NYSE? It's because the U.S. GAAP (Generally Accepted Accounting Principles) requirement for an NYSE listing would mean deep and probing disclosures of the Samsung Group's spider's web of circular shareholdings and related-party transactions. It is believed that Lee found these required disclosures far too uncomfortable, and vetoed any NYSE listing. Perhaps Lee's resignation will pave the way for this.
We must not forget that both Chung Mong-koo and Chey Tae-won ran their empires from prison, and that Chung Mong-koo perpetrated precisely the same crimes as Lee Kun-hee: creating slush funds to bribe government officials to facilitate the illegal transfer of control-stake shares to a son. For this reason, it is entirely possible that Lee's resignation is utterly meaningless; he has run Samsung somewhat by remote control all along, and we cannot rule out that he may continue to do so, with an added increment of remoteness.
Chaebol lords have always looked on boards and AGMs as an annoyance, and replaced any actual governance with rubber-stamp lackeyism. They have packed in thousands of fake ``independent'' directors and AGMs vote ``yes'' on everything. Korea was deeply shocked when the National Pension Corporation this year voted its measly 5 percent against electing a convicted felon chairman of the board at Hyundai Motors. Even the once-courageous Professor Jang Ha-sung has gone over to the dark side for Lazard, his activism-for-a-better-Korea having degenerated into activism-for-short-term-greenmail-speculation.
Nonetheless, the resignations of Lee and his deputies appear a bit more dramatic than the ``social contributions'' and expressions of contrition from Chung and Chey. No one can deny that Lee really is the CEO of Korea Inc., and as such, he may have chosen to ascend, Bill Gates-style, to a godlike level of philanthropy and legendary status, leaving mere mortals like Steve Ballmer and Yun Jong-yong to manage earthly affairs.
Keep in mind, if Samsung rises to 1 million won, if Samsung is listed on the NYSE, if Samsung Life is listed, if Samsung pays a normal dividend, or if Samsung adopts a holding company structure, Lee's billions are certain to multiply. That, indeed, may be the calculation he has already made.
Henry M. Seggerman is president of International Investment Advisers. He can be reached at henry.seggerman@iia-funds.com.