For shareholder value
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By Park Yoon-bae
Deputy managing editor
Samsung C&T’s victory against activist U.S. hedge fund Elliott Associates over its merger with Cheil Industries has significant ramifications not only for Samsung Group but also for the nation’s unique chaebol system.
The overwhelming approval of the merger at the shareholders’ meeting Friday will certainly help speed up ownership succession from Samsung Electronics Chairman Lee Kun-hee to his son Lee Jae-yong, vice chairman of one of the world’s top IT firms.
The victory will certainly give the junior Lee an opportunity to solidify his control of Samsung Group, the nation’s largest family-run chaebol, winding up a management transfer from his father who has been incapacitated due to illness since May last year.
Jae-yong is likely to consolidate his ownership and management rights by pushing for further mergers between other Samsung subsidiaries. His top priority appears to change the group’s governance structure to his advantage.
In this process he and his group may face a conflict of interest with investors as seen in the case of Elliott, which claimed that the Samsung C&T-Cheil Industries merger would only fatten the pocket of the owners and strengthen their power at the expense of minority shareholders.
Against this backdrop, Jae-yong and his conglomerate will have to make the utmost efforts to protect the rights and interests of their shareholders, especially small investors. Of course, they have already promised to do so in the face of Elliott’s battle against the merger.
The maximization of shareholder value can be achieved through corporate governance reform which will improve transparency and accountability in decision-making. Therefore it is necessary to put an end to the outdated governance and decision-making system that has long been unduly dominated by chaebol owners and their families.
First of all, the group has to get rid of the stereotyped negative image of chaebol, whose family members have long wielded “unlimited power” without taking responsibility for what they have done.
Samsung Group has already emerged as a global leader in IT, electronics, shipbuilding, construction and trade. It has also made much progress in living up to international business standards.
However, the Elliott episode indicated the group and its affiliates still have some weaknesses and vulnerabilities that should be addressed to avoid any potential attack from their rivals, shareholders and investors both at home and abroad.
What’s most important is to introduce a new corporate culture which will allow all parties to play fair and have respect for each other. It is also required to stop unfair inter-subsidiary deals that have led to chaebol’s dominance of local industries and markets.
Samsung Group must take the initiative in creating a level playing field to promote fair competition with its rivals and beef up cooperation with its subcontractors. Only after that can it solidify its position as a true global leader.
Other family-run conglomerates must take the Samsung merger case as an opportunity to strengthen protection against possible assaults by activist hedge funds or corporate raiders.
The best way of preventing such attacks is, needless to say, to reform chaebol families’ ownership structure; they have long controlled affiliates through cross-shareholding. This has enabled chaebol founders and their family members to reign over their corporate empires by possessing only a small portion of shares.
Now, they have to realize that such an ownership structure cannot work anymore in the face of vulture capitalists. They should leave no stone unturned to address this problem and also push for reform to separate ownership and management.
Chaebol owners may find it difficult to appeal to patriotism or antipathy toward foreign capital to protect themselves from hedge or vulture funds without pushing for badly needed reform. Imagine what would happen if anti-chaebol sentiment among the public is combined with shareholder activism.