Samsung's testing times

• Published Jan 25, 2017 3:36 PM KST
• Updated Jan 25, 2017 3:36 PM KST

By John Burton

It is somewhat ironic that Lee Jae-yong, the de facto head of the Samsung group, has borne the brunt of populist public anger against the family-run conglomerates, or chaebol, unleashed by Choigate and its exposure of alleged corrupt ties between business and government.

Since taking over leadership of the group after his father’s heart attack in 2014, Lee has done more than any other chaebol boss in restructuring holdings to the benefit of shareholders. This has primarily consisted of selling off some struggling businesses while forging entry into new sectors, such as automotive electronics and biotechnology.

Several factors lie behind his actions. The first is Lee has eschewed the empire-building practices of his father. Lee Kun-hee, and has recognized that a more focused business structure – primarily in electronics and finance -- improves Samsung’s competitiveness in global markets.

That also represents an acknowledgement that the industrial landscape in which Samsung has been operating is changing. Increased Chinese competition in such areas as chemicals and shipbuilding means that Korea is losing its advantages in these industries.

Finally, a looming inheritance tax bill, estimated at $6 billion, is forcing Lee to dispose of assets to help raise funds to pay for it.

Samsung has also been responding to outside pressure, particularly from foreign funds such as Elliott Management, which has been pushing for a more transparent group structure. Samsung has suggested, for example, that it will adopt a holding company structure to replace the current complex cross-shareholding arrangements.

Such pressure is only likely to increase. Moon Jae-in, the opposition candidate who is seen as the presidential frontrunner, has vowed to reform the chaebol. He wants to make them more “democratic” by reducing the influence of the family owners, subjecting big business to increased anti-trust policing and giving minority shareholders greater rights.

Such an agenda is likely to be approved by the National Assembly, which is now controlled by the opposition parties, if Moon is elected president.

But it should be noted that few in Korea actually want to dismantle the chaebol since there is recognition that their large production and R&D prowess gives them a competitive advantage in global markets.

Rather, the focus is on introducing a more professional style of management that is not subject to the idiosyncratic whims of family owners, while curbing the dominance of the chaebol in the domestic market in order to give smaller businesses more room to grow.

A key test case of whether such reforms will succeed is what will happen at Samsung and to Lee, who still faces allegations of bribery despite a court dismissal of an arrest warrant for him last week.

The Special Prosecutor’s Office investing Choigate has accused Lee of paying millions of dollars in bribes to Choi Soon-sil, the influential confidante of impeached Preside Park Geun-hye, to persuade the National Pension Service, a key Samsung shareholder, to approve the merger of two key Samsung’s affiliates in 2015.

If Lee is convicted of bribery, it could throw into legal limbo that controversial merger between Cheil Industries, Samsung’s de facto holding company, and Samsung C&T, which was aimed at strengthening the Lee family’s control of the group.

Moreover, the current political atmosphere would make unlikely that Lee would enjoy the same lenient treatment given to previous chaebol bosses convicted of crimes. His father, for example, was prosecuted for tax evasion, breach of duty and bribery but then received presidential pardons.

But concerns that a conviction would paralyzed Samsung appear to be overblown. The Lee family has been more involved in strategic decisions rather than day-to-day operational ones and the senior executives at Samsung Electronics, for example, are seen as capable in steering the company on their own.

It also appears that prosecutors may have a hard time in convicting Lee since they need to produce evidence of a direct link between Samsung’s admitted contribution to foundations set up by Choi and the NPS decision to approve the Samsung merger. The court decision to turn down Lee’s arrest warrant seems to confirm that evidence is lacking.

Whatever the outcome of the case, Samsung is likely to make moves favorable to minority shareholders, such as increasing dividend payments and appointing independent board members. Investors are already anticipating these developments since the share price of Samsung Electronics recently surged to a record high despite recent woes, including the recall of the Galaxy Note 7.

If the Lees are willing to make enough concessions to the demands of both government and investors to improve corporate governance, they are likely to retain control of the group. Guided by the example of Samsung, it is reasonable to expect that other chaebol family owners will follow a similar playbook as well.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at johnburtonft@yahoo.com.