Samsung: last puzzle for corporate governance

By Jun Ji-hye

It's fair to say Samsung's cross-holding structure has been very effective, as it makes it all possible for Samsung Chairman Lee Kun-hee and the group's top family scion including Vice Chairman Lee Jae-yong to control the country's most-powerful industrial conglomerate with a small stake.

The web-centric ownership structure is, however, getting attention this time as Samsung is asked to correct it after investors are calling for the group to improve governance structure and increase transparency of its management. This is also the call from the government.

Cross-shareholding, also known as circular shareholding, is a common practice of major Korean conglomerates, which has taken flak for not being transparent.

Samsung would be the last candidate among the country's top five conglomerates to respond to the requests after Hyundai Motor Group announced its decision last week to streamline its complex ownership structure by making its auto parts unit, Hyundai Mobis, its control tower.

To implement this measure, Hyundai Motor Group Chairman Chung Mong-koo and Vice Chairman Chung Eui-sun need to pay about 1 trillion won ($945 million) in tax on transfer of properties, a move construed as the two expressing intention to manage the group transparently and shamelessly.

As well as Hyundai, LG, SK and Lotte Group have also presented plans to voluntarily improve their governance structures on request of the Fair Trade Commission (FTC) Chairman Kim Sang-jo.

Adding pressure to Samsung is the fact that Kim Ki-sik, a longtime shareholder activist and former liberal lawmaker, has begun his new job as the new head of the country's top financial regulator, the Financial Supervisory Service. He has been nicknamed the “chaebol sniper” for his criticism of Korea's conglomerates.

Given that Vice Chairman Lee, heir apparent of Samsung, has recently resumed his business activities after being released from jail in February, Samsung officials are expected to speed up discussions to improve its ownership structure.

The first task facing Samsung is that Samsung SDI, a battery maker, should sell 4.04 million shares of Samsung C&T, which accounts for 2.1 percent of the total, by Aug. 26 as ordered by the FTC.

In February, the FTC issued such an order, saying Samsung SDI's possession of Samsung C&T's shares was another form of cross-shareholding that was made in the process of merging Samsung C&T and Cheil Industries in 2015.

“We will review possible measures so a stock sale can be done by the deadline,” a Samsung SDI official said.

Considering market value, the shares are estimated to be about 520 billion won, with mentions made of possible scenarios such as Samsung C&T buying them as treasury stocks, or Lee buying them as his private property.

Then, a far more difficult task awaits Samsung as it faces calls to clean up the relationship between Samsung Life Insurance and Samsung Electronics, which is cited as the core of resolving Samsung's chain of cross-shareholding.

Earlier this year, FTC Chairman Kim said at the heart of the problems involving Samsung was the relationship between the two companies.

Kim's comments apparently referred to the fact that Samsung's owner family holds only a 5.37 percent stake in Samsung Electronics, including Chairman Lee Kun-hee's 3.88 percent stake. But when adding up shares possessed by affiliates including Samsung Life Insurance and Samsung C&T, the number rises to 20 percent. The largest shareholders for Samsung Life Insurance and Samsung C&T are the chairman and the vice chairman, respectively. Kim's remarks are aimed at such a link.

Samsung Life Insurance holds a 7.6 percent share of Samsung Electronics. From Samsung's point of view, a very cautious attitude is necessary because if it simply sold the stocks, the owner family could lose control of the group to foreign investors.

A possible scenario is that Samsung C&T, whose largest shareholder is Vice Chairman Lee, would purchase stocks in Samsung Electronics from Samsung Life Insurance. But there is another problem, as an astronomical amount of money, maybe tens of trillions of won, would be required for it.

Considering Samsung Electronics' total market value at 315 trillion won, the stocks possessed by Samsung Life Insurance are estimated to be worth about 24 trillion won.

A source from Samsung said it is a long-term matter as there are a number of complicated issues involving laws and money.

“In principle, we will resolve issues surrounding cross-shareholding,” the source said. “But nothing has been decided yet on details such as the methods and the timing.”

Beneficiaries

Meanwhile, Samsung SDI and Samsung Electro-Mechanics are expected to be beneficiaries when the group's cross-shareholding matters are resolved, according to Yoon Tae-ho, an analyst at Korea Investment and Securities.

Samsung SDI, Samsung Electro-Mechanics and Samsung Fire and Marine Insurance together hold 6.1 percent of Samsung C&T stocks, worth an estimated 1.6 trillion won.

“If the three affiliates sell their whole shares of Samsung C&T, Samsung SDI and Samsung Electro-Mechanics could realize a profit from the sale and see improvement in ratio of earnings to dividends,” he said.

He noted, however, this does not apply to Samsung Fire as its acquisition cost of the stocks was higher than the present stock price.

The analyst added Samsung is expected to have a forward-looking strategy to resolve the cross-shareholding controversy as the group seems to have a clear willingness to reform itself after the massive political scandal involving former President Park Geun-hye, which led to her impeachment and Vice Chairman Lee's arrest.