Samsung Electronics

Korea's great abdication

PUBLISHED : Saturday, 26 April, 2008, 12:00am
UPDATED : Tuesday, 11 October, 2016, 11:31am

In the closest event the 60-year-old republic has seen to a royal abdication, South Korea was agog on Tuesday morning as scandal-struck Samsung chairman Lee Kun-hee announced his resignation. The gossip now is all about what drove him to it, whether he will really give up power - and whether his son, heir apparent Lee Jae-yong, will return to become the third-generation chairman of Korea's mightiest chaebol, or family-run conglomerate.

In a nation where the power and influence of big business is massive, the announcement was unprecedented. Some idea of the influence wielded by Lee, 66, may be gleaned from the nicknames applied to him and the family business: Lee has been dubbed 'the most powerful man in Korea'; the country, in turn, is sometimes referred to as 'the Republic of Samsung'.

'This is a complete surprise,' a Samsung employee said of Lee's bombshell. 'We are all very shocked.'

Tom Coyner, author of Mastering Business in Korea, added: 'I can't think of another case like it. The era of the 'masters of the universe' is coming to an end.'

Lee Kun-hee took over the chairmanship of the group in 1987 after the death of his father, Lee Byung-chul, who had founded Samsung ('Three Stars') as a trading company in colonial Korea in 1938. The founder helmed Samsung through its early years of growth, entering retail, media, electronics, construction and shipbuilding.

But it was Lee Kun-hee who oversaw the group's ascent on the value chain. After realising that Samsung products were seen as cheap commodities in US retail outlets, he famously ordered senior managers to 'change everything except your wife and kids'.

However, he has made a number of managerial missteps. A noted car buff, he moved into vehicle manufacturing just before the Asian financial crisis, and installed his son at the head of E-Samsung. The vehicle venture collapsed and was sold to Renault. E-Samsung sank in the tech bust, to the tune of US$200 million.

The family has faced tragedy. In 2005, Lee Kun-hee's youngest daughter committed suicide in her Manhattan apartment. There was local speculation that her choice of boyfriend had not met with family approval.

Even so, Samsung prospered. Unlike Daewoo - which imploded under debts of US$80 billion in 1999 in what was then the world's largest bankruptcy - Samsung bounced back from the Asian financial crisis with a stronger-than-ever focus on its core competencies.

In its flagship businesses - semiconductors, mobile phones, shipbuilding and construction - Samsung is a world leader, and even opponents such as Jang Ha-seung, a shareholder-rights activist who has clashed with group management in court, acknowledge its competitive excellence.

Today the conglomerate boasts annual group revenues of about US$150 billion, accounting for about 20 per cent of South Korea's exports, and 15 per cent of its gross domestic product. The group's assets are estimated at US$280 billion.

As its subsidiaries, such as Samsung Electronics and Samsung Engineering and Construction, are led by professional chief executives, no immediate impact is expected on the group's performance after Lee's resignation.

At his Tuesday press conference, Lee said: 'I express my deepest apologies for causing great concern to the public as a result of the special probe.' He apologised to employees that he had not been able to make Samsung the globally respected company he had promised.

Given that Samsung is the world's largest business group after General Electric, and Samsung Electronics the world's largest electronics company by assets, many would say that Lee was as good as his word. But his public apology and stepping down demonstrate that while Koreans are hugely proud of outfits like Samsung, Hyundai and the SK Group on the global stage, there is also embarrassment and resentment at the endless abuse of power by conglomerate heads.

The Lee family has been under a special prosecution investigation, ordered by the National Assembly, after Kim Yong-chul, a former Samsung in-house lawyer, exposed corrupt dealings at the group last year. The investigative team went in looking for US$200 million in slush funds. After a series of unprecedented raids - including on the Lee family mansion, a compound that was previously sacrosanct - they uncovered US$4.6 billion in hidden assets.

Lee and Samsung's vice-chairman, Lee Hak-su, who runs the group's day-to-day business, were both indicted last week for tax evasion and breach of trust. Trials are pending on those charges - but not for bribery. Samsung opponents call the issue a whitewash.

Despite repeated violations of the law, ranging from false accounting, embezzlement, bribery, tax evasion and - in the case of Hanhwa chairman Kim Seung-youn, violent assault - South Korea has been reluctant to punish chaebol chiefs. The groups, wielding huge advertising budgets, have considerable influence over media.

Judges routinely state that jailing chaebol leaders would damage the economy, but Mr Kim, the Samsung whistleblower, alleges that senior members of the bench are among those bribed by the group.

However, in Lee's case - where the probe was ordered by Parliament, and the squealer came from inside - the evidence may have been too much to ignore.

'I think he has decided to accept responsibility - there is overwhelming evidence against him,' said Kim Joon-gi, a law professor at Seoul's Yonsei University. 'The other thing, I think, is that he wants to pave the way for his son's succession.'

Lee Jae-yong, who has been rehabilitated after his early business failure by being made chief customer officer of group flagship Samsung Electronics, was widely expected to succeed his father. However, he will now be moved to an overseas posting.

Lee's son has been the subject of investigation for receiving shares at below market prices in Samsung Everland, the group's de facto holding company. While Samsung said it also would dissolve its powerful strategic planning office, the body accused of managing the wealth transfer, the younger Lee remains the largest shareholder in Everland, granting him managerial power in the group.

Lee Kun-hee's wife, Hong Ra-hee, who has been accused of using illegal funds to acquire art, will resign as director of the Samsung-owned Leem Art Museum. All changes would take place by the end of June, said Yim Jun-seok, a public relations manager at Samsung.

Regardless of whether Lee Kun-hee is titled 'chairman' or not, it is not clear whether he will lose his influence over the empire his family forged; he has always been a low-profile leader.

Even if he resigns the de facto chairmanship, he may remain a de jure puppet master behind the scenes, as he has the ear of those who head Samsung subsidiaries: all rose to power in a culture of obedience to the Lee family.

'I think the means of management is not important for him,' said a national assemblyman and former chaebol insider. 'Only death can make him step down.'

But others saw a silver lining in terms of Korean future business practice. 'In the previous [scandals] of Hyundai Motor, SK Corp, and others, the chairmen were briefly jailed, then came back to management,' said Jang Ha-seung, a corporate governance crusader and dean of Korea University's business school. 'Chairman Lee looks like he will not go to jail, but he took responsibility: for other chaebol, it sets an example.'

Lee Jae-yong remains the safe bet to take over the leadership in the next few years.

'It looks like Lee Jae-yong's future is established; taking him out of management at the moment does not mean he will not come back,' said Dr Jang. 'I am more interested in what sort of systematic changes will follow up.'

But other Korea watchers wondered whether such a move would be possible in a climate where foreign institutional investors - and, more recently, South Korea's own National Pension Fund - have shown that they will vote against certain board members and founding-family members.

'This could open the way for a more vigorous exercise of shareholders' rights,' said Mike Breen, author of The Koreans. 'We should not assume that the Lees will hold on to the reins of power - Samsung may genuinely become a multinational.'