Samsung turning the page?

What exactly happened?
In a development that thrilled critics as much as it left loyal supporters disillusioned, the Seoul Central District Court sentenced Samsung scion Jay Y. Lee to a five year jail term, ending months of speculation and uncertainty with respect to the Korean chieftain’s future.
Mr. Lee was first arrested on bribery charges in February 2017 and has been in jail ever since. In a definitive ruling, the 49-year old was found guilty of bribery, hiding assets abroad, embezzlement and perjury. While he is certainly not the first chaebol leader to be found guilty of a crime, he may very well be the first to serve any time in jail. For context, every other business titan caught in similar positions to this date have been pardoned by previous governments.
What is different about this case?
The incumbent Korean President, Mr. Moon Jae-in, ran on a platform that in part vowed reform to South Korea’s chaebol, a group of family-run business conglomerates that have traditionally been very cozy with the Korean government. Notwithstanding the potential success of Mr Lee’s inevitable appeal, it appears unlikely that he will be granted a presidential pardon from this administration.
How did Samsung get into this tangle?
This trial was part of a bigger corruption scandal that eventually led to the impeachment and ouster of South Korea’s then president, Ms. Park Geun-hye. In sum, Mr. Lee was found guilty of paying bribes in the guise of donations in anticipation of favors from Ms. Park.
Why does Lee even need these favours?
The founding family holds less than 5 percent share of Samsung, despite almost iron-fisted control over the $395 billion company. This is maintained through a complicated and opaque web of cross-ownership stakes. While the legitimacy of this ownership network has rarely been outwardly questioned during the reign of Samsung chairman Mr. Lee Kun-hee (Jay Y. Lee’s father), there is understandably more suspicion surrounding the heir apparent. Since a heart attack forced the chairman from day-to-day operations in 2014, the company has been scheming over the heir’s consolidation of power within Samsung Electronics, the group’s notable “crown jewel that produces smartphones, computer chips and flat-screen TVs”.
To that end, a controversial merger of Samsung affiliates that would tighten Lee’s grip on the company was proposed in 2015. Prosecutors argued successfully that the Samsung heir bribed the then-President to pressure the National Pension Service, a key shareholder of two Samsung units, to vote for this merger.
What happens now?
For the company itself, it appears that little short-term damage is forthcoming. The ruling itself resulted in a 1% drop in stock price, but its shares have surged 34% since Lee was first arrested in February.
This may indicate market anticipation of reform, especially with respect to the often opaque business structure and decision-making process within the firm itself. Lee testified in court that he was not involved in key decision-making, while operational control of Samsung Electronics is devolved to three CEOs who each run major business segments.
These operational commanders are acknowledged to have acquitted themselves well running the company and will likely keep the ship steady through near-term turbulence, but Samsung’s long-term strategic outlook will depend on whether real leadership transition can occur seamlessly. This must first come from Lee Kun-hee himself, who has not even formally transferred power to his son. Even that proved a matter of some tension, as Korean corporate culture does not encourage major decision-making without the approval of the head honcho. Since his 2014 illness, Samsung has had to navigate the inconvenience of an incapitated chairman who cannot give final approval. Devolving final authority to these three CEOs may prove even trickier given the family element.
For South Korea, this may prove a watershed for how things work in business. For the longest time, Koreans have tolerated the chaebol’s long shadow over the economy (for reference, Samsung and its affiliate companies make up about 30% of South Korea’s stock index’s market value). The prevailing fear vis-à-vis sending a chaebol tycoon to jail was the possible disruption to the economy — and so presidential pardons received popular support.
If Lee’s fate proves a signal to the traditional conglomerates that these often corrupt ties will no longer be tolerated, it may unleash the full potential of the Korean economy — driven by ground-up enterprise and innovation no longer confined by the traditional hierarchies of “salaryman” conglomerate structures.
