With Samsung enjoying record results despite its de facto leader’s imprisonment, the author of an upcoming book on the tech giant raised questions about whether Samsung and similar Korean conglomerates can continue under “royal family” management, or are headed for a post-imperial era.
“Historically, the ruling family was an asset in unifying the company, but recently has become a liability,” said journalist Geoff Cain in an interview with Asia Times, following a closed-door briefing to Seoul businessmen and diplomats on Samsung’s inner workings. “There have long been expectations that Korean conglomerates will reform and give up family rule, and Korean democracy has advanced, but the corporate culture now is essentially the same as it was in the mid-1950s.”
Cain’s book, “The Republic of Samsung,” the fruit of four years of research in Seoul, Tokyo, New York and Silicon Valley, is currently undergoing legal review pending publication with New York-based Crown next year. The Asia-trotting journalist first became fascinated by the group when researching a magazine piece on Samsung Electronics.
“I had a lot of access early on during the Samsung-Apple dispute, but found access limited – I could not go deep and I came away with a feeling that I did not know the company well,” he said. “Every other tech company had one person who was very identifiable, but Samsung’s leader was shrouded in mystery.”
Samsung is the mightiest of the “chaebol” – the sprawling, family-run business empires that dominate Korea’s commercial landscape and which are, in many cases, high-value global brands. The chaebol were Korea’s growth engines as it surged from economic zero to manufacturing hero from the 1960s-1980s, and remain employers of choice. Moreover, chaebol largesse supports sports teams and the arts through sponsorships, and keeps media companies afloat through advertising. Chaebol even provide marketing muscle for national mega-projects like the 1988 Seoul Summer Olympics and the 2018 Pyeongchang Winter Olympics.
Yet their relationship with the public is stormy. They are accused of abusing suppliers and oppressing SMEs; of being key figures in the corruption scandals that endlessly roil Korea, Inc.; and of prioritizing the interests of their secretive “royal families” over shareholders. Moreover, wealth and power appears to trump political reforms and judicial sanctions: Convicted chairmen routinely receive suspended jail sentences or presidential pardons.
“The way the chaebols venerate their leaders is fascinating,” said Cain, who compares chairmen to Korean kings and even North Korean leaders. “When they started out they were not too competent, they were playboys and loaded up on debt, but if you look at official histories of the groups, they are venerated as wise prophets.”
The interplay between entitled “royal families” and their publicly-listed companies reflects Korean corporate culture, Cain said. “How does a Korean company survive and thrive in a business world in which Western business culture dominates?” he mused. “There is a tension between the old dynastic system and the desire to be a national tech company and innovator.”
Samsung is currently headless. Chairman Lee Kun-hee, has been in coma in a Samsung-run hospital following a 2014 heart attack; he is not expected to recover. His only son, vice-chairman, board member and and de-facto third-generation leader, Lee Jae-yong, was detained in February, and started a five-year jail sentence in August for his role in the corruption scandal that overthrew President Park Geun-hye.
This leaves Samsung in the hands of professional managers. “In the traditional chaebol culture, the founding family does the vision, and the executives execute the vision,” Cain said. “CEOs in Korea are more like COOs, with the chairman more like the CEO in the Western model.” Despite – or perhaps because of – this unusual situation, group flagship Samsung Electronics saw record profits in Q3; its shares are currently trading at record highs.
So, might the company fare better under professional executives than Lee family leaders?
Cain believes so. “Old generation executives say, ‘We need the family for long-term vision, we need a Lee to set the next 20 years of investment,’” he said. “My response is that this made sense in 1992, when Samsung was a follower, but now Samsung is at the top, new growth engines are not so clear. When the head of the ruling family is in jail, you have to ask, ‘What is he supplying?’”
Still, the author concedes that the Lees contributed significantly to Samsung’s success. Though both suffered legal entanglements, Lee Byung-chul founded and expanded the company, while son and second-generation head Lee Kun-hee unified Samsung’s vision, navigated it though the 1997-98 Asian financial crisis and transformed it into a global brand that overtook Sony and challenges Apple.
The jailed Lee Jae-yong, 49, is a former equestrian and a fluent English speaker. He reportedly favors modern managerial approaches and attended Harvard – albeit, without completing his advanced degree. But business success has been elusive. His first venture, E-Samsung, collapsed under $20 million debts. He was vaguely talked up as a masterly “relationship manager” until Apple’s Steve Jobs unleashed a billion-dollar lawsuit against Samsung. Lee then oversaw Samsung’s Galaxy Note 7 disaster, before being engulfed in the presidential bribery scandal.
His performances in televised National Assembly hearings related to that scandal were damning. “He was not a good speaker, not a good leader, he buckled under pressure,” Cain said. “You got a sense from his testimony that he does not have the charisma of his father.”
Even so, Cain has some sympathy. Due to Korea’s inheritance taxes – at 50%, among the world’s highest – taking over his incapacitated father’s shares will lose Lee a whopping $6 billion. “This is not the chaebol being evil,” Cain said. “The way the system is set up, there is an incentive to cheat, it is very complex.”
Governance remains chaebols’ vulnerability. “The way the Korean system is set up, they are not supposed to exist,” Cain said. “For a long time, laws banned holding companies and raised inheritance tax, so chaebol adopted cross-shareholding structures, and this led to backdoor deals and corruption.”
Many royal families control chaebol not through large shareholdings, but through fiendishly complex webs of cross-shareholdings that rely on the goodwill of allied shareholders, white knights and institutional investors. Under Seoul’s current administration, the National Pension Fund plans to adopt a stewardship code and Cain does not believe foreign shareholders support Lee.
“Cross shareholding structures are untenable,” Cain said. “I think the possibility of a breakup of Samsung is real.” A split in Samsung is less likely to be along family lines – Lee’s two sisters also head affiliates – more likely into non-financial and financial affiliates; giant insurer Samsung Life is a key shareholder in Samsung Electronics.
All this presents major challenges for Lee. His appeal is expected next spring, though given his links to the despised ex-president, justice may not be the foremost priority. “I think it’s about public opinion: Once people have forgotten, and once his father officially dies, I think he will get a pardon,” Cain said. “He will return.”
If so, whether he can remain a chaebol royal or will become a constitutional monarch remains to be seen – but the chaebol have a long record of weathering crises.