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Cambridge University professor

By Kwack Jung-soo, business correspondent

Samsung is arguing that any special law on its management system should include safeguards like disproportionate voting rights or golden shares.

The “Samsung special law” idea was proposed by Cambridge University professor Ha-joon Chang, who said third-generation members of the managing Lee family should be guaranteed management authority, with the government stepping in to acquire those rights if they perform poorly. Samsung suggested it agreed in principle with the idea, but also wanted safeguards in place.

Progressive NGOs and economists oppose the idea of guaranteeing the third generation any management authority with a special law. They’re predicting a debate over possibly reworking Samsung’s governing structure to bring it more in line with the interests of the national economy at a time when the company is under pressure from both a leadership vacuum - after chairman Lee Kun-hee was sidelined by heart disease in mid-May - and declining performance.

Samsung seemed to support Chang’s proposal, arguing on July 29 that management right safeguards would be needed to prevent foreign speculators from wielding too much influence, given that the 50% maximum inheritance rate would roughly halve the stake the third generation inherits from Lee. Even if they don’t pose any immediate threat to management authority, the company is expecting foreign investors to ratchet up pressure to increase dividends.

But Samsung was also against enacting a special law to protect management authority.

“There are a lot of companies out there,” said an executive director at Samsung on condition of anonymity. “Does it really make sense to make a special law that guarantees management rights only for Samsung?”

“It’s just a matter of instituting the kind of safeguards they have in places like the US and Europe - disproportionate voting rights, golden shares, poison pills, things like that,” the director added.

Samsung people were particularly sensitive to the idea of the government receiving inheritance taxes in the form of stocks to be transferred to the National Pension, with management authority to be taken over in the event of mismanagement by the third-generation Lees.

“Who gets to judge what is good or bad management, and according to what standard?” asked one source at Samsung, on condition of anonymity.

Solidarity for Economic Reform (SER), a civic group and longstanding proponent of chaebol reform, opposed the Samsung special law idea, which it called impracticable and undesirable.

“Practically, Samsung doesn’t support the special law,” said SER director Kim Sang-jo.

“Not only is it difficult to create standards for third-generation management or get support from both sides in the National Assembly, but even if it passes, you can’t really expect the government would do a great job of managing Samsung,” Kim added.

SER is also against recognizing circular equity investment or waiving the separation of finance and industry to guarantee management authority to the third-generation Lees. Instead, it’s calling for improvements to Samsung‘s current ownership and governance framework.

“Samsung has a skewed ownership and governance framework where money from Samsung Life contract holders is used to buy and hold Samsung Electronics stocks so the controlling family can hold on to its governing rights,” Kim said. “We can’t let that go on under the third generation.”

Kim argued for giving Samsung a roughly five-year grace period to improve its ownership structure and bring it more in line with market expectations. In the medium to long-term, he recommended adopting a holding company system.

Kim Jin-bang, an Inha University professor and expert in chaebol governance frameworks, opposed both the special law and the safeguards, disagreeing that foreign speculators would pose a threat to management authority if the third generation’s stake shrinks.

“Foreign funds don’t threaten management rights if the company is managed properly, even when the controlling shareholders only have a small share,” Kim said. “And if Samsung’s third generation runs things poorly, there’s no need for them to hold on to their management authority.”

“South Korea’s problem isn’t a threat to majority shareholders’ authority, it’s abuse of management authority,” Kim added.

“The challenge to majority shareholder rights is just what they need to run things properly, and if they do a poor job they need to take responsibility.”

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