hankyoreh

A flag flutters in the wind outside of Samsung headquarters in Seoul’s Seocho neighborhood. (by Shin So-young

One month has passed since Samsung Group announced its five measures for reforming management at the end of February, following the indictment of Samsung Electronics Vice Chairman Lee Jae-yong. Among these five measures, Samsung has closed the Future Strategy Office (FSO) and removed Samsung Electronics President Park Sang-jin (chairman of the Korea Equestrian Foundation). But there are still no indications that it is allowing its subsidiaries to manage themselves or shutting down its government liaison departments. And while various subsidiaries are working on requiring external contributions and donations to be approved by the board of directors, with Samsung Electronics announcing its implementation of this reform measure, the measure is unlikely to be effective because the external directors are little better than yes men. The group’s midterm score for its implementation of the management reform plan is around 50 or 60 points, some experts are saying.

According to multiple sources at Samsung subsidiaries on Mar. 28, 16 publicly traded subsidiaries of the group, including Samsung Electronics, Samsung C&T and Samsung Life Insurance, all held general shareholder meetings on Mar. 24. These meetings only dealt with approving financial statements and appointing members of the board and audit committees, and none of them contained a measure about increasing autonomous management, sources said. The subsidiaries also said that these issues were not discussed nor related resolutions passed during the meetings of the board of directors held prior to the shareholder meetings.

This contrasts with how the SK Group responded to the arrest of Chairman Chey Tae-won amid allegations of fraudulent accounting at SK Networks in 2003. The SK Group announced a reform plan that included dissolving its control tower (called the corporate restructuring headquarters) and letting subsidiaries‘ boards of directors handle their own management, and a specific implementation plan was drawn up during the shareholders meeting in Mar. 2004.

“If Samsung wants to enable its subsidiaries to manage themselves, the key steps are strengthening the independence of the external directors by adopting a resolution at the board of directors or revising the charter at a general shareholders meeting, establishing a CEO recommendation committee to elect the company president and creating an internal system for regulating the compensation of registered directors. The fact that nothing of the sort occurred at these shareholders meetings means we’re unlikely to see any meaningful progress in connection with autonomous management at the subsidiaries for at least one year until the general shareholders meetings next year,” said Lee Su-jeong, a researcher at Solidarity for Economic Reform.

“The fact is that the subsidiaries weren’t adequately prepared for autonomous management because the Future Strategy Office was closed so quickly. You can assume that this will be implemented in the future,” said a former FSO executive.

In addition to the strategy team at the FSO, Samsung also had separate government liaison departments at its subsidiaries. After Samsung announced the management reform plan, it disbanded the FSO’s strategy team, but it has retained government liaison departments at its subsidiaries. “We need our government liaisons because we have to have a channel of communication with government regulators such as the Fair Trade Commission. Since the dissolution of the government liaison department at the FSO, we haven’t changed our government liaison department,” Samsung Electronics said.

“Since we get requests for submitting and reviewing material from the Financial Supervisory Commission and the Financial Supervisory Service, we have to have someone working with them,” Samsung Life Insurance said.

One interpretation is that Samsung’s pledge to dissolve its government liaison organization only applied to the FSO. But it’s more natural to assume that Samsung’s specific reference to government liaison work also included the government liaison departments at its subsidiaries, since the group was already planning to disband all seven teams at the FSO.

The fifth reform measure is requiring external contributions and donations exceeding a certain amount to be approved and executed by the board of directors or a subcommittee of the board. Samsung Electronics has already announced its plan to implement this measure, and other subsidiaries are reviewing it as well. In order for inappropriate requests from political interests (such as the contribution to Choi Sun-sil’s Mir and K-Sports Foundations) to be filtered out during the board of directors’ review, it’s essential that the external directors be independent. Many are concerned that this measure will not be very effective because a considerable number of the external directors at Samsung subsidiaries are regarded as being little better than a rubber stamp.

In fact, the Center for Good Corporate Governance voiced its opposition to half (17 of 34) of the candidates for external directors or audit board members at seven Samsung subsidiaries that held their general shareholders meetings on Mar. 24 (Samsung C&T, Samsung SDS, Samsung Electro-Mechanics, Samsung Fire & Marine Insurance, Samsung Securities, Samsung Life Insurance and Hotel Shilla). The center was opposed to these candidates for reasons including their approval of the contribution to the Mir and K-Sports Foundation and their lack of independence resulting from a conflict of interest.

“Two of Samsung’s five measures for reforming management have been completely implemented: the dissolution of the Future Strategy Office and the removal of President Park Sang-jin. Since requiring the approval of the board of directors for external contributions and donations is currently in the process of being implemented, you could say that their midterm grade is around 50 or 60 points,” said Lee, the researcher at Solidarity for Economic Reform.

Considering that the management reform plan Samsung announced after it was investigated by a Special Prosecutor in 2008 was not properly implemented, some people associated with Samsung expect that scenario to be repeated. At the time, Samsung only followed through on the resignation of Chairman Lee Kun-hee. Even after announcing the dissolution of the FSO, the office‘s work continued incognito. Though the group had announced the resignation of Samsung Vice Chairman Lee Hak-su, Lee remained in charge of the FSO. Nor did Samsung keep its promises to give the money in borrowed-name accounts (believed to amount to around one trillion won) back to society or to replace external directors at financial subsidiaries whose work was tied to Samsung.

During the general shareholders meetings this year, work-based ties with Samsung were the grounds for the Center for Good Corporate Governance’s opposition to the appointment of Park Dae-dong (an advisor at the Yulchon law firm) as external director at Samsung Fire & Marine Insurance, Kim Gyeong-su (a professor at Sungkyunkwan University) as external advisor for Samsung Securities, and Yun Yong-ro (an advisor at the Sejong law firm) and Heo Gyeong-uk (an advisor at the Bae, Kim and Lee law firm) as members of the audit board at Samsung Life Insurance.

By Kwack Jung-soo, business correspondent and Lee Wan, staff reporter

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