[Column] Samsung's choice

Posted on : 2007-06-16 15:30 KST Modified on : 2007-06-16 15:30 KST
Kim Jin-bang, Professor of Economics at Inha University

Samsung Electronics' largest shareholders are Samsung Life and Samsung Corporation. Samsung Corporation's largest shareholders are Samsung SDI and Samsung Life. Samsung SDI's major shareholder is Samsung Electronics. Therefore, [due to the nature of such circular shareholding,] if you control Samsung Life you control the whole Samsung group. Samsung Life's major shareholder is Everland, and Everland's major shareholder is Samsung Electronics' Lee Jae-yong, an executive at Samsung Electronics and the son of group chairman Lee Kun-hee.

Lee Jae-yong became Everland's biggest shareholder when he acquired 630,000 shares in 1996. Everland issued convertible bonds that Lee then acquired and switched over to shares. Lee's three daughters also acquired 630,000 shares between themselves [in this manner].

The decision on May 29 by a high court was yet another confirmation that the convertible bonds transaction was illegal. Lee Kun-hee's children paid 7,700 won (currently US$8.29) per Everland share. Two years later, however, when Samsung Card bought stock in Everland from the JoongAng Ilbo newspaper, it paid 100,000 won. When Everland issued new stock in 1999, and when Samsung Card and Samsung SDI purchased them as well, the price was 100,000 won a share. This and many other facts show you how absurd the 7,700 won price tag was. The difference meant a loss for Everland, and a loss for Everland meant a loss for Cheil Industries and Samsung Corporation, its largest shareholders at the time.

The court judgment makes note of strange stock transactions from even earlier. S1, securities firm, and Samsung Engineering were both listed after Lee Jae-yong acquired shares in both. Later he sold them for a margin of 53.9 billion won. The biggest illegality or roundabout shortcut is hidden in the process through which Everland became Samsung Life's major stockholder. When Everland acquired 3.45 million shares in Samsung Life in 1998 it paid 9,000 won a share, which is utterly preposterous. It was at this time that Lee Kun-hee also acquired an additional three million shares in Samsung Life, and it was also at this time that the names of current and former executives disappeared from Samsung Life's list of shareholders, which is reason enough to suspect the Lee family was having shares returned to it that had been in others' names in order to avoid having to pay inheritance tax.

Samsung is the archetype of Korean jaebeols, or chaebols. A tycoon depends on affiliates' investments to control a large number of companies with a small amount of equity. This control is then passed down hereditarily. A wide range of less-than-legal means are put to use in strengthening control and handing it down. Then there are things about Samsung that separate it from other jaebeols. It is a financial company that is at the center of the group's control structure. Other big conglomerates have financial companies but they do not control their main companies through financial ones.

All of this is making things difficult for Samsung. It is hard to hand down control without using illegal and expedient methods. It has to give up having control inherited if it wants to do something about its less-than-legal past practices. It will be hard to maintain control if circular shareholding becomes prohibited or there are stronger laws separating financial and industrial industry. Therefore it might deny even the clear illegalities while using even more clever and secretive means to pass on control, and to use all its influence to render the principle of separation of financial and industrial companies irrelevant.

Another way exists for Samsung; being reborn as a Samsung that exists for all its interested parties and puts behind it the old ways of hereditary tycoons maintaining absolute control. One way might be to separate out its financial companies, like Samsung Life, or to go to a system of holding companies and bring in more expert and responsible management. Absolute control leads to corruption and inheriting control leads to incompetence. The makeup of jaebeols has to be changed if corruption and incompetence are to be prevented, and Samsung needs to set the example. A jaebeol must not violate market rules or social principles to protect the tycoon and the loyal members of his court, and Samsung must refrain from this. One hopes to see Samsung make the wise decision here.

Please direct questions or comments to [englishhani@hani.co.kr]

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