Will Lee Jae-yong still try to manage Samsung Group from behind bars?

Posted on : 2017-08-26 19:58 KST Modified on : 2017-08-26 19:58 KST
Business ethics group says South Korean society “will not tolerate” disgraced heir’s return to management
A flag with the Samsung logo (Shin So-young
A flag with the Samsung logo (Shin So-young

The five-year prison sentence given to Samsung Electronics Vice Chairman Lee Jae-yong on Aug. 25 in the Samsung bribery case calls into question the transition of management rights over the Samsung Group to Lee, the grandson of the company founder. Efforts to reorganize the group’s ownership and governance structure to facilitate the handover of power to Lee had been moving forward quickly, but they have now come to a full stop.

The project to reorganize the Samsung ownership and governance structure to transfer control of the group to Lee Jae-yong after Samsung Electronics Chairman Lee Keun-hee, his father, was hospitalized in May 2014 can be generally divided into four stages, market analysts say. The first stage was the merger between Samsung C&T and Cheil Industries in 2015, which laid the groundwork for controlling the entire Samsung Group.

The second stage was to be the conversion to a “financial holding company” system centered on Samsung Life Insurance. In fact, Samsung asked the Financial Services Commission in Jan. 2016 to conduct a preliminary review of a plan for just such a conversion, but this plan was shelved because of objections from the commission. The third stage was to be splitting Samsung Electronics into a holding company and an operating company, which would lead to the fourth stage, in which the holding company that had been spun off from Samsung Electronics and the financial holding company centered on Samsung Life Insurance would be combined into a single holding company system. But Lee’s prison sentence has rendered the plan moot, at least for now.

“Lee needs to stop being so ambitious about [reorganizing] the ownership and management rights at Samsung. From now on, he’ll have to stop trying to get around the law,” said Solidarity for Economic Reform, which is directed by Kim Woo-chan, a professor at Korea University.

In order to really come into his inheritance at Samsung, Lee must not only acquire control of the group through reorganizing the ownership and governance structure but also earn the trust of both Samsung employees and South Korean society by demonstrating his business acumen as the CEO of Samsung. While Lee’s status as the official heir to Samsung is unlikely to be questioned for now, this case has seriously harmed his leadership and credibility.

“Lee Jae-yong’s strategy during his trial of denying his status as the heir apparent at Samsung ended up also being a denial of his role and the value of his presence during the three years his father has been hospitalized. This has further reinforced the reputation he has gotten for being sheltered, since he has never held a position where we had to take personal responsibility for business performance,” said a former executive for Samsung Electronics.

Lee seems likely to try to run the company from behind bars, while postponing his official succession to control of the group for at least a few years. There’s some speculation that Lee’s younger sister Lee Boo-jin, who is CEO of the Hotel Shilla, might take his spot, but that doesn’t seem very likely. “South Korean society won’t tolerate Lee Jae-yong being reinstated to management just because he’s the son of Lee Kun-hee. Samsung’s professional managers need to rid themselves of any lingering attachment to Lee Jae-yong and to create a new governance structure for a ‘Samsung without an owner,’ ” said Solidarity for Economic Reform’s Kim.

By Kwack Jung-soo, business correspondent

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