hankyoreh

Samsung Electronics Vice Chairman Lee Jae-yong (Yonhap News)

The legal compliance oversight committee of the Samsung Group has released recommendations for improving the conglomerate's governance structure, attracting interest both within and outside of the business community.

A statement by Vice Chairman of Samsung Electronics Lee Jae-yong last year saying that there would be no fourth-generation succession by his family can be linked to the committee’s activities as well.

In its annual report for 2020 released on Sept. 30, the committee said, "We will review the results of external consulting services pushed for by the Samsung affiliate task force and take actions aimed at improving the governance structure." This indicates that the committee's core actions will actively seek to intervene in "improving Samsung's governance."

Though Lee made headlines in May 2020 by announcing there would be no fourth-generation succession for the group, interest in improving Samsung's governance structure had diminished for a time before resurfacing recently. Last year, the group hired Boston Consulting Group to devise a governance restructuring plan reflecting Samsung's acceptance of the committee's requests.

No draft of the restructuring plan has been released yet, making it difficult to predict the direction and handling of the reorganization. Yet the atmosphere of the committee as it works on restructuring can tell us a few things.

An expert in corporate governance who was invited by the committee to give a lecture on management succession said, "[Improvement of Samsung’s governance structure] is understood as an issue related to the group's corporate governance and equity as a whole, not that of an individual corporation."

This view stresses the reorganization of the shareholding structure led by Samsung C&T Corp., Samsung Life and Samsung Electronics, which is the basis of the vice chairman's grip on the group.

"The problem [of violating the principle of separation of financial and industrial capital] arising from Samsung Life's holding of shares in Samsung Electronics also warrants mentioning," the expert added.

Another core matter is the investment structure of the group's life insurance and electronics affiliates. Given that the Insurance Business Act seeks to prevent insurers from holding stakes in non-financial affiliates, improving the governance structure will be meaningful only after Samsung produces a roadmap for revamping the investment structure.

"The committee has no legal authority but can offer advice," the expert said. "The situation is such that the committee is the only place where this issue can be raised."

The committee seeks to build a leadership system for the group after Lee Jae-yong steps down. Kim Ji-hyung, chair of the committee, told The Hankyoreh in August, "How the 'top class' [leadership] is formed to lead the group based on the giving up of the fourth-generation succession is the eventual core [of the corporate governance issue].”

Given that the Samsung Group is the nation's No. 1 conglomerate and a world-class business force, its future is a matter of great consequence. Discussions and decisions on further tasks that will arise from this topic will inevitably occur long before the third-generation rule of the Lee family ends. Also falling into this category is how to change the role and authority of Vice Chairman Lee, who is standing trial for illegal inheritance of management rights. He is expected to lead for several decades given his relatively young age of 53, thus talk of who will lead Samsung after him is premature at this point.

Different perspectives also exist within the committee. One member said, "Corporate governance is about normalizing the functions of the boards of individual companies and how to organize the governance of a business group. But the improvement of Samsung's governance structure must consider applying both concepts."

"The tasks are to bar Samsung Group from doing something like an 'illegal merger' again and to ensure that decisions are made rationally and transparently," they added. "After the elimination of [the Future Strategy Office, which functioned as the group’s control tower], the business support task force has played the same role to an extent. How to revamp this is also a major issue in corporate governance restructuring."

Many voices in civic society and groups of experts say the start of a governance reshuffle will signal the establishment of a stable and board-centered management structure. Kim Jin-bang, a professor of economics at Inha University and an expert on South Korea’s conglomerates, said, "The key to improving corporate governance is the proper formation of the board of directors and giving the latter the power to appoint the CEO."

He also urged no preferential bias toward the controlling shareholder, adding, "If the board, which reflects the sentiment of general shareholders, elects the CEO, the issue of succession will naturally see a resolution. There is no other solution."

Kim Woo-chan, director of the Economic Reform Research Institute and a professor of business administration at Korea University, noted two challenges: Those committing illegal activities such as "manipulation of national affairs" must be suspended from management for a fixed period, and articles of association should be prepared to separate and elect all members of an audit committee.

"Crucial to improving Samsung's governance structure is keeping in check the family of the controlling shareholder," he added. "The inclusion of just these two tasks in the reorganization plan would earn a grade of 100 points."

The first of Kim Woo-chan's two recommendations refers to embezzlement secretly committed by the board and the latter involves the board's decision to approve the 2015 "illegal merger" of Samsung C&T Corp. and Cheil Industries. Considering that the embezzlement led to the formation of the oversight committee and the launch of the group's governance structure reform, a preemptive system of checks set up before legal and institutional reforms are conducted could be the answer.

By Kim Young-bae, senior staff writer

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