Lee Kun Hee steps down after being charged with tax evasion. Reaction among watchers is mixed; shares didn't budge
It was one of the most stunning scenes in the history of South Korean business. Standing in front of reporters packing a basement conference room at Samsung's Seoul headquarters on the morning of Apr. 22, Lee Kun Hee, for decades the most powerful businessman in the country, announced his resignation as chairman of Korea's largest conglomerate, the Samsung Group, and chairman and co-CEO of Samsung Electronics, the world's largest maker of memory chips, liquid-crystal-display panels and TVs, and the second-largest cell-phone maker only after Nokia (NOK). Bowing deeply, Lee apologized to the nation for corporate governance problems that have been the focus of investigators for more than three months. "I'll take responsibility for all the flaws of the past," said the disgraced chairman, who was charged last week (BusinessWeek.com, 4/17/08) by a special prosecutor with tax evasion and breach of fiduciary trust.
Nobody disputes the tremendous success Samsung achieved in the past two decades under Lee's leadership. The $160 billion Samsung Group is a source of Korea Inc.'s pride, accounting for 21% of the country's total exports. The electronics unit has transformed itself from a second-tier producer of TVs and appliances into a design powerhouse and a trend-setter of the planet's information technology industry.
Yet investors and longtime watchers of Korea's chaebol, or conglomerates, responded with a relative calm over the unexpected resignation. "I don't think there will be a fundamental change in Samsung," said Ahn Young Hoe, chief investment officer at Seoul-based fund manager KTB Asset Management, which owns some $500 million in Samsung Electronics. "Lee Kun Hee will remain as a major shareholder and his family will wield influence in one way or another."
Perhaps reflecting such sentiments, Samsung Electronics shares stayed little changed, closing 0.1% higher at $678 on Apr 22. In fact, the stock has risen 20.5% so far this year against a 5.8% fall in the benchmark Kospi index on the Seoul bourse, as investors have believed the probe into Samsung could improve the company's independent management from the group while not affecting its finances. Although Lee Kun Hee is the chairman, management of the electronics unit has been firmly in the hands of respected Vice-Chairman and Chief Executive Yun Jong Yong and his team of talented professional managers who have steered the company's rise.
Shareholder activists have criticized the 66-year-old Lee and his relatives for what the activists assert is the Lee family's near-absolute control of Samsung's 59 affiliates ranging from insurance and credit-card services to shipbuilding and chipmaking, even though the Lees only have a sliver of shares of the group. The family managed to retain the tight grip because reforms in the past decade have tackled accounting and governance in listed companies but have done little to limit the founding family's control via tangled cross-shareholdings of affiliates, some of them held privately.
Critics of Samsung acknowledge Lee's resignation and other reform steps could open the way to improving Samsung's governance system. Samsung will disband the powerful Strategic Planning Office, or SPO, which prosecutors have alleged arranged illegal business deals to benefit the Lee family at the expense of other shareholders. Chairman Lee's son, Lee Jae Yong, an heir apparent, will step down as Samsung Electronics' chief customer officer and will stay overseas for building up experiences, according to Samsung officials.
Special prosecutor Cho Joon Woong on Apr. 17 accused the SPO of arranging an illegal 1996 transaction to give the junior Lee, who turns 40 in June, and his sister a combined 64% stake in Samsung Everland, which was later made a de-facto holding company of Samsung Group. Lee Jae Yong and his three sisters paid $9.9 million to exercise warrants converting bonds they held into shares of Everland, an unlisted amusement park and real estate company, at just one-eleventh of the market value.
Then in a private placement, Everland allegedly was able to buy 18.4% of shares in unlisted Samsung Life Insurance that had once belonged to the founder, Lee Kun Hee's father, but had been transferred into accounts controlled by Samsung executives. Samsung Life, in turn, owns 7.3% of Samsung Electronics. Therefore by controlling Everland, Lee Jae Yong now controls the biggest block of shares in the electronics giant.
Cho also accused Lee Kun Hee of owning some $4.5 billion worth of stock in Samsung Life, Samsung Electronics and other companies that were hidden in nearly 1,200 brokerage accounts in the name of former and current executives. Such holdings, prosecutors say, were kept secret to avoid paying hefty taxes. Samsung officials say those shares, which were held that way to help Lee protect his management rights, will now be held under the name of Lee, who will pay taxes that were avoided.
Samsung execs say the reform measures announced Apr. 22 are "just the beginning" to make group companies more transparent and independent. "We will actively pursue changes if there are such needs in the future," says Vice Chairman Lee Hak Soo, head of the SPO, who also vowed to step down by the end of June.
Some activists argue the reforms fall short of guaranteeing the prevention of the family's return. "The problem is the son can always be elevated to the chairman and assume near-absolute control unless a system is built to guard against such practices," says Korean National Open University economist Kim Ki Won, who has studied the chaebol for two decades. "My hunch is that there's only a 30% chance of Samsung achieving a good governance system in view of the lack of reference to the son's illegally earned benefits."
Others, though, are more hopeful. "I respect today's move by Chairman Lee, who unlike other chaebol chiefs, personally took responsibility for wrongdoings," says Jang Ha Sung, dean of Business Administration College at Korea University and a longtime promoter of shareholder rights. "What's still needed is to build a sustainable system enforcing transparency and accountability."