Samsung Nominates Jay Y. Lee to Board as Note 7 Crisis Deepens

  • 48-year-old to take more active role on strategic decisions
  • Samsung Electronics market value slumps $22 billion in 2 days

Samsung Electronics Co. nominated Lee Jae Yong to its board in a move that allows the son of its ailing chairman to take a more active role just as Korea’s largest company faces its deepest crisis in years.

Samsung has lost $22 billion in market value over two days as the fallout widens over faulty batteries in its Note 7 smartphone. Regulators, airlines and the company itself have warned customers to stop using the devices immediately, while Samsung races to procure replacements. Lee, now co-vice chairman, would be formally elevated to the nine-person board after a shareholder vote in October.

The stock drop suggests the damage to Samsung’s brand could go well beyond the early analyst estimates of $1 billion for a single product’s recall. The company has spent heavily on marketing its name in past years, and had hoped to get a head start on Apple Inc. by unveiling the device weeks before the new iPhone emerged. That advantage has now disappeared.

“This is a signal that Samsung needs strong leadership in the midst of risk and uncertainty,” said Park Ju Gun, president of corporate watchdog CEOSCORE in Seoul. “By showing the markets that he’s assuming responsibility, Lee Jae Yong may be seeking to take a step forward in the succession.”

The 48-year-old known as Jay Y. has been taking a larger role since his father Lee Kun Hee was hospitalized in 2014 after a heart attack. While he has taken on more responsibilities, South Korean cultural norms dictate that he doesn’t succeed his father while the 74-year-old is alive.

With the board nomination, he will become more involved in strategic decision making, including mergers and acquisitions, the Suwon, South Korea-based company said in the statement Monday.

“This is a highlight of Samsung Group’s succession process,” said Chung Sun Sup, CEO of Chaebul.com, which researches Korea’s family-run conglomerates. “And one last step remaining before Lee Jae Yong is to be given the title of chairman.”

Samsung shares have plunged 11 percent since Friday, the biggest two-day decline since 2008, after U.S. regulators joined the company in cautioning users to power down their Note 7s and refrain from charging them.

The company has said about 2.5 million had been shipped before the recall, including those in the hands of consumers and carriers. Note 7s with new batteries are due to become available on Sept. 19.

Before the problems with the Note 7, Samsung had been experiencing a recovery in sales and earnings that had driven its shares to a record. The recall came just days before new iPhones were unveiled and opens more of the field to Apple in the market for high-end devices.

“Samsung’s nightmare is just getting worse and worse,” said Bryan Ma, vice president of devices research for IDC. It’s possible that airlines, rather than isolating Note 7s, may decide to ban all Samsung phones given the difficulty of differentiating between models. “If true, then the Note 7 could end up dragging down the rest of the portfolio.”

The U.S. Consumer Product Safety Commission and Samsung are in talks on an official recall of the devices as soon as possible. While almost all CPSC recalls are done voluntarily in conjunction with a company, once the agency becomes involved, it triggers additional protections for people. For example, U.S. law prohibits the sale or resale of any recalled item once CPSC acts.

“The uncertainty over the Note 7 recall has grown following the tough reactions from the U.S.,” said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul. “Samsung has to settle this situation as early as possible by replacing every Note 7 device in order to reassure customers. In the worst case scenario, Samsung may have to consider discontinuing Note 7 sales for a time.”

The shareholder meeting will also vote on the sale of Samsung’s printer business to HP Inc. for $1.05 billion that was announced Monday.

“The board of Samsung Electronics believes that the time is now right to nominate Jay Y. Lee as a member of the board,” it said in the statement. “Mr. Lee has extensive experience as a business leader over many years and has made important contributions to the success of Samsung Electronics.”

The Lee family controls the company and about 60 affiliates through a raft of cross-shareholdings. Samsung is the largest of the family-controlled conglomerates, commonly known as chaebols, that dominate South Korea’s business landscape.

Chief Financial Officer Sang-Hoon Lee will stand down as a director to maintain the board’s current structure of four members from management and five from outside the executive ranks.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE