Samsung Scion Follows Father's Path in Scandal Not Just Business

  • Jay Y. Lee is accused of bribery, embezzlement by prosecutors
  • Legal woes complicate Lee’s revamp at Samsung Electronics

What's Next for Samsung After Jay Y. Lee Arrest?

The legal drama playing out in Seoul over whether Samsung scion Lee Jae-yong engaged in bribery and embezzlement has the feel of a Greek tragedy. It’s a tale of an ambitious son trying to live up to his father’s legacy -- and the twist of fate that binds them together.

Lee is the crown prince of South Korea’s most powerful business dynasty. His family,  through a complex network of cross shareholdings, controls the Samsung Group, a vast corporate empire with more than $230 billion in revenue and tentacles that extend into financial services, hotels, biopharmaceuticals and fashion. But the coronation has been disrupted. Lee was arrested Friday as a special prosecutor is investigating him as a suspect in a sprawling political scandal that has already led to the impeachment of South Korean President Park Geun-hye.

Jay Y. Lee leaves the Seoul Central District Court on Feb, 16.

Photographer: SeongJoon Cho/Bloomberg

The 48-year-old executive, who has denied wrongdoing, has spent a lifetime readying himself to take over Samsung from his larger-than-life father, Samsung Chairman Lee Kun-hee. The elder Lee, 75, is South Korea’s richest man and a legendary business figure credited with turning Samsung Electronics Co. from a copycat appliance maker into a global electronics powerhouse. In 2014, he suffered a crippling heart attack and hasn’t played an active role in day-to-day management since.

Until recently, the younger Lee, who goes by Jay Y., looked like a sure bet to succeed his father as chairman. Since joining the group’s flagship Samsung Electronics in 1991, Lee has risen through the ranks to vice chairman. Last October, he joined the consumer electronics and smartphone maker’s nine-person board, and he has an ambitious agenda to push the company into new areas of growth such as software and biotech.

South Korea’s Family-Run Conglomerates

“His father was at the heart of building an amazing industrial machine,” said Shaun Cochran, global head of thematic research at Hong Kong-based brokerage CLSA. “Jay Y.’s focus has been to modernize the structure and culture while protecting the core legacy. While that’s certainly not easy for anyone, he is surely uniquely placed to bridge those two worlds.”

Before the latest legal problems, Jay Y. had been pushing for changes at Samsung Electronics. In the past three years, Samsung has acquired dozens of international companies including LoopPay Inc., Viv Labs Inc. and Harman International Industries Inc. in a bid to find new sources of growth. Lee has also tried to instill more financial discipline. He sold off the company’s corporate private jets.

Lee has also been a key figure in managing Samsung Electronics’ sometimes contentious relationship with rival Apple Inc. While both sides have clashed in court over patent claims, Samsung is both a supplier and rival to the iPhone franchise. Jay Y., who cultivated solid ties with Steve Jobs, attended the Apple co-founder’s funeral in 2011.

Note 7 Debacle

More recently, Jay Y.’s reputation has taken a hit from the botched roll out of the Galaxy Note 7 smartphone, which was pulled from the market last year after some of the devices burst into flame. The debacle is projected to cost the company more than $6 billion.

QuickTake The Story of South Korea's Chaebol

A damaged Samsung Galaxy Note 7 phone.

Photographer: Shawn L. Minter via AP Photo

Lee also faces a threat from activist hedge fund Elliott Management Corp., which is pushing Samsung Electronics to simplify its ownership structure. The New York-based fund, founded by stock picker Paul Singer, is pressing Samsung to add independent directors and dish out a special $26 billion dividend to investors.

Yet those challenges pale in comparison to his current legal woes. In December, Lee was one of nine chaebol heads publicly questioned by lawmakers in connection with the Park scandal. Prosecutors homed in on Lee because of tens of millions of dollars that Samsung gave to a Park confidant. They allege Samsung paid the money, along with a 1 billion won horse, so Korea’s national pension fund would support a controversial merger between two Samsung companies that helped Lee’s succession planning.

Lee, who hasn’t been formally charged with wrongdoing, denied any impropriety and last month a Seoul court denied a prosecutor’s request for his arrest. But Lee was called in for 15 hours of questioning this week and a spokesman for the special prosecutor said they have uncovered additional evidence. Prosecutors expanded the charges against Lee and sought another arrest warrant, which was granted Friday.

If he’s jailed, “it is likely to significantly delay the leadership transition and deal a blow to his legitimacy as the next leader of Samsung Group,” said Kim Sang-jo, professor at Hansung University.

The drama has also dredged up memories of Chairman Lee’s own run-ins with Korean prosecutors: Over the years, the Samsung patriarch was convicted of tax evasion, bribing a former South Korean president and breach of duty over losses at Samsung affiliates.

Protester hold portraits of Lee Kun-hee and Jay Y. Lee in 2008.

Photographer: Kim Jae-hwan/AFP via Getty Images

Brushes with the law aside, this father and son story has largely been one of contrasting leadership styles. Where the elder Lee once struck terror in the hearts of underlings, Jay Y. has a reputation for being subdued, collaborative and analytical. He’s the product of some prestigious schooling: Seoul National University, Keio University in Japan and Harvard Business School, where he worked on a doctorate that he never finished. He’s fluent in Japanese and English.

Jay Y. has been on the career fast track since he joined Samsung Electronics. Early on, he attended board meetings as an observer, according to former board directors, and everyone in the room knew it was part of his training to succeed his father one day.

Contrasting Styles

Goran Malm, a Swedish businessman, noted a big contrast in styles between father and son. Back in 1994, Malm, then chief executive officer of General Electric Medical Systems Asia, accompanied GE CEO Jack Welch to Chairman Lee’s residence in Seoul in the hope of selling tissue scanners to Samsung hospitals. Seated in a room in his sprawling Korean-style house with a handful of underlings around him, Chairman Lee exuded power. “He was clearly a strong boss,’’ Malm recalled. “After that meeting, we got those orders and our relationship improved dramatically.’’

Malm got to know Jay Y. after Samsung Electronics’ board invited him to join as an outside director. Chairman Lee never once showed up at board meetings, but a 30-something Jay Y. did, quietly observing everything and being far more approachable than his father, according to Malm.

“He’s modern and global because of his upbringing and experience,” Malm said. “He grew up inside the company, and has seen all of the issues.’’

Lee and Kwon Oh-hyun at the Allen & Co. Media and Technology Conference in 2008.

Photographer: Matthew Staver/Bloomberg

Now, the younger Lee’s future is uncertain. If he is ever convicted and a court sends him to prison, Samsung would have to consider alternative leadership for the first time in decades. He could be replaced, at least temporarily, by a trusted lieutenant, a committee of senior executives or perhaps his sister. 

That said, disgraced executives at big Korean conglomerates, or chaebol, do have a record of making comebacks after run-ins with the law. Should a court convict Lee, he could return to the company later or even call the shots from behind bars, just as executives from Hyundai Motor Co. and SK Group have done. Lee’s father survived his own legal setbacks, thanks to government pardons -- twice.

“Jay Y. will probably survive the storm,” said Chang Sea-Jin, professor at National University of Singapore. “Still, this catastrophe may ultimately weaken his ownership control.”

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