Technology

Jay Y. Who? Samsung Verdict May Not Matter to Family Businesses

  • ‘There was no line of approval involving me,’ Lee testified
  • Judges will issue ruling Friday in influence-peddling scandal

Samsung's Jay Y. Lee to Learn His Fate

During the months-long corruption trial of Jay Y. Lee, the billionaire heir to Samsung Group and his former deputies testified that he wasn’t really involved in making decisions at South Korea’s biggest conglomerate.

Jay Y. Lee

Photographer: SeongJoon Cho/Bloomberg

That may help him prove he’s not a criminal, but could also hurt his reputation as a manager for the family-run business that helped rebuild the nation in the aftermath of war.

Since Lee was arrested in February, the crown jewel -- Samsung Electronics Co. -- posted record net income and released the Galaxy S8 smartphone to critical and commercial success. Semiconductor sales are booming, shares reached an all-time high and it has just unveiled the new Note 8 device. So does it really matter to the company if a judge convicts Lee on Friday and sends him to prison for as many as 12 years?

“Lee was penny-wise and pound-foolish,” said Kwon Young-june, a professor who researches corporate governance at Seoul’s Kyung Hee University. “In trying to clear himself of legal responsibilities, Lee has portrayed himself as someone incompetent and without any vision.”

Prosecutors accused Lee of bribery, embezzlement and hiding assets overseas as part of an influence-peddling scandal that led to President Park Geun-hye’s ouster. One allegation says Samsung bought an $800,000 horse for the daughter of Park’s confidante.

The alleged scheme was intended to gain presidential support for a 2015 merger between two affiliates that increased Lee’s sway over Samsung Electronics, while owning just a minority of its shares, prosecutors said. Samsung and Lee have denied the charges and said the deal was to boost business competitiveness.

A three-judge panel is expected to announce a verdict for Lee on Friday. Prosecutors are seeking a 12-year prison sentence for one of South Korea’s most powerful businessmen.

Perhaps the most persuasive argument that Samsung can be successful without Lee may have been made by the man himself. Choking back tears during riveting testimony, the 49-year-old said he knew little about Samsung affiliates other than the electronics business.

“There was no line of approval involving me,” Lee said. “I had no knowledge to make decisions, nor the competence.”

Lee said former Samsung Electronics Chief Executive Officer Choi Gee-sung was in charge of major issues at the conglomerate, and the two “shared information.” Lee referred to Choi as his mentor and used a Korean honorific term when mentioning his name.

Lee also said he never participated in meetings at the now-defunct Corporate Strategy Office led by Choi, and he also never met alone with the leader of a Samsung affiliate other than the electronics unit.

That office was the subject of nationally televised parliamentary hearings, during which lawmakers alleged it had a long history of lobbying government officials. At that time, Lee announced he was dissolving the office.

During his subsequent court testimony, he said he was “coached” by Choi to make that announcement. Lee was rebutting accusations he must have been powerful enough to unilaterally dissolve the most powerful Samsung office.

“Regardless of the outcome of the case, the facts clearly demonstrate a clear lack of leadership and taking responsibility,” said Thomas Cooke, professor at Georgetown University’s McDonough School of Business. “By his own testimony, Jay Y. Lee admits this.”

Lee said becoming the group’s leader never crossed his mind after his father suffered a debilitating heart attack in 2014. Lee Kun-hee, South Korea’s richest person, hasn’t been seen in public since, yet he still holds the title of chairman.

When a prosecutor asked the younger Lee how it was possible he didn’t know how Samsung’s support for a local equestrian body turned into alleged bribes for the presidential confidante, Lee responded: “I was told everything was going well, so I thought it was.”

He added, “I’m still not familiar with details. And I’ve been catching up a lot through this trial.”

In Lee’s defense, former Samsung Electronics executives testified that the company had professional managers running divisions, and Lee was only tangentially involved.

“While not involved in day-to-day operations, Vice Chairman Lee contributes to Samsung Electronics’ strategic decision-making related to future growth and business alliances, based on his strong global network and long-term vision,” Samsung said in an email Wednesday.

After the elder Lee fell ill, Choi said he retained “all the power” and would preside over group meetings while the heir sat next to him.

“He needed to learn lessons running the company,” Choi said. “So I would gather pieces of information and hand them to him.”

Choi said he shared key information with Lee out of courtesy but didn’t ask the heir for input.

“He is not the type who often offers his opinions,” Choi testified. “Just once in a while.”

Choi, one of four former company executives indicted with Lee, also said he withheld information from the vice chairman about dealings with the South Korean leader’s confidante.

“I wanted to protect the heir by not telling him about it,” Choi said, with Lee watching. “I thought I’d just resign myself if it became a problem.”

Controlled by the Lee family through a web of cross-holdings, Samsung is South Korea’s biggest conglomerate, comprised of about 60 units selling life insurance, cargo ships and clothes. The empire has a market capitalization of about $395 billion.

Samsung Electronics makes up most of that, with a value of $272 billion. It is the world’s biggest maker of smartphones and memory chips, with customers including Apple Inc., Wal-Mart Stores Inc. and Microsoft Corp., according to supply chain data compiled by Bloomberg.

Samsung shares have risen 32 percent this year, outperforming the benchmark Kospi.

Brushes with the law aren’t new to the Lee family. Lee Kun-hee received a suspended three-year prison sentence for evading taxes. He was later pardoned by then-President Lee Myung-bak.

Lee’s absence could lead to further empowerment of managers such as Vice Chairman Kwon Oh-hyun, who oversees semiconductors; President J. K. Shin, who is in charge of mobile products; and President Yoon Boo-keun, who runs the consumer appliances business.

“Guilty or not guilty, it’ll have almost little effect on the company at least in the short term,” said Won Jong-Jun, chief executive officer at Lime Asset Management Co. “He hasn’t really taken charge of the decisions, so his fate probably won’t have much effect on the value of the company.”

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