Samsung's Scandal, South Korea's Shame

Not one and the same.

Photographer: Jean Chung/Bloomberg

A decision to arrest a top executive of the Samsung Group on suspicion of bribery and embezzlement would no doubt cheer the millions of South Koreans fed up with collusion and cronyism among the country’s elite. The way to prevent future scandals, however, is to transform the huge companies like Samsung that dominate the country’s economy.

QuickTake Q&A: What’s Behind the Samsung Bribery Allegations?

A court will hold hearings Wednesday whether to issue an arrest warrant for Jay Y. Lee. The vice chairman of Samsung Electronics Co. stands accused of approving roughly $36 million in “donations” connected to a shadowy confidant of President Park Geun-hye, allegedly meant to help win approval to merge two Samsung affiliates and consolidate his control over the company. Samsung has denied any wrongdoing.

Whatever the courts rule, one more high-profile scalp is unlikely to end the cozy relationship between politics and big business in Korea, which is dominated by the country’s huge conglomerates, or chaebol. Past corporate titans have received suspended sentences or swift pardons -- including Lee’s father, Samsung’s ailing chairman Lee Kun-hee (twice). Like her predecessors, Park entered office vowing to end such favoritism; she later argued that the chaebol were too important to Korea’s economic health to allow their leaders rot in jail. There’s no guarantee her successor won’t follow the same path.

Lasting reform requires addressing two central problems. The first is that the families that own and run the chaebol, now into their third and fourth generation of leaders, exert undue influence over what are ostensibly public companies. Despite holding what are often quite small stakes in group firms, they maintain a stranglehold over decision-making through complex and opaque webs of cross-shareholdings. The government has banned any new such arrangements, but existing ones must also be dismantled and ownership structures made more transparent. Boards need better-trained, more empowered and truly independent outside directors.

The second problem is that despite Park’s promises to “democratize” the Korean economy, the chaebol and their affiliated companies continue to dominate economic activity. The combined revenue of the five biggest conglomerates accounts for nearly 10 percent of Korea’s GDP, according to research firm CEOScore. This not only encourages back-scratching but also holds back the small and medium-sized companies that account for the vast majority of Korean employment. Such companies require better access to capital and technology, not to mention stricter enforcement of fair-trade rules so that they can win contracts typically doled out to the chaebol’s favored suppliers.

Spurred on by public anger, lawmakers are finally debating several of these changes. This is to the good: Politicians need to talk more about the benefits of reforming the chaebol rather than the costs -- often imagined -- of reining them in. Meanwhile, powerful institutional investors such as the national pension fund have to become more active in challenging chaebol management. Even more than talk, however, what’s needed is a new mindset. South Korea’s continued economic success depends on the cultivation of a more entrepreneurial culture, one that rewards companies for their ideas and their energy, not their size and political connections.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.