Scandal-Plagued Samsung Chairman Quits

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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."

Moon is BusinessWeek's Seoul bureau chief.