Samsung Under Siege

Allegations of governance abuses help shed light on how the founding family maintains its grip on the conglomerate

Despite years of reform efforts, the founding family has kept an iron grip on the chaebol, steering it to phenomenal growth. Now a government probe has put the group's leadership under the microscope
AP Photo/Ahn Young-Joon

by Moon Ihlwan

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Samsung's theme park, Everland plays a central role in family control Ahn Young-Joon/AP Photo

An anti-Samsung protester in Seoul wears a mask of chairman Lee Lee Jin-Man/AP Photo

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In Samsung Group corporate lore, it was the dawn of a new era. After reading a harsh report by a Japanese adviser on the rigid and outdated management practices at South Korea's biggest conglomerate, Chairman Lee Kun Hee summoned 100 top executives to a June 7, 1993, meeting at the baroque Kempinski Gravenbruch Hotel, a former hunting lodge near Frankfurt. The reclusive billionaire angrily lectured his brass on the urgency of developing world-class, trend-setting products—and made them watch a 30-minute video documenting shoddy production of Samsung washing machines. "Change everything," Lee ordered, "except for your wife and children."

Nobody disputes the magnitude of the management transformation that followed. In 15 years, flagship unit Samsung Electronics has gone from a mass producer of me-too goods to one of the world's premier brands of cell phones, digital TVs, refrigerators, and memory chips, overtaking Sony (SNE) as the world's top electronics company. Samsung Heavy Industries is now the world's No. 2 shipbuilder, and the group's construction, insurance, brokerage, and trading units are tops in Korea. The $160 billion Samsung Group is by far Korea's biggest chaebol, or conglomerate. While most other chaebol split up or sharply narrowed their focus after Korea's 1997 financial crisis, Samsung today accounts for 18% of Korea's gross domestic product and 21% of exports.

Few at the time, however, appreciated how serious Lee was about the second half of his famous dictum, the part about family loyalty. Lee's wife and children, in fact, seem to have become even more entrenched within the group. The 66-year-old chairman and his family own just a sliver of shares of the chaebol's 59 affiliates, yet they assert astounding control. For example, while they have only 3% of mighty Samsung Electronics, the Lees have final say over strategic decisions and major appointments. The family has retained this grip despite years of assault by reformers that brought down the powerful chiefs of the Daewoo, Hyundai, and Ssangyong groups. A Samsung spokesman says other shareholders support Lee family control.

Now fortress Samsung is under siege. On Apr. 17, an independent counsel appointed by Korea's Parliament indicted Lee and 9 of his senior executives on charges ranging from tax evasion to breach of fiduciary trust after nearly four months of a sweeping probe. The investigation has opened a window into the Byzantine ways that the Lees have been able to assert so much control over the far-flung group. Special prosecutor Cho Joon Woong said that Lee Kun Hee owned $4.6 billions of dollars worth of stock in insurer Samsung Life and other companies, cash and bonds that were hidden in some 1,200 brokerage and bank accounts in the names of former and current executives. Lee's holdings, prosecutors suspect, were kept secret so that he could avoid paying hefty capital gains taxes on trades.

RADICAL SHAKEUP?

The Lees allegedly had other methods of fending off the chaebol busters. The prosecutors accused the group of helping Lee's son and heir apparent, Lee Jae Yong, effectively gain control of large stakes in key Samsung units by arranging transactions that helped him acquire shares in a holding company at below-market prices. That vehicle is Samsung Everland, a theme park 20 miles south of Seoul with roller coasters, river rides, and attractions sporting names such as European Adventure, Safari World, and Aesop's Village. What's more, the group's own former chief counsel, Kim Yong Chul, has publicly claimed that the group stashed hundreds of millions of dollars in bogus accounts used to pay off prosecutors, politicians, and even journalists, but the prosecutors said they could not find supporting evidence.

Immediately after the prosecution announcement, Samsung apologized for "causing concern." Previously, it had consistently denied the allegations, some of which have circulated for more than a decade.