BusinessWeek Logo
In Depth April 17, 2008, 5:00PM EST

Samsung Under Siege

(page 2 of 3)

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

While any indictments may do little to ease the Lees' hold, charges could spark sweeping management changes. The company vows to fix governance problems if evidence of wrongdoing surfaces. "I'll take all responsibility, legally or morally," Chairman Lee told reporters on Apr. 11. "I will seriously consider a radical shakeup of the management team, including myself." On Apr. 17, his spokesman said: "Taking this special prosecution investigation as a new starting point, Samsung is preparing reform plans." Details of the plan are due to be released next week.

So far, the impact on Samsung Electronics has been small. The allegations of sweetheart share deals for Lee's son involve transactions that occurred more than a decade ago. The company today is one of the most widely held emerging-market stocks, and despite the recent controversy has gotten high marks for financial transparency from Crédit Lyonnais, Institutional Shareholder Services, and Euromoney. Although Lee Kun Hee is chairman, management of Samsung Electronics has been firmly in the hands of respected Chief Executive Yun Jong Yong, who took the helm in 1997, and his team of talented executives who have guided the unit's global ascent.

But the scandal highlights investor worries about the unit's leadership. Yun is 64 and nearing retirement. Insiders say Chairman Lee's son, Lee Jae Yong, 39, who earned an MBA at Japan's Keio University and studied at Harvard Business School, is being groomed as Samsung Electronics' future chief. But he is rarely seen in public, and so far his most visible role in the company has been chief customer officer, a job that has entitled him to meet such tech titans as Apple's (AAPL) Steve Jobs, Intel's (INTC) Paul Otellini, and Microsoft's (MSFT) Bill Gates. While the younger Lee isn't likely to take over the unit soon, nobody else has emerged as a clear successor. A Samsung Group spokesman says the younger Lee "will become Samsung's leader" only after winning approval of shareholders.

How has the Lee family held its grip despite years of efforts to reform the chaebol? Samsung Electronics' phenomenal growth, a source of great national pride, has provided some protective cover for the group. "Success has made Samsung seriously powerful in Korea," says Kang Shin Woo, chief investment officer of Korea Investment Trust Management, whose mutual funds own nearly $1 billion in Samsung Electronics stock. And reforms so far have tackled governance in listed companies but have done little to limit founders' control via tangled cross-shareholdings of affiliates.

No Korean family has managed to cling to a vast corporate empire as artfully as the Lees. Lee Byung Chull founded Samsung as a small rice trading outfit in 1938, when Korea was under Japanese occupation. After the Korean War, Lee moved into textile manufacturing, retail, and other businesses. Like other chaebol, Samsung grew into a many tentacled giant in the '60s and '70s under late President Park Chung Hee, who rewarded successful exporters with cheap credit and exclusive licenses to make goods protected from imports. Samsung expanded into electronics, chemicals, hotels, shipbuilding, construction, insurance, and dozens of other areas.

Lee Kun Hee took over in 1987 after the death of his father, who had been living in seclusion at a traditional, wooden mansion, where he devoted himself to Korean architecture, gardening, and poetry. With fluent Japanese and conversational English, Lee Kun Hee earned an economics degree from Tokyo's Waseda University and took MBA courses at George Washington University in Washington, D.C. He plowed billions into ill-fated car and construction equipment ventures that he had to sell after the Asia crisis. But he succeeded in ushering in modern management systems, and his bold electronics investments paid off big.

Chairman Lee rarely visits Samsung's corporate offices.

Reader Discussion

 

BW Mall - Sponsored Links