Korea Seeks to Rein in Samsung

The case against the heir to leadership of the sprawling Samsung empire tests the will of the government of Korea’s liberal President Moon Jae-in to make good on the kind of sweeping campaign promise that every Korean president has made for the past 30 years.

Can Moon, unlike his predecessors, curb the power of the chaebol or conglomerates that dominate Korean life – or will he too wind up compromising and forgiving like all the others? No target looms larger than Samsung, by far Korea’s largest chaebol, and no individual more visible than Lee Jae-yong, de facto chief of the entire empire as vice chairman of flagship Samsung Electronics.

Lee today stands convicted of bribery, embezzlement and other charges. The case lies at the heart of the great scandal that brought down the ousted Park Geon-hye, also jailed and facing almost certain conviction for having pressured Samsung and others to donate immense sums to foundations set up by her closest friend and confidante.

Surely Lee, having been sentenced to five years in prison on Aug.25, will wind up staying where he’s been while on trial, that is, behind bars. It would seem unlikely that Moon would be inclined someday to grant him a pardon, the same treatment accorded JYs father, Lee Kun-hee, twice convicted in massive corruption cases and twice granted residential pardons, first by President Kim Young-sam in 1997 and again by President Lee Myung-bak in 2009.

With Lee Kun-hee in a coma since suffering a massive heart attack in 2014, JY now has to shoulder both the responsibility and the blame. Unlike his father, however, he represents both a name and a system that is anathema to seriously reform-minded leaders.

President Moon is dedicated not to overhauling the chaebol system but to shaking it up, curbing the ability of companies within the same group to guarantee control by the same ruling family from generation to generation. Every Korean president, conservative or liberal, since the first presidential election under the democracy constitution in 1987 has made similar promises, but all signs suggest Moon means what he’s been saying.

Kim Sang-jo, chairman of the Fair Trade Commission, has stated that “profiteering by chaebol owner families not only leads to illegal transfers of wealth but also destroys the corporate eco system.” He reached that conclusion from material that he gathered on behalf of Solidarity for Economic Reform while a professor at Seoul’s Hansung University, and he clearly hopes to make good use of it.

For President Moon the “paradox of reform” is that it risks holding back the economy rather than encouraging growth. Samsung’s 80 or so companies, led by Electronics, account for 20 percent of Korea’s gross domestic product with an operating profit of US$25.11 billion on total revenue of US$173.36 billion. The challenge of the case will be to see if it leads to change for the better, a greater role for stockholders outside the family and more opportunities for rivals.

The vision of Lee, widely known as Jay Y or JY Lee, as he was led in and out of the Seoul district courtroom, in jail while on trial, then found guilty of embezzlement and bribery, sentenced and sent to prison, his arms bound in ropes, clasped by guards on either side, was not exactly new to Koreans. Over the years they’ve seen a number of chaebol chieftains hauled into court in similar circumstances.

Lee, however, hardly fits the picture of the typical scheming chaebol operator. Seen on the street or in one of his many companies, he might be mistaken for a diligent salary man, dark-suited, white-shirted, quiet, serious, polite, neither flamboyant nor particularly tough.

Sadly, the whole case suggests that JY was in over his head after Lee Kun-hee suffered a heart attack more than three and a half years ago, going into a coma from which he has never recovered. The elder Lee retains the title of chairman of Samsung Electronics but remains unable to make decisions, much less participate in group strategy.

In fact, JY was thrust into responsibilities for which he had been groomed for years by men whose advice he accepted as voices of experience. That helps to explain why JY’s arrest and imprisonment along with two executives will not have a lot of impact on Samsung Electronics sales worldwide. There should be no appreciable dent in Samsung earnings regardless of whether he serves all his five-year sentence or, as is quite likely, gets out earlier on probation.

The numbers show Samsung Electronics rivals, Apple, Micron, Intel, Toshiba et. al., have no reason to gloat right away while the new Galaxy Note 8 hits global markets. Samsung, selling 23 percent of the world’s smartphones, nearly twice the 12 percent sold by Apple, enjoyed a record $8.7 billion profit in the first quarter and a stupendous $12.4 billion profit in the second quarter of this year thanks to the success of the Galaxy S8 smartphone after the disaster of the fire-prone Galaxy Note 7.

What better place to begin to control the chaebol than with Samsung? It was, after all, Lee’s scheme to consolidate power by having Samsung C&T take over Cheil Industries, increasing his hold over Samsung Electronics and other companies, that got him into trouble. The result of the takeover was that Lee and his two sisters hold comfortably controlling stakes in the combined company, which in turn dominates Samsung Electronics.

For the $7.8 billion deal to go though, the National Pension Service, under the thumb of the government, had to vote its shares over the strenuous objections of a stubborn minority shareholder, Elliott Associates, based in New York. Samsung, to get on the good side of the government of Park Geun-hye, channeled funds to two foundations and donated enough for the daughter of Park’s long-time confidante to acquire a horse for dressage training in Germany. The TV image of that high-stepping steed has become a symbol of JY’s crimes.

But what difference will all the furor make? No one forgets the dual convictions of JY’s father and subsequent pardons, for financial transgressions. JY and his sisters still hold their shares in Samsung C&T and still rule the empire, if not day to day, at least by remote control.

Will JY be able to do so from prison or will his executives undermine his authority while minority shareholders demand a greater say? Foreigners, who en masse own more than half the shares in Samsung Electronics, are likely to want to intervene in the company’s affairs even as the Fair Trade Commission challenges its sway over the economy. The foreigners will never unite as a bloc, but they may insist on reforms matching those of the FTC.

Short term, though, buyers of smartphones and other gizmos and gadgets won’t notice the difference. Most of them are probably not even aware that the heir to the Samsung throne remains in jail. If there is to be change, it will be long-term and gradual.

Donald Kirk is a veteran journalist based in Korea and a regular contributor to Asia Sentinel