South Korean business conglomerate Samsung has been struggling with a number of obstacles in the first half of 2019. The escalating trade war between the United States and China has caused a global economic slowdown which also affects Samsung’s business success. Market uncertainty has resulted in the tumbling of semiconductor prices. With a large portion of Samsung’s revenues coming from semiconductor sales, the price drop negatively impacts the company. Additionally, Samsung Electronics experienced a major setback when the Galaxy Fold smartphone release was delayed in April 2019 after the emergence of grave issues regarding the foldable phone’s display. Amid such turbulences, Samsung is facing another central challenge. A series of emerging fraud and bribery scandals have called Samsung’s family-based corporate governance into question.
Since 2018, investigators have interrogated and arrested high-ranking employees of Samsung over an accounting fraud involving Samsung’s biopharmaceutical affiliate, Samsung BioLogics. The fraud revolved around the artificial inflation of BioLogics’ subunit, Samsung Bioepis, by a value of 3.9 billion USD in 2015. This also inflated the value of Bioepis’ parent company Cheil Industries. According to allegations, the plan of this fraud was to facilitate the merger of subsidiaries Samsung C&T and Cheil Industries. This reportedly consolidated the power of Samsung’s heir, Lee Jae-yong, over the business conglomerate. Lee possessed a 23% stake in Cheil Industries but a share of only 1% in Samsung C&T. The Samsung Group has been in the hands of the Lee family since its founding in 1938. Due to this family-based ‘chaebol’ system, it is in the interest of the Lee family to maintain control of the Samsung Group and particularly of market leader Samsung Electronics. In the course of investigations, it was uncovered that senior executives had ordered the concealment and destruction of incriminating records of the fraud. Among the interrogated personnel is Chung Hyun-ho, president of Samsung Electronics.
Investigators focus on whether the fraud served the purpose of strengthening Lee Jae-yong’s position as de facto head of the corporation. Lee Jae-yong assumed leadership of Samsung Electronics in 2014 after his father and former Samsung head Lee Kun-hee suffered a heart attack, becoming unable to continue as head of the business. Although it is still unclear whether Lee Jae-yong will be questioned by investigators, he already came into conflict with the law when charges were brought against him in 2017. Lee was sentenced to 5 years in prison in August 2017 after he bribed former South Korean President Park Geun-hye and her adviser Choi Soon-sil, who are both now imprisoned. After Lee appealed the court’s decision, his sentence was suspended, and he was released in February 2018. His removal as Samsung’s leader, however, would impair processes at the highest decision-making level. This situation would hamper new business investments and innovation.
The chaebol system, which fosters the ownership of a corporation by a family, heavily influences Samsung’s corporate governance dynamics. For years, Lee has been primed to be Samsung’s leader and finding a replacement would be difficult. Lee has two younger sisters, Lee Boo-jin and Lee Seo-hyun, who are preoccupied with heading the luxury hotel chain Shilla and the fashion division of Samsung C&T, respectively. Given that Samsung’s governance model is based on family succession, it appears highly unlikely that a non-family member would take the place of Lee Jae-yong. The business is streamlined in accordance with the objectives of the Lee family, thus decreasing the decision-making power of the board of directors. When Lee Jae-yong received his prison sentence in 2017, strategic implementation was adopted by the newly instated Business Support Task Force. The task force continued to back the Lee family, thereby sustaining the chaebol system.
Samsung should seize market opportunities after Chinese telecommunications competitor Huawei was banned in the United States. The company should also zoom in on issues arising out of declining exports in the wake of the US-China trade war and the flawed Samsung Galaxy Fold. The fraud scandal and ongoing investigations, however, divert Samsung’s attention and may complicate business improvement at present.
As a major corporation in South Korea, the success of Samsung’s governance and operational tasks reflect on the country’s economy. The Samsung Group forms South Korea’s largest business conglomerate and encompasses electronics, heavy industries, life insurance, entertainment, construction, and advertisement subsidiaries. Samsung’s financial situation therefore influences South Korea’s economic growth. Although fraud scandals exacerbate Samsung’s reputational risk, it is unlikely that the conglomerate will abandon its family-centered leadership and completely restructure its governance. Finally, it would be in the interest of Samsung as well as South Korea’s economic health to maintain the stability of Samsung’s business success and leadership.
