Samsung in shock over heir's 5-year sentence

Demonstrators protesting against Samsung's de facto leader Lee Jae Yong on Friday outside the Seoul Central District Court where he was sentenced.
Demonstrators protesting against Samsung's de facto leader Lee Jae Yong on Friday outside the Seoul Central District Court where he was sentenced.PHOTO: BLOOMBERG

Jail verdict brings test for group's leadership as vice-chairman is found guilty over graft scandal

SEOUL • The five-year jail sentence of Samsung's de facto leader Lee Jae Yong drove the producer of smartphones and chips into a deeper quagmire as the vice-chairman was found guilty of all five charges over his involvement in a corruption scandal that led to the impeachment of the nation's former president Park Geun Hye.

The ruling on Friday will test whether Samsung Electronics can keep its top global status without its heir, as it is the first time the conglomerate will operate without a member of its owner family being physically part of the top management.

Lee's father, chairman Lee Kun Hee, has been hospitalised since 2014 after a severe heart attack.

Expressing bewilderment, Samsung insiders said they were disappointed with the court's decision.

Although Samsung officials had been holding their breath, they said there would not be any drastic changes in the management or a contingency plan for now. But they raised concerns on the possibility of a leadership vacuum that could suspend the group's future strategies and investment plans.

Samsung Electronics has three chief executive officers who each run major business segments - smartphones, consumer electronics and microchips, but they lack the authority to make large-scale acquisition investments without the owner family's approval.

"Making decisions on investing in new businesses, for which the return on investments is uncertain, or pushing for large-scale mergers and acquisitions, cannot be done by the hired executives, as they are too risky," said a Samsung official, adding that these are the kind of decisions only Lee had been able to make.

The Lee family holds less than 5 per cent share, but controls the tech giant, worth 306 trillion won (S$370 billion) in market cap, through an enigmatic web of cross-ownership stakes.

Mr Lee Kun Hee has 3.44 per cent in Samsung Electronics, while Lee Jae Yong has 0.58 per cent.

Professor Park Sang In of Seoul National University said: "I don't think that Samsung will face a management crisis anytime soon because of Lee's absence. But uncertainty over Lee's hereditary succession will surely grow, and this would put not only Samsung but also other conglomerates under enormous public pressure to take legal and transparent steps in the course of their succession."

Despite Lee's absence, Samsung Electronics has been flourishing - its share price has surged 34 per cent since his arrest in February.

While some say it would be difficult for the group to paint a big picture without him, chaebol reformists call it an opportunity to end the long-standing problems of the chaebol model - the opaque corporate governance and transfer of control within a group's founding family, often involving illicit means.

Lee's verdict sends a strong warning to other chaebol families and conglomerates they control, as the new government has been pushing a reform drive to cut the decades-old back-scratching ties between politics and businesses.

It also signals stronger intolerance towards collusion between conglomerates and politics.

"What we hope from the trial is to root out the government's long- held practice of demanding money from conglomerates whenever they need," said a source from one of the top five conglomerates in South Korea.

"I hope this will not happen again," he added.

THE KOREA HERALD/ASIA NEWS NETWORK

A version of this article appeared in the print edition of The Sunday Times on August 27, 2017, with the headline 'Samsung in shock over heir's 5-year sentence'. Print Edition | Subscribe