hankyoreh

Samsung Electronics Vice Chairman Lee Jae-yong heads to the third hearing in his corruption and bribery trial on Dec. 6, 2019. (Kang Chang-kwang, staff photographer)

“It’s been so hard. How many years has it been now?”

We’ve been hearing the complaints from Samsung all around. Samsung Electronics Vice Chairman Lee Jae-yong, is once again facing the threat of an indictment. This time, the charges concern the merger between Samsung C&T and Cheil Industries and accounting fraud by Samsung Biologics. This comes three years and three months after he was previously arrested on charges of supplying bribes to government influence-peddlers for the sake of his Samsung management succession on Feb. 17, 2017.

Lee has requested the convening of a “prosecutorial investigation review board” made up of ordinary citizens to examine the legitimacy of the prosecutors’ indictment. This marks the first time this has been done by a chaebol head. It was a gamble on Lee’s part -- one that prosecutors answered on June 4 with their request for an arrest warrant.

It’s obvious why this sort of tit-for-tat exchange is drawing such attention. But we also must not overlook the heart of the Samsung situation. At the center of the chaebol system is an approach of dynastic succession, “imperial” management by the group owner, diversification of projects, and superficial management. Of these four, the project diversification and superficial management components were casualties of the storm winds brought by the foreign exchange crisis in the late 1990s.

Over two decades later, the chaebols are facing an even bigger turning point. Cracks have begun to show in their seemingly impregnable practices of dynastic succession and imperial management. In an apology to the South Korean public in early May, Lee announced that he would be forgoing a fourth-generation transfer of power within the Lee family. It was the first time in more than 80 years of chaebol history that a top-ranked group like Samsung declared a break with dynastic succession practices.

In the case of the Hanjin Group, Chairman Cho Yang-ho failed to win reappointment as a director at a Korean Air general shareholders’ meeting in March 2019. In effect, an owner was driven out of his own company for acting like its “master.” This too was unprecedented. It could be viewed as an exception -- but major dam collapses sometimes begin with tiny holes.

Many South Koreans have been frustrated with the slow progress of chaebol reforms. But the signs are increasingly suggesting that the chaebol system, with its basis in irrational dynastic succession and imperial management practices, may have reached a critical moment. If anything, this is a moment for the chaebols themselves to question how much time they have left to change their ways. As they fritter away their time trying to defend their owners from the courts or hold on to management authority, they could find themselves like dinosaurs -- going extinct virtually overnight.

If the chaebol system collapses, that only means the end of the owning family; the companies themselves can remain perfectly sound. But the companies can also perish, as the 1997 Asian financial crisis showed. They need to move quickly to develop new ownership and control structures that the public can support. The problem is that there isn’t any one “right” answer. Just as different countries have their own laws, institutions, and cultures, so each one has to find its own solution.

For an object lesson, we may look to the “hidden champions” that Germany prides itself upon. Fortunately enough, I’ve had a few opportunities to cover them myself on the ground. The history of hidden champions dates back to the mid- to late 19th century. All of them started out under owner (family) management, but over more than a century since then, they’ve differentiated into a quite diverse range of management structures. Owner management coexists with professional management systems, along with different variations in between the two.

What we should pay attention to is the common feature shared by the hidden champions that still possess elements of owner management -- namely, their rational systems of succession. The appliance company Miele was co-established 120 years ago by two families. It is two co-proprietors, one each participating in management from the two founding families. Succession decisions are based on rigorous training and testing. The system is a far cry from “imperial management.” The board of directors consists of two representatives from the families and three professional managers. All five members hold equal decision-making authority. It’s an example of a management partnership between founding families and professional managers.

The changes to the hidden champions’ ownership and management structures really began around the third or fourth generation after their foundation. The reason can be found in a simple truth: management skill is not something you find in DNA. The hidden champions that insisted on owner management alone -- without the same soul-searching that Miele engaged in -- have all vanished. South Korea’s chaebols have similarly reached their third to fourth generations. It’s an unsustainable phenomenon, where people inherit authority without proving their abilities simply because they are descendants of the founder, and where different family members draw profits off of companies like parasites.

Back in June 2015, the Samsung C&T/Cheil Industries merger was a subject of intense controversy. The Hankyoreh was virtually unique among news outlets in its focus on how the merger ratio was calculated in a way that benefited Cheil Industries, where Lee owned a large stake. I was contacted about a senior executive with Samsung wanting to speak with me. “This is a big controversy right now. Does the merger really need to go ahead?” I suggested. “Why not cancel the decision for now and review it once the questions over unfairness have been dispelled?” But the executive merely snorted. They say there are no “what ifs” in history -- but Lee Jae-yong might be facing a different fate had he taken even a little of the Hankyoreh’s advice. It wasn’t too late then. Now he finds himself truly in desperate need of a winning hand.

By Kwack Jung-soo, editorial writer

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