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Late Samsung Electronics Chairman Lee Kun-hee passed away at Samsung Medical Center on Oct. 25. (Yonhap News)

Lee developed Samsung into a global household name, but leaves behind a dark legacy of illegal succession practices, tax evasion, bribery, and anti-union policies

More than just a business, Samsung has long been regarded as a special presence in South Korea. Much of the history behind that “specialness” overlaps with the imprint left by late Chairman Lee Kung-hee, who passed away on Oct. 25. Up until he was sidelined in 2014 by a myocardial infarction, the 27 years that he spent leading the Samsung Group -- after succeeding father and inaugural Chairman Lee Byung-chull -- stood as a symbol of the changing stature of South Korea’s economy. At the same time, darker aspects of Lee Kun-hee’s legacy -- including anti-union policies, illegal and dubious succession tactics, and government-business collusion -- remain unresolved issues in South Korea.

In 2019, Samsung Electronics, the mainstay company within the Samsung Group, recorded annual sales of 230 trillion won (US$203.76 billion) -- equivalent to nearly half the South Korean government budget of 469 trillion (US$415.49 billion). It’s a vivid illustration of Samsung Electronics’ stature within the South Korean economy. As recently as the 1980s, Samsung Electronics had fallen behind competitor Goldstar Electronics (today’s LG) in the domestic appliance market. From there, it rose to become the global champion in semiconductor memory, smartphones, TVs, and displays -- and it would be impossible to deny the decisive role Lee’s perseverance and decisiveness played in that growth. In effect, he kept the promise to “help Samsung grow to become the foremost global business” that he made in his December 1987 inaugural address after succeeding his late father, Samsung Group Founder Lee Byung-chull, to become group leader.

Born in 1942 as Lee Byung-chull’s third son, Lee Kun-hee’s lessons in business began in 1966 when he joined Tongyang Broadcasting Company and Samsung C&T. After taking over the group’s management reins in the wake of his father’s sudden death, he focused most of his energy on semiconductors. The opening salvo came in 1992 when Samsung succeeded in developing the world’s first 64MB DRAM.

In the process, Lee made no secret of his sharper edges as a manager. His “new management declaration” in Frankfurt in June 1993 heralded sweeping constitutional changes for the business. A famous example came in 1995, when he had all 1.5 million mobile phones on sale at the time piled up in a factory in Gumi, North Gyeongsang Province, and set on fire in a symbolic “burning at the stake.” It was intended as a form of shock therapy after the defect rate for the company’s wireless telephones jumped to 11.8%.

In addition to semiconductor memory, Lee’s swift decision-making also contributed to later success in smartphones and displays. It’s a case where the “Lee Kun-hee management style” paid dividends in industries with short product replacement cycles that require fast-paced technology development and large-scale investment. This was the backdrop for the so-called “pair-trawler legend”: the semiconductors and smartphones that continue to serve as linchpins for the South Korean economy today. Another characteristic of the Lee era was the focus on performance alone when making personnel decisions. By the 1990s, he was already preparing for the globalization era with a “regional specialist program” introduced to groom global specialists. In 2011, the Harvard Business Review called the regional specialist program “arguably the company’s most important globalization effort.”

But the same “Lee Kun-hee era” that ushered in such dazzling success stories not only fell far short of a “global standard” based in the law and common sense, but also saw a number of examples of legal evasions and breaches of norms. Lee was at the helm in 1996 when Samsung initiated its use of illegal and questionable tactics such as the issuance of Samsung Everland convertible bonds (CB) to pave the way for Lee Jae-yong to become the Samsung Electronics vice chairman. Under his leadership, South Korea’s largest conglomerate became notorious as a symbol of anti-union management policies involving the obstruction and suppression of labor organization, as well as collusion-based practices of reaping benefits from the use of bribes and political funds to control the powers that be.

It was inevitable that these practices would be put to the legal test. Lee Kun-hee was given a two-year prison sentence suspended for two years after a special prosecutor’s investigation in 1996 revealed that Lee had provided bribes of some 10 billion won (US$8.86 million) to former Presidents Chun Doo-hwan and Roh Tae-woo. In 2005, South Korea was shocked when the so-called “X-file” -- including a telephone conversation between then Samsung Electronics Vice Chairman Lee Hak-soo and JoongAng Ilbo Chairman Hong Seok-hyun that had been intercepted by the Agency for National Security Planning (ANSP) -- revealed that Samsung had used its money to recruit and maintain the support of major government figures.

The Samsung official who provided the bribes came away unscathed, while then lawmaker Roh Hoe-chan lost his seat for violating communications secrecy provisions after posting a list of prosecutors that were in Samsung’s pocket. A 2007 declaration of conscience by attorney Kim Yong-cheol included allegations of sweeping, systematic slush funds and lobbying, as well as assets shielded under borrowed names. After a special prosecutor’s investigation of Samsung’s slush funds the following year, Lee apologized to the South Korean public and temporarily stepped away from management.

The roots of the illegal and dubious activities that came to define Samsung lay in its desire to bequeath assets and power while evading taxes and to facilitate the Lee family’s abnormal level of control over affiliates. Having benefited himself from a “donation” made by means of a public interest corporation, Lee perpetuated the cycle of tax-free inheritance with his own three children, including son Lee Jae-yong.

In 2008, Lee Kun-hee stepped away from the group’s management, bowing his head before the South Korean public as he pledged to end cross-shareholding practices and transition to a holding company system. He also promised to pay taxes and fines on his hidden assets after converting them back under his own name, and to give back trillions of won in remaining funds to society.

Many of Lee’s promises remained unkept even after he snuck back into a management position two years later, citing the company’s “crisis.” With his passing, they remain unresolved issues for South Korean society. While Lee’s strategies that involved legal violations and tax evasion were designed to help his son take over the conglomerate’s management, they ironically have ended up hampering his successor by sparking a complicated legal battle.

By Koo Bon-kwon, senior staff writer

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