Samsung's succession in disarray

The company flag of Samsung Electronics flutters next to the South Korean national flag in Seoul, South Korea. AP Photo/Lee Jin-man

The company flag of Samsung Electronics flutters next to the South Korean national flag in Seoul, South Korea. AP Photo/Lee Jin-man

Published Jan 17, 2017

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Seoul - The

long-orchestrated plan to cement Jay Y. Lee’s position atop Samsung Group may

put him in jail instead, raising questions about who would step in to run South

Korea’s biggest conglomerate in the aftermath.

Prosecutors

are seeking Lee’s arrest on allegations including bribery and embezzlement,

which if proven could prompt him to relinquish duties at the family business.

Potential replacements include executives running key divisions of the dominant

electronics business, as well as a sister - hotel executive Lee Boo-jin. While

a long shot, her anointment would mark a seismic shift in the way the nation’s

patriarchal empires are run.

After

spending years following his father’s footsteps to the chairman’s seat of Samsung

Group, Lee is trying now to avoid the missteps that triggered his father’s two

criminal convictions. Even if the accusations against him involving South

Korea’s president are proven in court, it’s still possible Lee could return to

the company later or even call the shots from behind bars, just as executives

from Hyundai Motor and SK Group have done.

“Chaebol

executives have a history of managing from the jail, whether it be via lawyers

or secretaries visiting them,” said Lee Kyung-mook, a professor at Seoul

National University’s Graduate School of Business.

Read also:  Samsung chief faces long day

Samsung

declined to comment when asked about a potential leadership vacuum. A court

hearing is scheduled for Wednesday to determine whether to approve the

prosecutor’s request for an arrest warrant. Whether the warrant is granted or

not, prosecutors would continue their probe with a possible indictment coming

later.

Potential arrest

Lee’s

potential arrest in the scandal surrounding President Park Geun-hye is another

calamity for the vice chairman of Samsung Electronics, the largest maker of

mobile devices. Last year, the company pulled its Galaxy Note 7 smartphone off

the shelves because some devices burst into flames. The debacle cost

Suwon-based Samsung an estimated $6 billion and a competitive advantage before

Apple released its iPhone 7 models.

Lee, 48,

has had trouble matching the success of his father, Lee Kun-hee, who transformed

Samsung Electronics from a copycat appliance maker into a global powerhouse in

TVs, smartphones and memory chips. The elder Lee - South Korea’s richest man -

suffered a crippling heart attack in May 2014, and Samsung shares fell that

year and the next before recovering in 2016.

“It’s a

perilous practice that a person can take over a company just because he or she

was born to a successful father,” opposition lawmaker Park Yong-jin said. “The

biggest problem with our economy is that people with unproven skills run its

biggest companies.”

Read also:  A Presidential scandal and Samsung succession

Lee doesn’t

play the role of day-to-day manager, depending rather on co-CEOs and other top

managers to handle those responsibilities. But employees and shareholders

depend on him to provide strategic guidance when it comes to decisions like the

next big bets in technology or potential acquisitions.

After the

elder Lee’s collapse, executives including J.K. Shin, who is in charge of the

smartphone division, handled daily operations for Samsung Electronics.

The son became

de facto leader of the group, which then embarked on an intricate

reorganization to solidify his control. Prosecutors want to know if that effort

involved making payments to a presidential confidante in exchange for

government support.

Candidates

If Lee is

imprisoned, he could be replaced by Samsung Electronics’ co-CEO Kwon Oh-hyun, a

64-year-old who leads the semiconductor and display businesses. The successes

of those two divisions helped propel Samsung to its best operating profit in

three years during the quarter ended December 31.

Another

candidate is Yoon Boo-keun, who heads the consumer-electronics unit

encompassing TVs and appliances.

“He’s part

of the trio with Lee and Kwon that has run Samsung Electronics,” said Park

Ju-gun, president of Seoul-based corporate watchdog CEOSCORE. “Samsung could be

run as if that trio were still intact.”

It also

would be “natural” for Lee Kun-hee’s eldest daughter to be considered, said

Chung Sun-sup, who runs corporate researcher Chaebul.com.

Lee Jae-yong, a vice chairman of Samsung Electronics arrives for hearing at the National Assembly in Seoul, South Korea in this file image. AP Photo/Lee Jin-man

Lee

Boo-jin, 46, is CEO of the luxury Hotel Shilla chain, which is on track to

post revenue growth for a sixth straight year, according to data compiled by

Bloomberg. She owns 5.5 percent of Samsung C&T, one of the biggest

shareholders in Samsung Electronics.

“Some

speculate she could practically take over, but being a large shareholder

doesn’t mean she could run a massive company like Samsung Electronics,” Chung

said. “Realistically speaking, Kwon may be the one.”

Lee

Kyung-mook, the Seoul National University professor, also identified her as a

candidate to manage the conglomerate, albeit temporarily.

A daughter

taking over Samsung would break with tradition in South Korea, where sons

succeed fathers at the chaebol that dominate the economy. Still, Samsung has been

a trailblazer in doing away with old business practices and hiring women

aggressively.

“Lee’s

sister may briefly take the reins, but there’s little chance she’d take over

permanently given she has fewer shares in the firm than her brother,” the

professor said.

The

youngest surviving daughter, Lee Seo-hyun, is an executive at Samsung C&T.

In the

meantime, Jay Y. Lee may miss the window of opportunity to succeed his father

as parliament moves to make it harder for Samsung to use its own shares to help

him consolidate control, said Heo Pil-seok, CEO at Midas International Asset

Management in Seoul. That could make the stock more volatile.

Park, the

lawmaker, submitted a bill nicknamed the “Jay Y. Lee Law” to prevent financial

firms from supporting the types of internal mergers orchestrated to help Lee

boost control.

“The

corporate governance at Samsung could remain awkward for an extended period of

time, and that would increase uncertainties,” Heo said.

Scandals

The elder

Lee faced his own scandals - a 1996 conviction for bribing a former president

and a 2008 conviction for embezzlement and tax evasion. Both times, he was

pardoned.

That

history may work against his children, and Jay Y. Lee acknowledged publicly

that someone else may take over the collection of about 60 divisions whose

combined revenues equal about one-fifth of South Korea’s gross domestic

product.

During a

parliamentary hearing before President Park’s impeachment, he was asked whether

he would surrender management control of Samsung.

“I will

hand it over if there is someone better than me,” he said. “I will hand it over

at any time.”

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