The Dismantling of the "Republic of Samsung"?

Asian markets were rocked by this bombshell announcement that Samsung chairman (and the son of its founder) Lee Kun Hee was to step down after being indicted for tax evasion and breach of trust. Of course, the Samsung conglomerate is one of the largest in Asia; in Korea, its market capitalization constitutes 20% of the big board there. With Lee resigning together with many other top Samsung executives--not to mention the reassignment of his son abroad--does this mean the end of the road for an economic model which has served predominated in the past? To Westerners, it smacks of crony capitalism. To many Asians, however, it speaks to such things as "Asian values" and a host of other imponderables if one cares to discuss arm's-length capitalism. Indeed, there is some research which purports to find developmental benefits from corruption in East Asian examples [1, 2]. It is hard to say whether the Korean economic model is due for a makeover. Yet, it is even harder to say whether the days of the Lee's influence over the Korean political economy are numbered. Old habits die hard. From Bloomberg:

Samsung Group Chairman Lee Kun Hee lauds global business standards, ethical management and accounting transparency in his ``CEO message'' posted on the corporate Web site. ``If we are careless in our execution or complacent with what we have accomplished thus far, we could easily tumble to the bottom in a flash,'' writes Lee, 66, who has overseen South Korea's biggest family-run conglomerate, or chaebol, for two decades.

While Lee's indictment last week on charges of breach of duty and evading about $113 million in taxes blunted his ethics push, the announcement yesterday that he and other top Samsung executives will step down puts more at stake. The chaebol model itself -- criticized by outsiders as a closed network even as it poured investment into the economy -- may be unraveling, according to some analysts.

The announcement signals ``an end to the era of the Masters of the Universe,'' says Tom Coyner, who helps advise foreign investors in Korea as president of Soft Landing Consulting Ltd. in Seoul. ``The resignation by Chairman Lee Kun Hee is unprecedented.''

Samsung's presence in the nation's economy is huge. Its 59 subsidiaries -- led by the flagship Samsung Electronics Co., Asia's largest maker of mobile phones, chips and televisions -- made up about 18 percent of South Korea's 2006 gross domestic product of $888 billion. Now, management of the group that has guided strategy for the chaebol for decades is in doubt.

Group Vice Chairman Lee Hak Soo and President Kim In Joo will quit by the end of June, Samsung said in the statement yesterday that brought news of Lee Kun Hee's departure. The group's strategic planning office, which controls group operations, will be dismantled and Samsung may turn into a holding company, the statement said.

The chairman's son, Lee Jae Yong, will be reassigned overseas. The charge of breach of duty arose because Lee Kun Hee caused losses at Samsung by helping his son gain control of group units, according to prosecutors. The resignations create a vacuum atop a business empire that was started in 1938 by Lee Byung Chull, Lee Kun Hee's father. The current chairman's departure will leave Samsung affiliates under independent management, a Samsung official said.

The tax evasion and breach of duty charges resulted from a probe that began in January after Samsung's former chief lawyer, Kim Yong Chul, issued public allegations of financial irregularities. Other Samsung executives were charged with similar offenses, including Lee Hak Soo, 61, and Kim In Joo, 49.

Prosecutors said that the strategic planning office was involved in managing about 4.5 trillion won ($4.5 billion) in funds and helping the transfer of control to Lee Jae Yong. Prosecutors said they found no evidence of Kim Yong Chul's central allegation -- that the group diverted funds to bribe government officials and journalists. Kim had alleged that the planning office directed the purported bribery operations. ``I'm truly sorry for causing so much concern with the investigation,'' Chairman Lee, who hasn't admitted or denied the charges, said in a televised press briefing yesterday. ``I will assume full legal and moral responsibility.''

Samsung Fire & Marine Insurance Co. President Hwang Tae Seon and Samsung Securities Co. Chief Executive Officer Bae Ho Won will also resign, while Samsung Life Insurance Co. chief, Lee Soo Bin, will represent the group externally, the statement said.

The family-controlled chaebol emerged in Korea after Park Chung Hee, who seized the country's presidency through a military coup in 1961, promoted industrialization through multiyear economic plans. The International Monetary Fund cited the chaebol's debt-driven practices as part of the reason the economy landed in a financial crisis at the end of 1997.

The chaebol have long had close ties to the government, and some politicians who favor greater limits on the industrial groups call Korea the ``Republic of Samsung.'' Many chaebol recruit senior government officials or ex-prosecutors to lobby for them, says Cho Seung Min, a former researcher at the Institute of Public Policy and Administration at Chung-Ang University in Seoul. Lobbying is unregulated, he says.

Lee's family controls group units through a maze of cross shareholdings. For example, the chairman and related parties own 36 percent of Samsung Life, which in turn is the biggest shareholder of Samsung Electronics, according to regulatory filings. The chairman's son is the second-largest owner of Samsung Everland Inc., the group's de facto holding company.

Shares of most Samsung Group subsidiaries listed on the Korea Exchange fell yesterday. Samsung C&T Corp., the building and trading arm, slid 9 percent to close at 70,700 won. Samsung Securities, Samsung Fire, Samsung Engineering Co. and Hotel Shilla Co. all fell by more than 3 percent. Samsung Electronics gained less than 1 percent.

Chairman Lee was convicted in 1996 for bribing ex- Presidents Chun Doo Hwan and Roh Tae Woo, drawing a two-year prison term that was suspended for three years. He was pardoned by President Kim Young Sam a year later. Prosecutors in 2005 had investigated whether Lee and other company executives used corporate funds to pay presidential candidates. He was later cleared. The chairman took the helm in 1987 after the death of his father, who founded Samsung as a four-story wooden store selling groceries in the southern city of Daegu. By 2006, Samsung Group's revenue jumped ninefold over two decades to $159 billion, according to the company's latest consolidated figures. Its 2006 exports totaled $70 billion, or 21 percent of the country's total exports.

Lee's resignation contrasts with Hyundai Motor Co. Chairman Chung Mong Koo, who has kept his position even as he faces a retrial for embezzlement. Chung was convicted last year. Anti-chaebol groups remain unconvinced that the changes announced yesterday will enhance Samsung's transparency. ``We hardly believe there will be any real improvement in the group's corporate governance,'' Solidarity for Economic Reform, a Seoul-based civic group, said in an e-mailed statement.