Chaebol Family Governance: Samsung 1, Hedge Funds 0

To the Lees, control of Samsung is their birthright. To Westerners, the Lees are not a corporate royal family.

The intricate web of cross-shareholdings characterizing Japanese and Korean multinationals has long befuddled and annoyed Westerners. In Japan, the keiretsu (cross-shareholding) system based on conglomerates' various companies owning each other's shares is deliberately meant to keep longstanding and closely-linked structures intact for the likes of Mitsui, Sumitomo, etc. In Korea, the chaebol perform a similar function. In more recent times, especially after liberalizations demanded of Korea in exchange for IMF emergency lending, these cross-shareholdings have been meant to keep minority (read: foreign) shareholders at bay.

As of late, the most pesky of these have been US hedge funds. Recently, there was a showdown for the very soul of Samsung over the succession of its ailing leader Lee Kun-hee. Samsung insiders wanted familial succession, whereas minority Western shareholders agitated for a more "democratic" selection process for the succession:

The Lee family that controls the Samsung conglomerate won its showdown with minority shareholders on Friday, but the vote still represents a watershed for corporate governance in the world’s 14th-largest economy. Though Samsung won, the bell is tolling for South Korea’s chaebol system of corporate control.

After weeks of pleading and foreigner-bashing by Samsung executives, shareholders narrowly approved the sale of Samsung’s construction arm to its de facto holding company, Cheil Industries. The transaction won 69.5% of the votes, barely more than the necessary two-thirds. The deal will help heir apparent Lee Jae-yong keep control of Samsung Group upon the death of his ailing father, Chairman Lee Kun-hee.

From the Western perspective, they are treated by Samsung the same way Argentina treats its creditors (more on the Southern American nation in a little while):

Opposition to the deal was led initially by the U.S. hedge fund Elliott Associates, which rightly argued that the transaction undervalued the purchase by as much as $7 billion. But the insider self-dealing also mobilized thousands of mom-and-pop shareholders and exposed the cronyism and political favoritism that have made the giant chaebol firms increasingly unpopular in Korea. Samsung’s more than 70 affiliates, linked through a complex network of cross-shareholdings, account for a huge chunk of South Korean gross domestic product, and Samsung Electronics is the world’s second largest tech company by sales after Apple.

But that high profile is all the more reason for Samsung to abide by modern rules of corporate transparency and respect for minority shareholders. Instead Samsung played on nationalist sentiment and drew on its political influence to prevail. In echoes of Argentina, Samsung claimed to be defending itself against “an attack by a foreign hedge fund seeking short-term trading gains.” But Elliott and the Canada Pension Plan Investment Board, another opponent of the insider deal, bought their shares on the open market. If Samsung wants only South Korean shareholders, it ought to say so and return to being a nonpublic company.

I am of two minds about this. While shareholders large and small should be treated well, Western shareholders have a much shorter-term orientation--as in the current quarter. Although it is difficult to construct a counterfactual argument, would Samsung have become the globe-spanning conglomerate that it is now if activist minority shareholders from the West were agitating for these sorts of things in the 60s or 70s?

My belief is that it's not merely a fight over "bad" Asian corporate governance against "good" American corporate governance. There is a cultural gap that demands more scrutiny than simply dismissing Korean practices as continuations of favoritism, crony capitalism, ignorance of shareholders rights and so forth. They really do things differently elsewhere, and the world is not merely America writ large.