What does the jailing of its heir mean for Samsung?
25 August 2017
You just need to walk down the streets of Seoul to see how entrenched Samsung is as part of Korean life. It is South Korea's largest "chaebol" - a Korean name made up of the words "clan" and "wealth", which together mean a massive family-owned empire - and makes up a fifth of the country's GDP. It is made up of numerous different businesses, ranging from consumer electronics to healthcare to life insurance. It's also the company that many young Koreans want to work for, as I found out during a trip to Seoul earlier this year, despite the corruption woes of company heir Lee Jae-yong (also known as Jay Y Lee). But now with Lee sentenced to five years in prison, how much will this impact on the fortunes of South Korea's most powerful company? Not too badly in the short term at least, says Geoffrey Cain, author of an upcoming book on the Samsung empire. "Samsung has a decentralised ruling system of management, so Mr Lee was never really involved in the day-to-day management of the company. He was more of a guiding hand for the empire," Mr Cain says. Samsung itself has told me that it has three co-CEOs in place running the management team, and that it will endeavour to lead its operations without disruptions "and will find a way to minimise the impact of the legal proceedings". But while it may be business as usual for now, it's hard to see how in the long term Samsung won't suffer. I've been told that Lee's position at Samsung was never about specific product design or the performance of the company every quarter. His job was to provide the conglomerate with a long-term vision. The unique perspective he had as a founding family member, I've been told, allowed him to seek out opportunities for Samsung. Educated overseas, Lee's role was about developing future businesses and nurturing relationships with global clients. He was always given the most difficult clients to manage, I've been told, because he always had a deeper understanding of the company's future path. Lee knew where Samsung needed to go and he wanted to help it get there - these are skills that you can't just step in and replace right away. Samsung may have no shortage of qualified professionals who are currently handling the different divisions, but without a family leader it is hard to see how the firm can push ahead with a new direction - something it desperately needs as it tries to compete with rivals from China and Japan. Lee's verdict is also likely to have been watched very carefully by South Korea's powerful chaebols. Even though this is not the first time a chaebol boss has been convicted and sentenced to prison, most of them don't serve their entire jail terms. Lee's case is unusual in that he received such a long sentence for a chaebol boss. He has the right to appeal but in South Korea any sentence that is longer than three years cannot be suspended. Privately, chaebol sources have told me they feel unfairly maligned by the current campaign against them. After all, they argue, they are a vital force of South Korean industry - sales revenue from the top five chaebols are worth more than half of the country's entire economy. Indeed, it is true that chaebols have helped to transform this once-poor nation into Asia's fourth-largest economy. But it's also true that these sprawling empires wield enormous influence and have exploited that influence both politically and economically to dominate South Korea's business world. "The verdict is a big signal that the country is moving towards chaebol reform," Geoffrey Cain told me. "But these are just the early stages - this is just the start." The case against Lee has always been about more than just one man's actions. The fact that this verdict has been handed down in the opening months of President Moon Jae-in's administration should signal a commitment to chaebol reform - after all it was among the major platforms of his campaign. There's almost certainly more reform to come. But what shape it will take is still unclear.
But while it may be business as usual for now, it's hard to see how in the long term Samsung won't suffer. I've been told that Lee's position at Samsung was never about specific product design or the performance of the company every quarter. His job was to provide the conglomerate with a long-term vision. The unique perspective he had as a founding family member, I've been told, allowed him to seek out opportunities for Samsung. Educated overseas, Lee's role was about developing future businesses and nurturing relationships with global clients. He was always given the most difficult clients to manage, I've been told, because he always had a deeper understanding of the company's future path. Lee knew where Samsung needed to go and he wanted to help it get there - these are skills that you can't just step in and replace right away. Samsung may have no shortage of qualified professionals who are currently handling the different divisions, but without a family leader it is hard to see how the firm can push ahead with a new direction - something it desperately needs as it tries to compete with rivals from China and Japan.
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Long-term impact?