South Korea

Money and power: Samsung embroiled in South Korea scandal

Major industrial firms are so intertwined with power in South Korea that citizens joke they live in the «Republic of Samsung». Now the heart of that republic is in the eye of a political storm.

Samsung heir Lee Jae-yong (C): some critics say he has «the Minus touch» after several of his pet projects have fizzled out
Samsung heir Lee Jae-yong (C): some critics say he has «the Minus touch» after several of his pet projects have fizzled out (AHN Young-Joon | POOL/AFP)

Major industrial firms are so intertwined with power in South Korea that citizens joke they live in the "Republic of Samsung». Now the heart of that republic is in the eye of a political storm.

The family-run conglomerate is still reeling from last year's Galaxy Note 7 recall, its patriarch is on his death bed, and prosecutors on Monday sought the arrest of his son and heir on charges of bribery, embezzlement and perjury.

When Lee Jae-Yong emerged from a marathon 22-hour questioning session last week, his taut, fixed hint of a smile gave nothing away, seemingly characteristic of the electronics giant's opaque leadership.

+1

Samsung heir Lee Jae-yong (C): some critics say he has "the Minus touch" after several of his pet projects have fizzled out ©AHN Young-Joon (POOL/AFP/File)

"There is this widespread perception that the Lee family is above the rule of law," said Shim Jung-Taik, an author of several books on Samsung and its corporate culture.

"Many South Koreans hope that prosecutors investigating the case will prove that wrong," he said.

Samsung, whose turnover is equivalent to a fifth of South Korea's GDP, is one of several sprawling conglomerates, known as "chaebols", that dominate the country's economic landscape.

The chaebols are credited with powering Seoul's state-directed growth in the 1970s and 80s, pulling the war-ravaged nation out of poverty.

But critics say their founding families run them less as global firms and more as private fiefdoms that enjoy deep-rooted ties to the government.

When millions of people took to the streets to demand the ouster of now impeached President Park Geun-Hye in the latest bribery scandal, they also demanded the paymasters be punished.

"Street rallies of unprecedented magnitude apparently convinced lawmakers and prosecutors that they could no longer ignore the public anger over corporate corruption," Shim told AFP.

Lee, vice chairman of flagship subsidiary Samsung Electronics, was hauled in over accusations he bribed Park's secret confidante Choi Soon-Sil with nearly $40 million to seek policy favours.

If convicted he could been sentenced to several years in prison, but powerful businessmen have previously met lenient fates in South Korean courts.

Lee's own father, Samsung's longtime patriarch Lee Kun-Hee, who is credited with turning the once-obscure manufacturer into a global powerhouse, was found guilty in 1996 of bribing former President Roh Tae-Woo.

He was given a suspended jail term, but received a presidential pardon a year later.

Lee senior was convicted of tax evasion and breach of duty in 2008 for creating secret slush funds worth billions of dollars -- again receiving a suspended jail term and another presidential pardon.

- 'Hard lesson' -

The Lee family directly own only five percent of Samsung shares but control the group via a complex web of cross-shareholdings between group subsidiaries.

Samsung allegedly bribed Choi to secure a state approval for the controversial merger of two Samsung units in 2015, seen as a key step to ensure a smooth succession for Lee.

Many external investors opposed the deal, saying it wilfully undervalued one of the firms involved. But it went through after Seoul's state pension fund voted in favour.

"Such lack of transparency is Samsung's biggest weakness that makes it vulnerable to outside criticism... or to political pressure" to offer bribes, said Kim Sang-Jo, economics professor at Hansung University.

The timing of the crisis could have not been worse for the 48-year-old Lee, who has struggled to prove he deserves to take over the firm from his bedridden father.

Last year's recall of the Galaxy Note 7, when the world's top smartphone maker was forced to discontinue its flagship handset over exploding batteries, damaged the son's nascent leadership.

Lee's two sisters -- especially Lee Boo-Jin, 46, who leads the group's fast-growing hotel business -- have proven to be capable managers, while some critics suggest Lee has "a Minus touch" after several of his pet projects fizzled out.

Lee's absence might have a limited impact on the day-to-day operations of Samsung, where each unit has its own CEO and overall business strategies are set by an elite team of executives at its Future Strategy Office.

But in the long term, Samsung's future hinges on reform of its byzantine governance structure, Kim said, adding Lee appeared to be more willing to listen to critics than his father.

The group said last year that it was considering splitting Samsung Electronics into two units, as suggested by many critics including the US activist hedge fund Elliot Management.

"Samsung should learn a hard lesson from this whole crisis that it should reinvent itself as a truly global, transparent entity," said Kim, "whether Lee Jae-Yong goes to jail or not".