[News analysis] Samsung in management crisis due to owner risk

Samsung Electronics Vice Chairman Lee Jae-yong in front of the Seoul High Court for his trial related to bribery charges on Dec. 6. (Kang Chang-kwang, staff photographer)

Delay in appointments leads to setbacks in formulating project plans

Samsung Electronics Vice Chairman Lee Jae-yong in front of the Seoul High Court for his trial related to bribery charges on Dec. 6. (Kang Chang-kwang, staff photographer)

“We are very sorry for the concerns and disappointment that we have caused for many people with labor-management issues.”

On Dec. 18, the Samsung Group issued a four-sentence “position statement” in the name of Samsung Electronics and Samsung C&T. It came after prison sentences were handed out on Dec. 17 to Lee Sang-hoon, chairman of the board at Samsung Electronics, and numerous other current and former executives charged with disrupting the formation and activities of a labor union at Samsung Electronics Service (Samsung SVC).

“We humbly recognize that the perspective and attitude toward labor unions within the company in the past did not meet the standards of the South Korean public or the expectations of society,” Samsung said in the statement, adding that it would “work to establish a future-oriented and healthy labor-management culture based on a spirit of respect for employees.” While some are taking the latest developments as a basis for predicting full-scale reforms to come from Samsung, Samsung Electronics insiders said a normalization of management is unlikely due to longstanding and regularly occurring issues with “owner risk.”

At the moment, Samsung Electronics’ “control tower” for deciding and pursuing reforms is effectively in ruins. One of the chief questions is whether the board of directors can properly function amid the major hole left when Lee was taken into court custody. Vice Chairman Lee Jae-yong stepped down from his registered director position after three years when his term expired in late October -- a decision many analysts attributed to concerns about objections from the National Pension Service (NPS) and other major shareholders. Only three in-house directors remain: business sector chiefs Kim Ki-nam, Kim Hyun-suk, and Koh Dong-jin. As officers in charge of semiconductors, smartphones, and home appliances, they are not especially well-versed in company affairs related to re-establishing labor-management relations, nor do they have leadership on the issue. Some are suggesting an acting chairperson should be selected as a stopgap, but related discussions have reportedly failed to make progress.

“As far as I’m aware, nothing is yet being discussed in terms of the board’s operation,” said one Samsung Electronics executive. Full-scale reform measures will be difficult to establish without board voting and review procedures, as the board is the organization’s core decision-making body according to the commercial code.

Regular company appointments delayed by several weeks

Normal company operations are also facing setbacks. To begin with, regular appointments have been delayed by several weeks. Since 2010, the Samsung Group has been presenting its appointments for the presidential board and executives during the first week of December, with employees successfully appointed afterward. A Samsung Electronics official said, “There hasn’t been any talk internally with regard to appointment.” Members of the appointment team for Samsung Electronics Human Resources Team Director Park Yong-ki (sentenced to one year in prison suspended for two years) were among those receiving prison sentences on Dec. 17 in connection with union-busting activities. In addition to Park, guilty verdicts were also handed out to executive directors and HR team executives Shin Hyeon-jin (one year in prison suspended for three years) and Bae Il-hwan (one year suspended for two years). With the HR team currently in disarray, appointments are unlikely to proceed unhindered.

“It’s looking more likely now that the regular appointments will be put off until around March to May of next year,” another Samsung Electronics official said. It would not be the first time that appointments were postponed. When the Future Strategy Office (FSO) was dismantled as the group’s “control tower” over involvement in a government influence-peddling scandal, regular appointments originally scheduled for late 2016 ended up taking place in May of the following year.

The delay in appointments is leading in turn to setbacks in formulating project plans. Since Dec. 16, Samsung Electronics has been drawing development project plans for next year with “global executive councils” for its individual project divisions. But the plans themselves and the officials responsible for executing them remain in flux with the regular appointments yet to take place. Executives are not in a position to direct project planning when they might end up being switched out in the next round of regular appointments.

“While the outline of next year’s smartphone project strategy is in place, it isn’t clear who’s going to be taking the helm in implementing it, so there’s been some turbulence internally due to concerns about project uncertainty,” a department director from the mobile phone division explained in a telephone interview with the Hankyoreh.

Samsung’s predicament rooted in owner-centered system/b>

Experts on corporate management and governance structures identified the “owner-centered system” as the root cause for the predicament Samsung finds itself in. In addition to the “no union” policy that has been carried on since the days of founding chairman Lee Byung-chul, the various legal breaches and workarounds used to pave the way for the succession of Vice President Lee Jae-yong to group authority are now being targeted for punishment by courts.

“We’re seeing fatal issues within the imperial ownership system, where professional managers are obliged to consider the owner’s intentions and interests ahead of the interests of the company and shareholders,” explained Lee Chang-min, a professor of business administration at Hanyang University.

“This is even more pronounced at Samsung than in other groups, with its reputation for being ‘management Samsung,’” he noted.

“With companies a lot larger in scale now [compared with the past], they’re going to end up repeating the same kinds of mistakes unless they change the owner-based system to one in which authority and responsibility are clearly delegated to professional managers,” Lee advised.

By Kim Kyung-rak, staff reporter

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