By Troy Stangarone
With the arrest of Lee Jae-yong on charges of bribery, embezzlement, perjury, and the illegal transfer of funds abroad, Samsung faces a period of uncertainty at a critical time for South Korea’s leading chaebol. Last year, Samsung had begun to turn around declining trends in earnings and seemed to turn a corner on product design until the failure of the Galaxy Note 7 damaged Samsung’s image. At the same time Samsung was managing these corporate challenges, it was also undergoing a multiyear transition to the leadership of Lee Jae-yong from his father Lee Kun-hee, who has been incapacitated since a heart attack in 2014. Now, Samsung faces the prospect of being without its new leadership before the transition has been completed.
Lee Jae-yong may ultimately be found to be innocent, but his temporary removal raises questions for Samsung’s near-term future as well as for the impact of a potentially more permanent departure from Samsung’s leadership.
Who Will Run Samsung in the Short-Term?
With Lee Jae-yong expected to be in custody at a minimum for up to 21 days as prosecutors prepare formal charges plus the length of any trial, Samsung will likely be run by a trusted caretaker. In the past, when Lee Kun-hee was unable to run Samsung due to convictions on bribery and tax evasion, lieutenants ran Samsung as caretakers. With Lee Jae-yong at least temporarily removed from the scene we should expect a similar arrangement. As was the bribery and tax evasion case with his father in 2008, multiple executives are also under investigation, meaning that Choi Gee-sung, the number two at Samsung, may not end up serving as the caretaker depending on how the investigation into Samsung’s ties to Choi Soon-sil develop.
While Samsung has delayed conducting its annual management reshuffle and setting business targets for the year in light of the crisis, keeping key people in place might actually add stability to Samsung at an uncertain time. At a division level, Samsung is run by professional managers who should be able to keep things moving forward, limiting the impact of Lee Jae-yong’s absence in the near-term. The real question for Samsung will be whether any caretaker is empowered to make strategic decisions, something which has not been the case in the past.
What Does this Mean for the Succession Plan?
The prospect of Lee Jae-yong spending an extended period of time behind bars raises questions about the viability of completing the succession plan. If he is ultimately exonerated, the succession plans can continue to move forward. At a minimum, the succession plan will slow down, but may have to be rethought if Lee Jae-yong is convicted.
Given the current uncertainty, the initial default option will likely be to follow the path of his father and leave Samsung in the hands of a caretaker until Lee Jae-yong’s legal situation is resolved and a future Korean president has granted a pardon allowing Lee Jae-yong to resume control. If a conviction requires an alternative plan, one option would be to continue with the succession process, but transition control to another family member such as Lee Boo-jin or Lee Seo-hyun. A third option would be to maintain family ownership, but transition the company to permanent professional management. In this scenario, the family would likely need to make clear that any professional manager was empowered to make strategic decisions for Samsung moving forward.
Will Samsung Continue Internal Reforms?
The charges against Lee Jae-yong may provide insight into whether the internal reforms at Samsung were supported by the entire Lee family or were the sole initiative of Lee Jae-yong. Under his leadership, Lee Jae-yong has sought to modernize and move Samsung’s internal culture to one more akin to a start-up to help spur innovation. Some of the moves included more flexible working hours, reducing management levels, loosening the use of titles, encouraging more discussion, and limiting the pressure to attend after work functions.
While Samsung has been successful with its traditional corporate culture, it also faces a more competitive international environment and change will likely be a key to long-term success. With Lee Jae-yong removed from Samsung’s day-to-day operations, will management begin to slip back into more traditional management styles, or has there been a broader decision made to reform Samsung’s internal culture in a way that would survive Lee Jae-yong’s absence?
How Will this Impact Samsung’s Brand and Growth?
Samsung took a hit to its reputation last year with the Galaxy Note 7’s battery issues. The Galaxy Note 7 aside, as long as Samsung continues to produce quality, innovative products its reputation is unlikely to take much of a hit internationally. Domestically, however, because of the ubiquitous nature of Samsung and the ties of the scandal to the impeachment of President Park Geun-hye, its reputation will face greater challenges.
While the Samsung brand is unlikely to be significantly damaged from the scandal internationally, efforts to reshape Samsung and find new areas of growth may face a more significant challenge. Lee Jae-yong had been trying to reshape Samsung by selling off unprofitable divisions or ones that seemed to have limited growth prospects, such as its printer business, while at the same time move into promising new fields like autonomous driving. Will shareholders of companies such as Harmon International * reconsider selling to Samsung and will other potential acquisition targets in promising areas look to more stable situations for merger partners instead of entertaining an offer from Samsung? Given the potential constraints on Samsung’s leadership, the reshaping of Samsung as a corporate entity is likely to slow.
Should Samsung Take Risks or Be Risk Averse?
The natural instinct of a company in a crisis is to minimize risks. Since the product design for this year’s new Galaxy and Galaxy Note models has already begun, any new features under consideration will likely be included in the Galaxy 8, since it release is expected to be in either March or April. However, in light of last year’s troubles with the Galaxy Note 7, there may be a temptation to play things safe with this year’s Note model and only include tested features that are popular in the Galaxy 8.
Playing it safe on design, though, could be the bigger risk for Samsung. The smartphone industry is quick moving, and if Samsung does little to innovate and differentiate itself from up and coming producers like Xiaomi, while allowing Apple to gain a bigger lead, it could find itself in the same position it was until recently with an increasing challenge from both high end producers and low end producers to its market share. Nokia and Motorola were both once dominate producers and were quickly surpassed by others. Regardless of the duration of Lee Jae-yong’s absence, Samsung will need to avoid becoming risk averse in the smartphone industry to maintain its position.
While South Korea has a complicated relationship with the chaebol, should Lee Jae-yong be convicted it would perhaps be a sad irony that one of South Korea’s most progressive third generation chaebol heirs would be taken down by scandal that represents much of the old Korea – in which there was an expectation that for companies to get along they had to do favors for the government and that the government could do them favors in return.
*Shareholders of Harmon International approved the sale to Samsung after this blog was initially published.
Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.
Photo from JCDecaux Creative Solution’s photostream on flickr Creative Commons.