|Graphic by Bae So-young|
By Nam Hyun-woo
Domestic conglomerates are suffering from growing legal risks that are stalking their owners and chief executives, which could potentially hinder them from making important managerial decisions.
As the COVID-19 pandemic has placed chaebol ― as they are known in Korea ― at a critical juncture where they must reshape their business strategies, industry watchers say the absence of their owners in the decision making process is discouraging companies from exploring new opportunities through investments and M&As
On Sept. 1, the prosecution indicted Samsung Electronics Vice Chairman Lee Jae-yong over allegations of accounting fraud and stock price manipulation that would strengthen his control of Samsung Group.
The indictment came despite a recommendation from an independent panel that reviewed the case and the evidence, recommending against such action. The review system was introduced two years ago to improve fairness in prosecuting cases deemed to be of great public interest, and prosecutors have followed the panel's recommendations since then.
Upon announcing the indictment, the prosecution said the review panel opposed the indictment due to the potential damage it could cause to the country's economy, but decided to carry on with the case citing a study on 35 conglomerates whose owners or chief executives were found guilty on certain charges.
The study was unveiled Jan. 13 by the Economic Reform Research Institute, which looked into cases involving 319 affiliates of 35 conglomerates from 2000 to 2018.
In the study, the researchers ― professors Lee Chang-min of Hanyang University and Choi Han-soo of Kyungpook National University ― concluded that the conviction of a conglomerate owner did not have a great impact on the affiliates' stock price, thus conglomerate leaderships' claims that their businesses were heavily affected by the owners' absence were made on weak grounds.
However, Industry officials and experts say their absence hampers companies in making important strategic decisions, slowing down responses to a fast-changing business environment, and thus the consequences loom larger than short-term movements in stock prices.
"Those who say investigations of owners or CEOs don't affect a company do not properly understand the role of CEOs," said Lee Byung-tae, a professor at the Korea Advanced Institute of Science and Technology's College of Business.
"CEOs receive a high salary because the decisions they make heavily affect the earnings of the company. And this is becoming more conspicuous in modern companies because they are required to be more prompt in making important decisions. For example, the long-stalled investigations into Samsung Electronics Vice Chairman Lee has jeopardized the company's ability to make fast decisions."
Samsung Electronics is rarely mentioned with regard to M&As following its acquisition of audio giant Harman International Industries in 2016. Since then, rumors have abounded that the company has lagged behind rivals Intel and Nvidia in grabbing promising firms that were up for sale.
In 2017, Intel acquired computer vision technology firm Mobileye for $15.3 billion, and purchased mobility-as-a-service firm Moovit in May this year for approximately $900 million. NVIDIA is now making headlines with the announcement of its acquisition of chipmaker ARM for $40 billion.
Amazon's Jeff Bezos earlier this year invested $15 million in British logistics startup Beacon, while Samsung's smartphone rival Apple has signed eight M&A deals this year alone.
While rivals are expanding or refurbishing their portfolios, Samsung has been mired in a series of legal battles involving Lee since 2016, when a number of civic groups here first filed complaints with the prosecution against him over the aforementioned charges.
Along with the accounting fraud charges, Lee still faces hearings regarding a bribery case involving jailed former President Park Geun-hye, and has already spent 353 days behind the bars from February 2018 to February last year.
While struggling with the risks facing Lee, Samsung Electronics has amassed cash and cashable assets valued at 36.11 trillion won ($30.51 billion) as of the end of the second quarter, up from 26.89 trillion won at the end of 2019.
"Following Lee's release from jail in 2019, Samsung Electronics unveiled massive spending plans, highlighted by a 180 trillion won investment into AI and semiconductors in August of that year," a local chaebol official said. "This shows companies can make strategic decisions promptly on their leaders' watch. Professional CEOs often face limits in making long-term decisions which come with costs."
A similar pattern is noticed in retail giant Lotte Group, which has faced a rapid change in its business environment in recent years. As consumers shifted toward online commerce, the group saw the necessity to reorganize its in-person business structure, but was slow to make decisions because Chairman Shin Dong-bin was facing a trial in 2018, also involving the Park bribery scandal.
Shin was jailed for eight months from February to October 2018, but recently dodged conviction risk as the Supreme Court handed down a suspended jail term in October last year. After returning to his business, Shin is aggressively reorganizing the group's structure, but has seen its profitability deteriorate.
SK Group also had similar experience. SK Group Chairman Chey Tae-won was jailed from 2013 to 2015 after being found guilty of embezzlement, and the group did not reported any M&As to the Fair Trade Commission (FTC) during that period. Since his return, the company has signed major M&A deals including with OCI Materials, Tongyang Magic and ADT Caps.
"Some say the prosecution and judiciary should care only about the charges and should not take other matters into account," another conglomerate official said. "But it is hard to deny that an owner's absence discourages companies from making important decisions and this deals a blow to the country's economy."