By Song Jung-a
http://www.ft.com/cms/s/0/2d89f85c-108c-11dd-b8d6-0000779fd2ac.html
Published: April 22 2008 18:07 | Last updated: April 22 2008 18:07

The emperor bows out - Lee Kun-hee leaves Samsung, which is responsible for a fifth of Koreas exports, facing its biggest challenge

It has long been an unwritten rule in South Korea that a few criminal convictions need not stand in the way of running the country’s biggest companies.

In recent years, Koreans have grown used to seeing the chairmen of leading conglomerates on trial for fraud or bribery one day, and back in the office the next.

So Tuesday’s surprise announcement that Lee Kun-hee, Korea’s most powerful tycoon, would immediately resign as chairman of Samsung, sent shockwaves through corporate Korea.

The reclusive Mr Lee was last week indicted on charges of tax evasion and breach of trust after a special prosecutor found that he managed billions of dollars in borrowed-name accounts and incurred losses at Samsung units by allowing his children to buy bonds in Samsung’s divisions at below-market prices.

But, as has so often been the case in Korea, many analysts, cynical about the prospects for real corporate change, expected Mr Lee to be given a slap on the wrist and then sent back to work.

Instead, Mr Lee resigned, saying he would take all responsibility for the scandal.

Even Samsung insiders were taken aback. “His resignation is shocking, totally unexpected,” said James Chung, a spokesman for Samsung Electronics. “We have some fear about whether we can do as well without him.”

Samsung is now facing the biggest challenge in its history.

Mr Lee has run the Samsung empire since 1987, taking over the reins after the death of his father, who founded the group as a small trading firm more than 70 years ago.

Mr Lee transformed the group from a copy-cat manufacturer into the global brand it is today.

Koreans have taken to calling their country the “Republic of Samsung” and referring to Mr Lee as its “emperor” – neither of them meant as compliments.

But, as he entered his late 60s, the chairman started preparing to pass the company to his only son, Lee Jae-yong – moves that landed him in hot water.

Although their ownership is tiny, the Lees have been able to control the group through a complex web of cross-shareholdings.

Lee Jae-yong is the biggest shareholder, with 25 per cent of Samsung Everland, the group’s de facto holding company, which in turn controls Samsung Life Insurance, which in turn controls Samsung Electronics.

Lee Jae-yong yesterday resigned from his specially created role as chief customer officer at Samsung Electronics – a position viewed as preparation for the chairmanship.

But Samsung said he would continue to work for the company.

Samsung also said it would dismantle the strategic planning office that advised the chairman and pledged to sell credit card group Samsung Card’s 24 per cent stake in Everland within five years, as part of efforts to reduce cross-shareholdings.

The changes failed to impress investors yesterday. Shares of most Samsung group units fell yesterday, as analysts expect that process of clearing up cross-shareholdings would take a long time.

But some analysts said the changes would allow Samsung to embark on real reform.

Mr Lee’s resignation could mark an “epoch-making” moment for corporate Korea, said Young Soo-gil, an influential economist who heads the National Strategy Institute.

“With his departure, Samsung can accelerate internal renovation and enhance its corporate competitiveness to become a truly global company,” Mr Young said.

“Now that every problem is exposed, social pressure has become unbearable for Samsung. It is bound to change, given potential negative repercussions it would face if did not accommodate the changing needs.”

Others, however, doubted that there would be fundamental improvements.

The fact that Samsung did not appoint a new chairman – instead saying Lee Soo-bin, the head of an affiliate, would represent Samsung externally – led to suggestions that Samsung would still try to install the younger Mr Lee as chairman in a few years.

“I don’t see any big change,” said a market strategist who did not want to be named.

“Mr Lee can exert his influence behind the scenes as long as he remains the major shareholder.”