By Song Jung-a in Seoul
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Published: April 23 2008 03:00 | Last updated: April 23 2008 03:00

Samsung, South Korea’s largest conglomerate, suffered the biggest upheaval in its corporate history yesterday when four of its top executives, including the chairman, suddenly resigned after a year of allegations of financial wrongdoing.

Lee Kun-hee, group chairman, said he would take “full responsibility” for his indictment last week for tax evasion and breach of trust by resigning immediately.

“I will step down from the Samsung chairmanship today,” Mr Lee, 66, said in a televised speech. “I am saddened as there is still much to do and a long way to go, but I am leaving with all the faults of the past.”

The decision is unprecedented in corporate Korea, where tycoons usually continue to run business groups even after being convicted of serious white-collar crimes. It comes as Samsung faces rising competition from emerging Chinese rivals.

With no replacement named, there is a power vacuum at the top of Korea’s biggest chaebol, a $150bn family-run conglomerate with business units involved in everything from shipbuilding and electronics to credit cards and hotels.

Mr Lee had been trying to pass group control to his son, Lee Jae-yong, who yesterday resigned as chief customer officer of flagship Samsung Electronics, although he will continue working for the company. The chairman’s top lieutenant, vice-chairman Lee Hak-soo, and the group’s president, Kim In-joo, will step down within two months.

The chairman’s wife, Hong Ra-hee, accused of buying expensive artworks with Samsung’s secret funds, quit as head of Samsung’s Leeum art gallery yesterday.

Samsung will be run by “professional managers”, the group said. Lee Soo-bin, the chairman of Samsung Life Insurance, will represent Samsung for external relations. The group said there would be no replacement for chairman Lee on the business side.

The upheaval comes after Samsung’s former chief lawyer made allegations of widespread financial improprieties at the group, becoming Korea’s first whistleblower.

After months of investigating, a special prosecutor last week concluded that Mr Lee, the chairman, had breached his financial duty by letting his children buy bonds of Samsung’s affiliates through irregular financial transactions, incurring losses at the companies.

He found Samsung managed about Won4,500bn ($4.5bn) in borrowed-name accounts, and that Mr Lee had evaded Won112.8bn of income taxes.

Nine other Samsung executives were indicted on various charges. Mr Lee was cleared of more serious allegations that he was involved in Samsung Group’s efforts to bribe the country’s powerful figures including politicians, government officials and prosecutors.

The affair coincides with the global market turmoil threatening Korea’s export-dependent economy and is likely to alarm the new government of President Lee Myung-bak, who took office two months ago. He pledged to boost growth to 7 per cent, partly by encouraging chaebol such as Samsung to invest and expand.

Samsung Electronics shares yesterday rose 0.2 per cent to Won675,000. Shares in most other companies in the group fell.

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.”

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Samsung has not named a replacement for Lee Kun-hee, its chairman, but said yesterday Lee Soo-bin would be its representative for “external relations”, writes Woo Jae-yeon.

Lee Soo-bin has been a staunch “Samsung man” for more than 40 years since he entered Cheil Jedang (now CJ Corp), a food-processing Samsung affiliate, in 1965.

The 69-year-old has served in the top job at several Samsung affiliates, including Samsung Techwin, CJ and, most recently, Samsung Life Insurance.

He served as Lee Kun-hee’s chief of staff in 1991 and has worked as chairman of Samsung Life Insurance since 1995.

He briefly filled Lee Kun-hee’s role when the latter left for the US for a medical check-up.

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Samsung was founded in 1938 when Lee Byung-chul opened a trading company. It expanded in the wake of the 1950-53 Korean War, adding a textiles business, building the country’s first large sugar refinery and forming a powerful trading network.

The founder added more businesses in the 1960s and 1970s, including Shinsegae department store, the JoongAng Ilbo newspaper, a shipbuilder, a chemical company and Samsung Electronics, which became the group’s crown jewel. Some businesses were spun off.

Samsung and other family-owned conglomerates known as chaebol thrived under the 1961-79 protectionist rule of President Park Chung-Hee.

Lee Kun-hee officially took over in 1987 when his father Lee Byung-chul died. The new chairman has shifted the group’s focus from quantity to quality, developing a renowned global brand. Under his leadership, Samsung became South Korea’s biggest conglomerate with about 60 divisions, accounting for about 15 per cent of the country’s economic activity.

Samsung’s exports totalled $70bn last year, more than 20 per cent of South Korea’s total.