[Viewpoint] Lee Jayong's Public Apology and Succession of Management Rights

On the 6th, Samsung Electronics Vice Chairman Lee Jae-yong issued a public apology, admitting that he had failed to strictly adhere to laws and ethics regarding the succession of management rights and labor issues, and pledged that Samsung would no longer engage in any illicit or condemnable practices. This apology came in response to the Samsung Compliance Committee's demand for an apology. Notably, Lee declared that he would not pass on management rights to his children.

It is common even abroad for founding families to participate in corporate management as controlling shareholders and to succeed management rights. The debate over whether family management or professional management is superior is largely meaningless, as there are countless examples of both success and failure under each system. The advantage of family management is that it can minimize agency problems. Founding families have a sense of ownership because they must pass on the "our company" built by previous generations to the next, allowing them to manage the company with a long-term perspective. In contrast, professional managers, since it is not "their company," may focus only on short-term performance during their tenure, leading to short-termism.

The greatest weakness of family management and succession of management rights is its lack of sustainability. As the saying goes, "wealth does not last three generations," and there are countless cases of failed family businesses. It is inevitable that individual family members' shares become diluted over generations. This process often leads to disputes among family members, and in the worst cases, companies that have been passed down from previous generations collapse. The luxury brand Gucci experienced extreme family disputes over asset division and management rights, culminating in the wife orchestrating the assassination of her husband in the middle of Milan. Ultimately, family management came to an end, and the company was acquired by another firm.

Another limitation of family businesses is whether they can continuously produce capable managers within the family. It is almost impossible for outstanding managers to be born consecutively in one family. There is no doubt that Samsung's success today was achieved by the exceptional managers Lee Byung-chul and Lee Kun-hee. The question is whether capable successors will continue to emerge among descendants to inherit the family business. When the Joseon Dynasty's royal system was established, the first king to systematically receive royal succession education as the eldest son and ascend the throne was none other than the tyrant Yeonsangun. Excellent managers are never simply born or created by succession training within one family.

A unique characteristic of Korean companies is that the vast majority are directly managed and have management rights succeeded by founding families called "owners," and cases of professional managers running companies are rare. Founding families use various methods to maintain their controlling shares and management rights, during which illicit, quasi-illegal, and sometimes illegal acts occur. The difficulties Lee Jae-yong faces today began when he received a gift of 6 billion KRW and paid 1.6 billion KRW in gift tax. During the process in which 4.4 billion KRW grew to approximately 7 trillion KRW, numerous incidents such as the issuance of Everland convertible bonds caused controversies and problems, ultimately leading to his imprisonment.

Lee's apology can be seen as the first step toward resolving past social controversies. Although he declared that he would not pass on management rights, there is no reason to completely exclude the Lee family from Samsung's management. It is necessary to find what role the Lee family can play in continuing to lead Samsung well in the future. Successful companies share the commonality that outstanding managers run the company, and there is a balanced system of appropriate checks and supervision by the board of directors and shareholders. I hope Lee's apology will not only be a pledge for Samsung's future but also serve as an opportunity for other family businesses to consider how to lead their companies going forward.

Shin Jin-young, President of the Korea Corporate Governance Service and Professor of Business Administration at Yonsei University