[Lee Jae-yong's New Samsung]④ One Step Closer to 'Responsible Management'... The Path Forward for the Lee Jae-yong Ship

Speeding Up Progress as a Leading Domestic Company
Challenges Include Registered Directors, Control Tower, and Governance Restructuring

Samsung Electronics Vice Chairman Lee Jae-yong is touring the research center during his visit to Samsung Bioepis located in Songdo, Incheon, on the 11th of last month.
[Photo by Yonhap News]

[Asia Economy Reporter Han Yeju] The 'New Samsung' ship led by Chairman Lee Jae-yong has just set sail. It must accelerate its journey to become a 'leading domestic company' that sheds its dark past images of accounting fraud and illicit succession and strengthens social responsibility. Especially, as the board of directors has emphasized swift and bold decision-making and management stability, it is expected to focus its capabilities on 'responsible management.' Accordingly, Chairman Lee is expected to roll up his sleeves to solve innovation tasks such as strengthening legal responsibility by registering as a registered director, reviving a control tower to support the organization, and reforming the long-standing governance structure.

◆The 'only unregistered executive' among the chairmen of the four major groups= In the business community, there is a forecast that Chairman Lee will establish the foundation for responsible management by taking office as a registered director in March next year.

Chairman Lee was appointed chairman after the promotion agenda was approved at the Samsung Electronics board meeting on the 27th of last month, but he is an unregistered executive. A registered director attends the board of directors, makes decisions about company management, and is legally responsible, making it a representative position of responsible management. The owner family registering as a registered director can be interpreted as meaning they take responsibility and step to the forefront of management. Currently, Chairman Lee is the only unregistered executive among the chairmen of the four major groups. Except for Chairman Lee, SK Group Chairman Chey Tae-won, Hyundai Motor Group Chairman Chung Eui-sun, and LG Group Chairman Koo Kwang-mo are registered as inside directors of SK Inc., Hyundai Motor, and LG Corp., respectively. Chairmen Chung and Koo also serve as board chairs.

If Chairman Lee returns as a registered director, it will complete the establishment of a responsible management system following his designation as the Samsung Group's head (owner) in 2018 and his inauguration as chairman on the 27th. This marks his return to the registered director position after about four years since his term expired in October 2019. Chairman Lee previously became a registered director through an extraordinary shareholders' meeting in October 2016. At that time, he took responsible management amid the crisis caused by the 'Galaxy Note 7 recall' incident.

Professor Lee Kyung-mook of Seoul National University Business School explained, "The board of directors is the highest decision-making body of a company that must be established by law," and "Chairman Lee Jae-yong should register as a director to realize responsible management."

However, it is reported that he has decided not to take the position of board chair for the time being. Samsung Electronics separated the roles of CEO and board chair in 2018 to make governance and management systems more transparent.

◆The necessity to rebuild a 'control tower free of accumulated evils'= Inside and outside the business community, there is a high possibility that Samsung will transform in the mid-to-long term into a structure similar to Sweden's largest corporate group, the Wallenberg Group. This means a 'triangular system' consisting of major shareholders, the board of directors, and professional managers will be solidified. In May 2020, when he was vice chairman, Chairman Lee declared that he would not pass on management rights to his children regarding succession. To achieve this, it is analyzed that establishing a board-centered management structure and appointing professional managers based on independent judgment by the board is the desirable form.

To ensure efficiency in board-centered management, the dominant view is that a group-level control tower is necessary. Without a group-level control tower, inefficiencies in decision-making inevitably increase, and if coordination is done unofficially without a control tower, there is a risk of illegalities.

Samsung's control tower started as the 'Secretariat' during the era of founder Lee Byung-chul in 1959, later called the 'Restructuring Headquarters' and 'Strategic Planning Office,' and from 2010, it was renamed the 'Future Strategy Office (FSO),' handling the group's personnel and strategy. However, Samsung abolished the Future Strategy Office in 2017 during the Park Geun-hye administration because it was identified as a link between Samsung and political circles, creating a negative image. Since then, Samsung affiliates have strengthened autonomous management systems. Currently, Samsung Group is substituting the control tower with three task forces (TFs): business support led by Samsung Electronics, financial competitiveness enhancement led by Samsung Life Insurance, and engineering, procurement, and construction (EPC) led by Samsung C&T.

Voices calling for the reorganization of the control tower have been steadily raised not only in the business community but also within Samsung. It is concerning that a global company with annual sales of 400 trillion won and 60 affiliates lacks a control tower responsible for swift decision-making and management support.

As Chairman Lee demands intensive innovation upon his inauguration, the establishment of a new group-level control tower is expected to accelerate. Given the fierce competition in core business sectors such as semiconductors and mobile, the emphasis on mergers and acquisitions (M&A) to enhance competitiveness and strategies to create synergy among business units is persuasive. Moreover, the Boston Consulting Group (BCG), which Samsung commissioned for internal competitiveness enhancement consulting, is also known to have recommended restoring a group-level control tower.

However, since the previous control tower (FSO) was perceived by some as an 'accumulated evil' and thus abolished, a cautious approach is likely. Rather than replicating the roles and forms of the past Restructuring Headquarters or FSO with a focus on 'management,' it is more probable that a slim organization will be launched to enable agile decision-making and synergy among affiliates.

◆Another axis of ownership: 'Governance structure reform'= Reforming the group's governance structure is also essential. Currently, Samsung Group's governance structure flows from the owner family → Samsung C&T → Samsung Life Insurance → Samsung Electronics. The owner family, including Chairman Lee (17.97%), holds 31.31% of Samsung C&T's shares, and through these shares, indirectly controls Samsung Life Insurance and Samsung Electronics. This governance form has been a long-standing issue for the group because Chairman Lee's stake in Samsung Electronics, the group's core, is only 1.63%, raising concerns about strengthening control.

However, the opposition party's proposed amendment to the Insurance Business Act is an obstacle to Chairman Lee's expansion of Samsung Electronics shares. If this amendment, known as the 'Samsung Life Insurance Act,' passes, Samsung Life Insurance must dispose of the remaining Samsung Electronics shares worth about 20 trillion won exceeding 3% of its assets on the market. In this case, the owner family's control over Samsung Electronics is expected to weaken, making it vulnerable to attacks by foreign capital.

There are also speculations that the governance structure might be reorganized by splitting Samsung C&T. The plan would divide financial affiliates, including Samsung Life Insurance, into a financial holding company and business holding company including Samsung Electronics, and the owner family would strengthen control by contributing shares of each company they hold in kind and then holding shares of these holding companies. However, it is analyzed that such governance restructuring will not proceed in a short period.