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Samsung's third generation seeks less top-down approach

Lee Jae-yong's decentralization drive could slow group down

Lee Jae-yong, Samsung's vice chairman and anointed successor to his father, Lee Kun-hee, faces a challenge as he seeks to decentralize management at the sprawling conglomerate.

SEOUL -- With the death of Lee Kun-hee, the chairman of Samsung Electronics who led the South Korean conglomerate's growth, his son Jae-yong is poised to take the helm.

Lee Jae-yong has vowed to create a structure at Samsung in which the best people lead the group from positions more important than his own. His aim is to delegate authority to people outside the founding family.

Kun-hee ran a tight ship, directing Samsung through a future strategy office whose purpose was to carry out his orders. Kun-hee rarely showed up at his office, instead receiving reports on operations from aides at home and elsewhere. When making decisions, he would task the strategy office with devising options. After making a decision, the office was responsible for executing his plans.

Kun-hee had daily contact with only a handful of aides, which set him apart from the group's rank and file.

Jae-yong was arrested in 2017 over allegations of misconduct related to his succession to the leadership of Samsung group and was imprisoned for about a year. Once back on the job, he began working to reform the group's governance.

He denies wanting to hand over the reins of Samsung to his own children, saying he will hire exceptional people and give them the authority to run the group. He says will move ahead with plans to delegate authority to executives appointed by his father.

Unlike his father, Jae-yong has actively attempted to narrow the gap between himself and ordinary employees, traveling to offices and factories around the world and having meals with workers at company canteens.

But gathering news from the front lines takes time. A number of important decisions have been delayed, such as a plan to invest 13.1 trillion won ($11.6 billion) in next-generation display panels for TVs. Decentralizing authority and taking staff-level opinions into account may weaken a competitive advantage that South Korean conglomerates are said to possess: the ability to move quickly when opportunities arise.

Despite the turmoil at the top, Samsung's earnings have remained solid, supported by revenues from its world-leading businesses, including memory chips, smartphones and TVs. However, rivals are fast catching up, gaining scale through acquisitions. This makes it imperative for Samsung to develop new businesses.

It has been six years since Lee Jae-yong, left, seen in this August 2009 photo, became the de facto head of Samsung when his father, Lee Kun-hee, fell ill.     © Reuters

It has been six years since Jae-yong became the de facto head of Samsung, taking the helm when his father fell ill. But the company has yet to come up with a future cash cow.

Jae-yong has named biomedicine, 5G, artificial intelligence, automotive components and foundries as "future growth business." But revenues from these new areas are modest.

Another looming issue is how to dispose of his late father's huge personal assets. Kun-hee's listed shares alone are worth around 18 trillion won. The inheritance tax bill on his real estate and other assets is estimated at well over 10 trillion won. For Jae-yong and other family member to take possession of these assets, they would have to sell some of their shareholdings in Samsung group. That is likely to weaken the family's control over the group.

Succession at South Korean conglomerates, or chaebols, often brings changes in corporate structure. When the founder of Hyundai Group died in 2001, his eight sons battled for control. In the end, the group fragmented into various parts, including Hyundai Motor, Hyundai Heavy Industries and Hyundai Department Store Group.

Samsung has been grooming Jae-yong for the chairmanship since he was in his 20s. He was prosecuted for manipulating the stock price of certain group companies as the conglomerate was restructured ahead of his eventual appointment as chairman.

There is a deep-rooted distrust of the chaebols in South Korea. The methods founding families use to retain control of their empires despite holding minority stakes, their efforts to hold on to their wealth by offering sinecures in group companies to family members attracts strong criticism. Some outside experts say these methods are out of step with the times.

Foreign investors, for their part. are casting a stern eye on Samsung. More than half its shares -- 56% -- are held by overseas investors. In 2015, U.S. activist hedge fund Elliott Management urged Samsung to change its governance, saying the founding family had too much power, given the size of its ownership stake. That pressure is likely to continue as Lee Jae-yong takes up his new post.

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