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Samsung heir's release will not kill South Korea's reform drive

Public anger over cosy government-business ties will force change

Samsung Electronics Lee Jae-yong leaves a detention center in Uiwang, South Korea, on Feb. 5 after an appeals court cut his sentence.   © AP

The release from prison of Lee Jae-yong, the heir to the Samsung corporate empire, might look like a setback for hopes of reform of the dominance of the chaebol business groups in South Korea.

But supporters of change should not be too disheartened. The popular anger about the cosy and sometimes corrupt links between business and politics is so strong that reforms will come any way.

Lee, vice chairman of Samsung Electronics, walked freed from prison on Feb. 5 when his five-year jail sentence for bribery was cut in half and suspended.

The District of Seoul Higher Court reduced the punishment imposed by a lower court five months ago when Lee was found guilty of bribing former President Park Geun-hye to secure government support for his plans to strengthen his control over Samsung.

The appeals court ruled that Lee Jae-yong had been "forced" to provide money to Park's confidante and the benefit he received in return was not explicit enough to prove he had sought to buy favor.

While the legal proceedings are not yet over because special prosecutors are set to appeal to the Supreme Court, it would be safe to conclude Lee will not go back to prison. There has never been a case of a higher court increasing a sentence imposed on a chaebol chief.

Since the Lee bribery case was at the heart of the impeachment of Park and a key driver of the chaebol reform plans of her successor, Moon Jae-in, the latest ruling naturally raises questions about those reforms. Put bluntly, how hard can President Moon push for change when the government's claim that much of the Korean establishment still bends to the power of the chaebol? Will the collusion between politics and business simply continue, as these critics argue it could?

Chaebol are definitely influential in South Korea. Ties between politicians and the chaebol will not simply disappear overnight regardless of whether Lee spends more or less time in jail. Critics of the Korean political system say politicians need money and the culture of buying political power by those that have the money is ingrained in Korean history.

From that perspective, many ordinary Koreans view the release of Lee as a dishearteningly familiar scene of a chaebol leader convicted of corruption walking away free. In the most recent case, Park in 2015 released Chey Tae-won, chairman of SK Group, who was convicted of embezzlement. At Samsung, Lee's ailing father, chairman Lee Kun-hee, who has been incapacitated since a heart attack in 2014, was convicted of tax evasion and bribery and pardoned twice.

Critics of the Korean judiciary say Lee Jae-yong's release has certainly blown a chance for judges to break firmly with the past and set a clear precedent that even the most powerful chaebol leader can no longer walk away with a slap on the wrist for a serious offense.

Meanwhile, the progress of chaebol reform in the legislature seems to have stalled. Lee's release comes at a moment when a key potential ally of Moon's ruling party has shifted its allegiance. Lawmakers of the former People's Party, which was considered center-left, essentially moved right by merging into a new party seen as center-right, and therefore pro-business.

Since the ruling party lacks a majority, many reform bills that are pending in the legislation are not even being discussed. An example is a move to slow "cumulative voting" that makes it easier for minority shareholders to elect independent directors to the board. Another planned bill would allow a "multi-derivative lawsuit" that enables minorities to bring class action lawsuits against directors of not only their company but also those of unlisted affiliate companies.

However, Lee's release will not stop the rising public hostility towards corruption. The force that led to his arrest and the impeachment of Park was set in motion when unprecedented numbers of South Koreans protested in the streets of Seoul demanding an end to corruption and for Park to step down. That was really the wake-up call for change and an announcement that public tolerance of corrupt politicians and chaebol leaders was no longer what it was.

Moon's key economic agenda has been the chaebol reform and South Koreans' request for chaebol reform is higher than ever before. There is a fundamental cultural shift taking place as more South Koreans get accustomed to global standards of governance and to shareholder capitalism. They want an end to a system where the founding families of chaebol can control listed companies long after they have sold a majority of the stock to outside investors.

If Korea has adopted capitalism, legally and socially, then a corporation should be run for the benefit of its owners, the stock holders. We know, however, that the founding families of chaebol, can, with only small direct stakes in their listed companies, divert profits as they wish. Chaebol reform is essentially changing the way chaebol families wield their power.

A new generation of chaebol leaders -- including, ironically Samsung's 49-year-old Lee -- is more responsive to change than their predecessors. They are less authoritarian than their fathers and have better understanding of shareholder capitalism. Voluntarily or involuntarily, they are less likely to run listed companies like their own private companies.

Many chaebol groups are cleaning up their group ownership structure by unwinding circular holdings. Latest business groups to go through that process are Lotte and Hyundai Heavy. The Fair Trade Commission is starting to exert more pressure on chaebol to reduce related party transactions that often benefit unlisted companies directly owned by family members at the expense of listed companies. The South Korean National Pension System (NPS) is mulling the adoption of a stewardship code to bolster its role as a fiduciary and protector of minority interests. After the adoption of the stewardship code, NPS is likely to ask cash-rich South Korean companies to increase their dividend payout.

Hence, South Korea's dividend payout ratio, which is the lowest among major stock markets, should continue to rise and related party transactions should continue to decline.

Commenting on the Lee case, Samsung welcomed the ruling. It pledged to continue with corporate reforms.

Samsung Electronics has actually been a leader in these changes, for example, by announcing an overhaul of its shareholder returns policy. Investors greeted the move by bidding up the stock price.

Lee's release generated some bad headlines for Samsung. But, in the longer term, it could help the group distance itself from the past and from the negative publicity generated by the corruption scandal. Samsung's latest $30 billion capacity investment decision announced a day after Lee's release is a sign of how the group wants to move on.

But this strategy will only work if Lee -- and his executives -- now keep their hands clean. It is hard to see how the Korean public would stomach another Samsung scandal.

Paul Choi is head of Korea Research at CLSA, a Hong Kong-based investment bank. Prior to this role, he was a portfolio manager in Singapore.

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