Why Samsung’s Recent Conviction Will Not Rid South Korea of Chaebols

Samsung is in search of a new leader after Jay Y. Lee, grandson of Samsung’s founder, was convicted of bribing South Korea’s President to approve a controversial merger between two Samsung affiliates. Many thought that the proposed merger, which had been heavily criticized by independent analysts and investors, would not receive the legally-required approval from then-President Park Geun-hye’s administration. Lee allegedly bribed President and people close to her, to the tune of $38 million, for her support. When this corruption was exposed, President Park resigned and Lee was prosecuted and ultimately convicted.

Some hope that these dramatic developments portend more far-reaching changes in South Korea’s economy—in particular, the destruction of the chaebols (literally “wealth clans”), the multinational conglomerates in which leadership is passed from person to person within a family. Many credit chaebols with the successful post-World War II transformation of South Korea’s agrarian economy into an international economic powerhouse, but others criticize chaebols on a number of grounds, including the claim that they concentrate power and wealth in the hands of a small family minority, pay low dividends to ordinary investors, and facilitate the sort of grand corruption exposed in the Samsung affair.

After President Park resigned in disgrace, she was replaced by President Moon Jae-in, promised to put an end to chaebols altogether. Alas, this is unlikely. Indeed, it’s looking increasingly like Samsung’s recent scandal will not have a lasting effect on chaebols, or even on Samsung’s long-term profitability.

It certainly doesn’t appear that Samsung is a company in trouble, or that the grip of the controlling family is threatened. Since Lee was taken into custody, Samsung’s share prices have risen. If the company thought the aftermath of the scandal put it in danger, it would likely dial back risky new ventures, but Samsung has done exactly the opposite, introducing plans for a new smart speaker and the first LTE Railway service on a high-speed train in Korea. As for the controlling family’s power, it’s telling that in October, one of Samsung’s three co-CEOs, Kwon Oh-hyun’s, resigned rather than contradict the Lee family’s policy on a product’s release. And although Samsung disbanded the mysterious “corporate strategy office” that was composed of members of the controlling family (and was presumably was involved in the decision to bribe President Park), the family continues to exercise substantial authority through other means.

On top of that, Samsung heads have a long history of engaging in corruption, getting caught, and getting away with a slap on the wrist (if that). Jay Lee’s grandfather, the founder of Samsung, grew the business by cozying up to government leaders; he was eventually convicted of bribery, but those charges were expunged soon after. When Lee’s father took control of the company in 1987, he was convicted and sentenced to two years in prison for bribing government officials. But his sentence too was overturned only a year later. In 2008, Lee’s father was convicted again—this time for embezzlement and tax evasion—but he was pardoned shortly after his conviction. Of course, the fact that Jay Lee was sentenced to five years in prison might be seen as evidence that Samsung and its leaders are no longer untouchable. But it’s still quite possible—in my view likely—that it will only be a matter of time until Jay Y. Lee’s conviction is rolled back, like his father’s and grandfather’s before him.

Why is it that South Korea seems to lack the political will not only to dismantle the chaebols, but even to hold Samsung (and other large chaebols) accountable for corrupt activities? The reason is simple: chaebols’ importance to the South Korean economy. Samsung alone represents about 20% of South Korea’s $1.1 trillion economy, and together the top five chaebols are worth more than a staggering half of South Korea’s economy. In addition, many South Koreans believe that chaebols pulled South Korea out of the Asian Financial Crisis in 1997 (though some foreign critics charge that chaebols were in fact a contributing cause of the crisis). Chaebols like Samsung are also huge employers. And because chaebols, unlike other large corporations, are so strongly identified with families and individual leaders, there’s a worry that convicting a chaebol’s leaders could damage the country’s economic health.

Of course, weighing on the other side is the intense political outrage spurred by the most recent bribery scandal. Most South Koreans believe white-collar crime is a serious issue and want it eradicated. And some are willing to call for the outright elimination of chaebols. But on balance, chaebols are protected by their perceived importance to the economy, and the government fears that the economic repercussions of taking serious action against the chaebols would trigger far more serious public outcry than the current impassioned denunciations of corruption and state capture.

Therefore, despite surface appearances to the contrary, the “trial of the century” that dethroned a sitting president and arrested a dynastic CEO will neither end chaebols’ influence in South Korea nor have much impact on their corrupt activities. Indeed, the trial is unlikely to have much lasting impact on Samsung as a company. At the end of this month, the final court of appeal in South Korea, the Seoul High Court, will hear Jay Y. Lee’s appeal in which prosecutors ask for a twelve year sentence to “establish rule of law” for chaebols. But chaebols’ importance to South Korea’s economy and employment means that, despite vitriolic public sentiment towards chaebols, lasting change to the chaebol system seem very unlikely.

One thought on “Why Samsung’s Recent Conviction Will Not Rid South Korea of Chaebols

  1. Pingback: Why Samsung’s Recent Conviction Will Not Rid South Korea of Chaebols | Matthews' Blog

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