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Verdict for Samsung heir weighs on telecom giant

The scandal that has swirled around the Samsung heir has sparked nationwide calls to reform “corrupt” chaebols © AFP/File / Ed JONES

Seoul, Korea, Republic of, Aug 23 – The heir to the Samsung empire faces the verdict in his corruption trial Friday, which threatens to leave the world’s biggest smartphone maker rudderless for more than a decade.

Lee Jae-Yong, vice chairman of Samsung Electronics and the son of Samsung group chairman Lee Kun-Hee, has been groomed all his life to take over the giant conglomerate founded by his grandfather in 1938.

It is by far the largest of the chaebols, the family-controlled firms that dominate Asia’s fourth-largest economy, which some South Koreans self-mockingly dub the “Republic of Samsung”.

Its turnover is equivalent to a fifth of the national GDP and it has long had close, opaque connections with political authorities.

But now prosecutors have demanded a 12-year sentence for Samsung’s 49-year-old “crown prince” if he is convicted of charges including bribery and embezzlement in connection with the corruption scandal that brought down president Park Geun-Hye.

Park, dismissed from office in March after public fury, is on trial separately accused of offering policy favours to tycoons including Lee who enriched her secret confidante Choi Soon-Sil, with Samsung handing over around $40 million.

Lee has been detained during his trial, and the prospect of his being imprisoned for years has sent shockwaves through Samsung, where the founding family’s rule has been taken for granted for decades.

The Lee clan directly owns about five percent of Samsung Electronics shares, but maintains its grip on the wider group through a byzantine web of cross-ownership stakes involving dozens of companies.

Although Samsung’s day-to-day business is maintained by the elite CEOs at each unit, analysts say they would be unwilling to make — and take responsibility for — costly decisions over large-scale acquisitions or investments without family approval.

Samsung heir Lee Jae-Yong © AFP / Gal ROMA

“In South Korea, such decisions are often endorsed by the patriarch of a ruling family,” said Chung Sun-Sup, the head of corporate analysis firm

Lee Jae-Yong’s sister Boo-Jin, who is in charge of the group’s fast-growing hotel business, was once touted as a potential stand-in.

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But many dismiss the possibility, saying she has few allies and little management experience at Samsung Electronics — the crown jewel of the group.

Despite Lee’s absence Samsung Electronics has reported stellar profits in recent months, sending its share price soaring, thanks to booming demand for its memory chips used in computers, servers and mobile gadgets.

Analysts say it is reaping the benefit of radical decisions made years ago under the senior Lee’s rule, including the construction of new chip factories that cost billions of dollars.

“With so much uncertainty at its leadership, Samsung may move more slowly than before to make the kind of bold, large-scale investments that made it so successful today,” Chung told AFP.

– Future strategy –

Since the senior Lee was left bedridden by a heart attack in 2014, Samsung has stepped up attempts to streamline itself, selling off marginal or less profitable businesses, while also enhancing Lee Jae-Yong’s authority.

Those efforts would be suspended if Lee receives a lengthy jail term, Chung said, which could force the group into “an unprecedented experiment” of operating without direct Lee family control.

South Korean prosecutors have demanded a 12-year sentence for Samsung’s “crown prince” © POOL/AFP/File / JUNG YEON-JE

But Geoffrey Cain, the author of a forthcoming book on Samsung, pointed out Samsung Electronics had been able to make strategic moves despite Lee’s detention in custody.

“The leader being in jail is a familiar story for chaebol groups, and one they can get around,” he said.

“Samsung will not be doomed without Jay Lee. Even if he gets a prison sentence, Samsung will be just fine. It’s up to the specialists to make their own decisions.”

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After the scandal sparked nationwide calls to reform “corrupt” chaebols, Samsung earlier this year disbanded its Future Strategy Office — a small, secretive group of top company veterans who directly served the Lees — vowing to give the board of directors a bigger role in decision-making.

– Millions of dollars –

New President Moon Jae-In won a sweeping election victory in May with promises of weeding out deep-rooted, corrupt ties between chaebols and regulators.

Prosecutors accuse Lee of seeking state approval for a controversial 2015 merger of two Samsung units seen as a key step to ensuring his accession.

He pleaded not guilty, saying he was not involved in decisions over the donations and not even aware of Choi’s existence.

The prospect of Lee being imprisoned for years has sent shockwaves through Samsung © AFP/File / JUNG Yeon-Je

During his trial, his lawyers and ex-members of the Future Strategy Office tried to portray him as an inexperienced, naive heir not even allowed to “meddle with” decisions made by the veteran executives chosen by his father.

As a legal strategy it is undoubtedly embarrassing, but it remains to be seen whether the three judges hearing the case, in which four other top Samsung executives are also accused, are convinced.

“If he is found innocent and walks away, it would be a huge setback against the court and the current administration,” said Shim Jung-Taik, an author of several books on Samsung and its history.

He warned of “huge public outcry” in the event of an acquittal, telling AFP: “In South Korea, the Lee case is not just a legal case but a social and political one whose result is seen as a verdict on wider chaebol culture and corruption.”

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