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Critics say changes are largely cosmetic
May 14, 2008
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Since the financial crisis in 1997-1998, the government has encouraged conglomerates to improve transparency and corporate governance and conglomerates like LG and SK have already reorganized under holding companies. But other groups, including Samsung, still maintain old management practices. Circular equity investment creates the appearance of an investment when none actually exists, said a Fair Trade Commission official dealing with conglomerates. It’s as if Company A invests $100 in Company B, which in turn invests $100 in Company A. In the case of the Samsung Group, Lee’s family, which founded the group, effectively controls all its 34 affiliates including Samsung Electronics, in which the family holds a tiny direct stake. In a giant circle, Samsung Everland Incorporated owns 19.3 percent of Samsung Life Insurance Corporation and the life insurer owns 7.2 percent of Samsung Electronics Corporation, according to Samsung Group, making it the No 2. shareholder after Citibank. Samsung Electronics, which is Samsung’s flagship company and the world’s leading memory chip producer, controls 46.9 percent of Samsung Card Corporation, and the card company has 25.6 percent of Samsung Everland. Jay Y. Lee, the heir to the group and ex-chairman Lee’s only son, holds a 25.1 percent stake in Everland. Ownership is based on holdings of common stock. “The bigger problem is that when one affiliate suffers financial troubles, it is difficult to downsize or sell the company because it could damage the link of circular investment,” the FTC official said, “or when an affiliate becomes a hostile takeover target, the entire group becomes vulnerable.” In addition to Lee’s resignation, the group announced it would break the ownership circle by having Samsung Card sell its stake in Samsung Everland. But some say the plan doesn’t go far enough. “Selling Samsung Card’s stake in Everland does not eliminate circular investment in the group, and it is a lot more complicated than that,” the FTC official said. “It seems that Samsung is going to disband it step-by-step.” Even if Samsung Card does follow through on the plan, Jay Y. Lee, other family members and other affiliates still hold more than a 60 percent stake in Everland and there is no threat to the family’s control over the group. Regardless of Chairman Lee’s resignation, there would be little change in his influence over the group, critics say. “This [Samsung Card’s stake in Everland] is just one link to disappear,” said Shin Hee-jin, a researcher at the Solidarity for Economic Reform, a civic group aimed at improving corporate governance. “There is no meaning. The biggest problem in Samsung Group’s ownership structure is that the family controls the group through financial institutions like Samsung Life Insurance. And this has not been resolved.” Critics say Samsung Card’s plan to sell its holdings in Everland was expected due to a 2006 amendment that bans financial institutions, like Samsung Life Insurance, from owning more than a 5 percent stake in nonfinancial companies, like Samsung Electronics. However, Samsung denies that dissolving circular investment was planned and says the idea of selling Samsung Card’s stake in Samsung Everland is a result of good intention. “It is far-fetched to say the stake sale was intended,” said a Samsung official, who wished to remain anonymous. “Samsung Card is going to sell its entire stake in Samsung Everland, not just the portion above 5 percent.” Though Lee Kun-hee resigned from his post, many expect him to maintain his hold on power. He is no longer group chairman, but in a survey by the Institute of Global Management of 105 business leaders including chief executive officers at major local companies last month, 69 percent said Lee would exert major influence from behind the scenes as a leading shareholder. Fifty four percent said Jay Y. Lee is more likely to become chairman because of his father’s resignation. Twelve percent said Lee’s resignation was temporary. In other family controlled conglomerates such as the Doosan Group, chairmen have stepped down briefly following indictments only to resurface later. [jbiz91@joongang.co.kr] |
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