Smartphone maker Samsung backs away from planned split

SEOUL, South Korea – The world’s biggest smartphone maker Samsung, assailed by a shambolic recall and embroiled in South Korea’s wide-ranging corruption scandal, on Friday, March 24, backed away from a planned corporate restructuring.

Following the embarrassing recall of the Galaxy Note 7 smartphone and under pressure from activist shareholders to improve corporate governance, Samsung Electronics said last year that it was considering splitting the company in two.

Its vice-chairman Lee Jae-Yong, heir to the parent Samsung group, has since been arrested and indicted for bribery, along with 4 other senior executives, in connection with the graft scandal that saw ex-president Park Geun-Hye impeached.

But at the Samsung Electronics annual general meeting in Seoul, board chairman Kwon Oh-Hyun said the firm had reviewed legal and tax issues around proposed division into a holding company and an operating unit, and identified “some negative effects”.

He did not elaborate, but told shareholders: “At this moment, it seems difficult to carry it out.”

Shares in Samsung Electronics – the group’s flagship subsidiary – sank 1.4% in morning trade, having hit record highs this year on expectations of higher profits.

Samsung SDS and Samsung C&T were down more than 6%.

Various Samsung units have cross-shareholdings in other parts of the group, a byzantine structure that enables the Lee family to control the business empire, which has revenues equivalent to a fifth of South Korea’s GDP.

A promised new governance committee, made up of independent outside directors, will still be set up by the end of April, Kwon said.

Corruption scandal

But Samsung Electronics had so far been unable to recruit “foreign directors who have experience as chief executive officers of global companies” to join it, he said “due to uncertainties in the internal and external environment surrounding the company”.

Vice-chairman Lee has effectively been at the helm of the Samsung group since his father suffered a heart attack in 2014.

His indictment sent shockwaves through the company and triggered the announcement of a major reform of its top-down management style.

The corruption scandal centers on the former president’s secret confidante Choi Soon-Sil, who is accused of using her ties with the head of state to force local firms to “donate” nearly $70 million to non-profit foundations, which Choi allegedly used for personal gain.

Samsung was the single biggest donor to the foundations and is also accused of separately giving millions of euros to Choi to bankroll her daughter’s equestrian training in Germany.

In total it handed over nearly $40 million.

One of the favors Lee allegedly sought from Park was state approval for a controversial merger of two Samsung units in 2015, seen as a key step to ensure a smooth transfer of power to him.

The deal was opposed by many shareholders who said it had willfully undervalued one of the firms. But it eventually went through after the national pension fund – a major Samsung shareholder – approved it.

‘We’re sorry’

Samsung has insisted the payments were charitable contributions it was obliged to make under pressure from officials, and not bribes.

But Kwon apologized at the meeting, saying: “We’re sorry that we have created a stir in society.”

The firm would review all its charitable donations, he said. “We’ve come to realize that our donations could be used for other purposes than we had intended.”

Campaigners say that the controversy could complicate Samsung’s proposed corporate split, as it has cast a renewed light on the cosy ties traditionally enjoyed by the government and family-controlled conglomerates known as “chaebols” that dominate the economy.

Groups including Samsung have increasingly become objects of public scorn as criticisms mount over their management practices, including rapid promotions for family members – some of whose antics have battered the firms’ images.

Millions of South Koreans who took part in weekly street rallies demanding Park’s removal also called for the arrest of the tycoons involved in the scandal, among them the leaders of Hyundai, SK and Lotte.

Chung Sun-Sup, the head of chaebol.com, a private watchdog on conglomerates, said the split plan could enhance the Lee family’s control over Samsung operating units, and was coming at a time of greater public and parliamentary scrutiny.

“The company is unlikely to push it through for a considerable time,” Chung told Agence France-Presse. – Rappler.com