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Samsung Heir's Indictment Could Put Deals, Big Decisions On Hold

Published on .

Jay Y. Lee, co-vice chairman of Samsung Electronics Co., center, is escorted by police officers on Saturday.
Jay Y. Lee, co-vice chairman of Samsung Electronics Co., center, is escorted by police officers on Saturday. Credit: SeongJoon Cho/Bloomberg
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The indictment of Samsung Electronics Co. de facto chief Jay Y. Lee and four other top executives on bribery and embezzlement charges threatens the company's ability to make major strategic decisions, including acquisitions and management changes.

While the world's biggest maker of mobile devices has capable managers who will, as before, continue to roll out new products and expand the business, any acquisitions, major management shuffles and changes to the corporate structure will probably have to wait until Mr. Lee's legal issues subside.

The vice chairman is accused of directing tens of millions of dollars to entities controlled by a confidante of President Park Geun-hye, in return for government support of a 2015 merger that cemented his control of the group. The indictment is yet another blow to the Suwon, South Korea-based company as it tries to regain its footing following the Note 7 debacle last year and the prosecution of the chaebol's heir.

"Samsung will choose to stay conservative in planning business strategy rather than implementing aggressive management decisions, such as cutting big overseas deals or making huge investments," said Park Ju-gun, president of Seoul-based corporate watchdog CEOSCORE.

The ordeal already prompted the Samsung Group to disband its Corporate Strategy Office, a high-level decision-making unit for the conglomerate that's been linked to the corruption investigation--a step that itself could hamper fast decision-making.

Samsung denies that Mr. Lee, 48, had traded cash for political favors. Other Samsung executives that were indicted include Corporate Strategy Office Vice Chairman Choi Gee-sung, President Chang Choong-ki, head of sports strategy Hwang Seong-soo and Samsung Electronics President Park Sang-jin.

Still, there are other executives left to fill the void left by Mr. Lee, such as Vice Chairman Kwon Oh-hyun and consumer-electronics chief Yoon Boo-keun.

"Samsung Electronics has a strong management team currently in place, led by its three co-CEOs," the company said. "This team has delivered superior performance and will make their best efforts to lead our operations without disruptions."

Another potential risk is a change in South Korea's government, which could apply more pressure against the system of chaebols, the tightly linked business conglomerates in the country that are controlled by a handful of families.

"If the opposition party really comes into power this year in the wake of the recent political scandal, they will push for the revision of the commercial law, which seems very destructive for chaebols," said CEOSCORE's Mr. Park.

The entire Samsung Group includes electronics, shipbuilding and insurance units and has combined revenues equivalent to about one-fifth of South Korea's gross domestic product. Mr. Lee has been groomed for decades to take over the conglomerate, which was founded by his grandfather and transformed into a national powerhouse by his father, Lee Kun-hee. The elder Mr. Lee collapsed from a heart attack in 2014.

Samsung has denied it made an unlawful offer or paid a bribe to the president or her confidante Choi Soon-sil in return for political favors, including support for the merger of Cheil Industries Inc. and Samsung C&T Corp. The special prosecutor alleges Samsung made payments to gain the backing of the government-run National Pension Service, the world's third largest pension fund with significant stakes in Samsung Electronics and listed affiliates. That deal was opposed by activist investor Paul Elliott Singer.

The younger Mr. Lee hasn't relinquished any of his corporate titles since his Feb. 17 arrest. He can seek bail and a court must make its first ruling within three months. Although a typical trial and verdict could take as long as 18 months, the special-prosecutor law recommends resolving the case much sooner.

The fact that Samsung shares are trading near record highs amid Lee's prosecution shows the market expects stability even after indictment, said Yi Han-sang, a business management professor at Seoul's Korea University. The stock rose 1% on Tuesday at the close in Seoul.

"It's not like the stock's getting beat up with a 20, 30% drop," the professor said. "The market has made up its mind about Samsung's prospects."

The next test for Samsung Electronics without Mr. Lee will be the debut of the S8, its flagship smartphone model, due in late March. The manufacturer can't afford to have another key product stumble in the same way that the Note 7 did, when battery failures caused some phones to explode and ultimately led to a major recall and termination of the product.

"Jay Y. Lee's main role was largely limited to a few things, such as building a good image of Samsung as the owner of the conglomerate, establishing solid network with his global counterparts and calling the final shots when cutting big acquisition deals in new growth areas," CEOSCORE'S Mr. Park said. "Samsung's businesses across all segments remain strong, which was well proved by its earnings and the recent share rallies."

--Bloomberg News