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Samsung and the 2018 Winter Olympics

Many observers will remember the 2018 Winter Olympics for two things: 1) the rapprochement between Seoul and Pyongyang following the participation of North Korean athletes; and 2) the North Korean charm offensive led by the sister of reclusive leader Kim Jong-un. But another invited guest also played a starring role at the Games – Samsung.

Ironically, all the Winter Olympic athletes – except those from North Korea – received special-edition Samsung Galaxy Note 8 devices that were gifted to them by the company upon their departure from Korea. During the Games, Samsung invited all spectators to visit its special pavilion where they could play with virtual reality headsets and other electronic gadgets.

However, the real story behind Samsung’s charm offensive at the Games touches upon many pain points in South Korea’s unique economic and political cultural landscape. Samsung is the largest conglomerate in the country, but has run foul of the law on several occasions and shown to have disregarded basic principles of corporate governance. The current government, led by President Moon Jae-in, has sent a strong message to Samsung and other chaebol leaders (chaebol is a combination of the Korean words for wealth and clan) that they must change their ways. But reform will take time, as the story behind Samsung’s participation at the Games will demonstrate.

A presidential pardon

Samsung’s presence goes back to the presidential pardon of the company’s chair nearly 10 years earlier. The second-generation leader of the family-owned company, Lee Kun-hee, who was 76 at the time of writing, was pardoned in December 2009 by Lee Myung-bak, who was the president of South Korea from 2008 to 2013. In August 2009, a judge convicted Lee Kun-hee of embezzlement and tax evasion and sentenced him to a suspended three-year term in prison and ordered him to pay $100million in fines.

His crimes were to have illegally engineered for his only son and two daughters significant stakes in two Samsung affiliates via the sale of convertible bonds. Blocks of shares were sold to his children at prices far below their market value. When these outrageous transactions became known, Lee was prosecuted. To halt the wheels of justice, he created a slush fund of more than $200million with which to bribe prosecutors and politicians into disregarding his illegal activities. Prosecutors had sought a sentence of seven years in jail and a fine of $350million.

The reason why Lee wanted to ‘gift’ the shareholdings to his three children in the first place dates back to his health problems, which emerged in the late 1990s, when he was diagnosed with cancer. Lee realised then that he needed to put a succession plan in place to enable his heirs to maintain ownership over Samsung and its 70 affiliates. Lee Kun-hee does not now have long to live. In May 2014, he suffered a massive heart attack which left him incapacitated on the top floor of Seoul’s Samsung Medical Centre. Since then, he has been the nominal chair of Samsung, leaving his only son as the de facto chair of the business. No news about his health has since been released, although his succession plan was only partially completed at the time of his sudden health deterioration.

According to Lee Myung-bak, the Samsung leader was pardoned in exchange for his help in securing Korea’s right to host the 2018 Winter Olympics. However, this legendary version of events has been recently contested by a former Samsung vice chair named Lee Hak-soo, who has alleged in court that the underlying reason for the presidential pardon was that Lee Kun-hee had agreed to pay $3.7million in legal fees to an American law firm that was representing a company that Lee Myung-bak’s brother owned. The news of this illegal deal has been covered widely in the Korean press, including the JoongAng Daily, ever since and the former president was placed under investigation for bribery and abuse of power in February 2018.

Samsung promotes Olympic bid

According to the so-called official story, Lee Myung-bak pardoned the Samsung tycoon so that he could participate on the Korean Olympic Committee (KOC), which was gearing up for a third time to win over the International Olympic Committee (IOC) vote in favour of the Korean bid; the first two Korean bids had failed. When Lee Kun-hee agreed to the proposition, the chair of the Korean Olympic Committee wrote that Samsung would provide the ‘reinforcements of a thousand soldiers and ten thousand horses’. This was an oblique reference to the offices and personnel that Samsung eventually put at the disposal of the KOC in key cities around the world to organise meetings and events with the IOC.

Over a period of 18 months, a committed Lee Kun-hee travelled around the world to lobby IOC voters wherever and whenever they met, allocating the resources of Samsung affiliates to win the bid. In 2011, the IOC voted in favour of Korea’s bid to host the games. By this time, Lee’s earlier conviction had been forgotten and he returned to Samsung as chair of Samsung Electronics, the company’s crown jewel.

Second generation strategy shift

Forbes recently estimated that the net worth of Lee Kun-hee was $20.2billion, making him the wealthiest man in Korea. His enterprising father, who had many children, had the good fortune to establish a company a few years before the country became independent. In 1938, the founder, Lee Byung-chul, started a trading firm dealing in foodstuffs. Once Japanese occupation ended, the entrepreneur started diversifying and exporting. When General Park Chung-Hee came to power in a coup d’état in 1963, Lee aligned his business model with the imperial dreams of a dictator who wanted to transform Korea into the world’s first factory of the world. Only those chaebol business leaders who were willing to oblige General Park in his pursuit of power survived. In return, the chaebols were showered with lucrative contracts by the US government as a payback for the general’s dispatch of more than 300,000 troops to the Vietnam War.

Lee Byung-chul was an obliging man – he even gave up control of his own financial institutions so that he could be seen as completely dependent on General Park. While the Korean workforce was known for its prodigious productivity, General Park outlawed trade unions and held wages down to a minimum. Working for a pittance for most of their lives, pensioners have now come to believe that the chaebol families have amassed all their wealth on their backs.

By the time of his death in 1987, Lee Byung-chul had diversified Samsung across so many sectors of the economy that it went well beyond the dreams of most Western conglomerates. For the export market, the company produced cheap goods that competitors in western countries could not undercut. Lee’s third son, Lee Kun-hee, inherited the empire and expanded it even more through organic growth. Around this time, however, China had suddenly emerged


as a major competitor to Korea. Chinese labour was even cheaper than Korean labour and, gradually, China was overtaking Korea in the supply of cheap goods to western countries. Ironically, many chaebol leaders in Korea did not take seriously China’s ascendance as the second factory of the world, until it was too late.

Asian financial crisis

In the late 1990s, the Asian financial crisis struck South Korea hard, hitting the chaebols that were dependent on export earnings. China was impacted, but not so much. Along with many others, Samsung nearly went into bankruptcy. A $40billion programme launched by the International Monetary Fund successfully shored up the economies of Korea, Thailand and Indonesia, the three countries most affected by the sudden devaluation of their currencies. However, many businesses went bust.

The Asian financial crisis was a wake-up call for Lee Kun-hee. To survive, he realised he could no longer compete with Chinese-made exports. His vision suddenly came to him. Samsung must become a leader in innovative, high-quality goods. To this end, he decided to do something that would leave a mark on thousands of Samsung employees. He turned up unannounced at one of the many Samsung factories making phone handsets and instructed all the employees to come down to the shop floor. There, he gathered hundreds of cheap handsets and called them ‘cancers’ for their defects. He then ordered a bulldozer to put about 150,000 of them in a pile before setting them alight. Many employees were sickened by the sight and smell; some became so distraught that they broke down in tears. He then organised a meeting with all his top managers at the Samsung HQ in Seoul where he issued his most famous ultimatum: “You must change everything, except your spouse and children.”

Samsung takes quality to heart

Eventually, management at Samsung got the message. Lee Kun-hee changed Samsung’s business model on many different levels. It entered into joint ventures with partners abroad to manufacture televisions, refrigerators and video equipment. It also used FDI to establish regional headquarters in China, Europe, Singapore and North America. In addition, the second-generation leader set up factories in China and other countries to manufacture consumer electronics and appliances. By 2005, Samsung had established 64 manufacturing and sales subsidiaries and 13 R&D centres around the world. In so doing, Lee Kun-hee was able to take advantage of local talent and be closer to his customers.

Lee Kun-hee also started hiring westerners at management level to stimulate innovation and idea generation, a move that shook up a culture that had been based on internal country-level contracts. Those foreigners who learned the Korean language were more likely to stay than those who did not try to integrate into the local workforce.

Tax evasion comes back to haunt Lee Kun-hee

Even though salaries have gone up in South Korea – the minimum wage has been raised by 16 per cent recently – many pensioners discover that they have almost nothing to live on. In fact, poverty has afflicted 50 per cent of the elderly, the same people who powered the transformation of South Korea into a wealthy country. But the over-65s still have the ballot box to turn to if they want to make reforms happen and in 2017, President Moon Jae-in was elected on a platform to reform the chaebol system.

Lee Kun-hee was one of those leaders who came under renewed scrutiny by the new government. A formal investigation has been launched into his suspected evasion of $7.5million in taxes. It is alleged that he set up more than 260 fictitious bank accounts that held $350million under the names of more than 70 Samsung employees.

In addition, the Moon government has investigated several brokerage firms, including Samsung Securities, for helping Lee Kun-hee conceal his income illegally. Thus far, the brokers have been fined $96.7million.

Third generation succession crisis leads to jail

Following his father’s heart attack in 2014, Lee Jae-yong became the de facto chair of Samsung, but he still did not own enough shares to prevent any disgruntled shareholders from challenging his ownership. He knew Samsung Electronics well, having joined it in 1991, become its president in 2009 and vice chair in 2013. With his father still alive, though, he needed to increase his stockholdings so that he could be considered a controlling shareholder of Samsung. To this end, he engineered a controversial merger between two Samsung affiliates, Samsung C&T and Cheil Industries, in 2015. Activist investor Paul Singer, who owns the US hedge fund Elliott Management, tried unsuccessfully in a South Korean court to block the merger, which went against the interests of minority shareholders.

But soon after the merger took place, Lee Jae-yong was investigated and found guilty of bribing Park Geun-hye, the former president of South Korea from 2013 to 2017. A judge sentenced him to five years in prison; several Samsung executives were also convicted. He spent nearly a year in prison before an appeals court reduced and suspended his sentence in February 2018, releasing him from jail a week before the opening of the Winter Olympics. As for Park Geun-hye, she was convicted in April 2018 of graft, abuse of power, coercion and bribery and sentenced to 24 years in prison.

It remains to be seen whether the former president will have her sentence suspended as was the case with Lee Jae-yong. With an estimated net worth of $7.8billion, and not yet 40 he still has his options open as he gradually returns to his duties of running Samsung, while wisely keeping a low profile. He even disappointed many of his fans by not attending the Winter Olympics. However, the 2015 marriage that he officiated between Samsung C&T and Cheil Industries served him well. He now has a large enough stake in Samsung to make him the controlling stakeholder; furthermore, his stake will increase when he inherits his father’s shares. Thus, the colossal enterprise, consisting of about 62 business units that are involved in dozens of economic sectors, from telecommunications to fashion, from pharmaceuticals to heavy industry, can push ahead with some big deals that were put on hold while the de facto chair was in prison.

Most western consumers know Samsung for its consumer electronics division, but how many would guess that it owns the exclusive The Shilla hotel in Seoul, one of the most luxurious hotels in Asia. Lee Boo-jin, the 47-year-old sister of Lee Jae-yong, has run it since its opening in 1979. Samsung’s 16 publicly-traded companies dominate the South Korean stock exchange (Kospi), accounting for about 30 per cent of the total market capitalisation.

Lee Jae-yong was not the only chaebol leader who was convicted of bribing former president Park Geun-hye. In February 2018, Lotte Group chairman Shin Dong-bin stepped down as head of the chaebol to start serving a sentence of 30 months in prison. Like Samsung, Lotte operates business activities in many sectors of the South Korean economy. His resignation, however, could lead to a major succession crisis in the Shin family, as his older brother has threatened to launch a renewed bid for power.


Constitutional reforms

Meanwhile, the pressure is still on the government to shake up a system that is a holdover from previous pro-chaebol administrations. At the constitutional level, President Moon wants to decentralise power away from the presidency, where power has been concentrated since an independent South Korea was established after World War Two. President Moon has submitted proposals to amend the constitution to create an American-style presidential system with a four-year presidency and a two-term limit. He also wants to lower the legal voting age from 19 to 18 and delegate more power to the office of the prime minister.

The debates leading up to these political reforms have been driven by the long-running abuses of power at the Blue House, the home to South Korean presidents. Nearly all former presidents have been accused of corruption, but the country’s reputation for poor corporate governance is changing for the better. And Paul Singer of Elliot Management is back again. He recently bought a $1billion stake in Hyundai Motor Group, so that he could put pressure on the auto giant to improve its corporate governance.

Reforming the chaebols

Chaebols are where social and economic power have resided in Korea ever since WW2. During his presidential campaign, President Moon promised to reform the chaebols. The top five chaebols, Samsung, Lotte, LG, Hyundai, SK – are worth by some estimates more than half of the country’s export-driven economy. As conglomerates, the chaebols consist of hundreds of affiliates whose brands dominate almost all sectors of the South Korean economy, to such an extent that they suffocate entrepreneurial activity. Each operates like a mutually exclusive partnership, making it difficult for start-ups to enter the supply chain. Even on the inside, the chaebols are known to negotiate lopsided terms with their external contractors that render it difficult for them to expand their scope and size.

To make the playing field more level between the chaebols and their contractors has been one of President Moon’s main goals. In June 2017, he appointed as chair of South Korea’s Fair Trade Commission, a man who holds that the fruits of economic growth should be evenly distributed. Kim Sang-jo, otherwise known as the ‘Chaebol Sniper’, has called upon chaebols to end their exploitation and voluntarily improve the lives of contractors, small business owners and start-ups.

Déjà vu for nut-rage lady

His job will not be easy. Take the case of Heather Cho, the eldest daughter of the chair of Hanjin Group, a chaebol that owns Korean Air among many other businesses. In 2014,
she made headlines as the ‘nut-rage heiress’ while on a plane owned by her father. Unhappy with the crew’s way of serving macadamia nuts, she struck a flight steward and demanded the aircraft return to its terminal in New York. She was convicted of a violation of aviation laws, sentenced to a year in jail and was released after a few months following a ruling by an appeals court. Four years later and Heather Cho has recently been named the CEO of Hanjin’s hotel chain.

Now that Lee Jae-yong is back, Samsung will benefit from his leadership but will also reap the rewards of his father’s hard work at attracting the Winter Olympics to Korea. Some critics, however, have argued that Samsung was too ubiquitous at the Games to the extent that many Olympic experts are now demanding that corporate sponsors of future Games keep a neutral posture before and during the event. Perhaps the Chaebol Sniper would agree with this proposal.


Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.

Ethical Boardroom is a premier website dedicated to providing the latest news, insights, and analyses on corporate governance, sustainability, and boardroom practices.


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