Analysis: Ahead of Lee verdict, Samsung Group lacks leadership 'Plan B'

Samsung Securities Co

24/08/2017 24:00

* Lower court ruling in Jay Y. Lee trial on Friday 
    * Samsung Securities regulatory approval delayed due to 
trial 
    * Lack of central figure "serious" - antitrust chief 
    * Weak, underperforming affiliates likely affected 
 
    By Joyce Lee 
    SEOUL, Aug 24 (Reuters) - Samsung Group, South Korea's 
leading conglomerate, has no 'Plan B' for taking big decisions 
if its billionaire de facto leader Jay Y. Lee is jailed for 
corruption, people familiar with the matter said. 
    Lee, 49, has been in detention since February, on trial for 
charges ranging from embezzlement to perjury in a scandal that 
prompted the ouster of the country's ex-president Park Geun-hye. 
    He denies wrongdoing, and a lower court will give its 
verdict on Friday, with prosecutors demanding a 12-year jail 
term.  urn:newsml:reuters.com:*:nL4N1KS06X He would likely appeal any conviction. 
    Facing a possible leadership vacuum, Samsung Group - whose 
businesses range from the world's leading smartphone and chip 
maker to hotels and insurance - has no plans to set up a 
leadership committee or a new executive role to drive strategy 
and take key decisions. 
    That could be a risk as some of the sprawling conglomerate's 
weaker businesses go through a turnaround plan or look for fresh 
growth drivers. 
    "There's no one right now who'll decide on group-wide 
issues," said a person with direct knowledge of the matter, who 
asked not to be named due to the sensitivity of the issue. "It's 
not impossible to imagine a scenario where a Samsung affiliate 
gets into trouble and other units become entangled." 
    Previously, Samsung would have resorted to its powerful 
Corporate Strategy Office - dubbed the control tower - that 
oversaw the group, orchestrated the big decisions on asset sales 
or arranged support for weakened affiliates. 
    But Samsung disbanded that office in February after it was 
criticized for its role in the graft scandal. It also suspended 
its weekly "Wednesday CEO meetings" of affiliate firms, leaving 
no centralised coordination. And Choi Gee-sung, Lee's mentor and 
head of the control tower, stepped down. 
    "I think Samsung faces major challenges in efficiently 
managing the entire group ... it will struggle for a while to 
re-establish a strategic decision making process," Kim Sang-jo, 
South Korea's new antitrust chief, told Reuters.  urn:newsml:reuters.com:*:nL4N1L60FS 
    In a statement in response to Reuters queries, Samsung said: 
"The Corporate Strategy Office's role was to support affiliates 
and coordinate with them, including mediating overlapping 
businesses and (their) different interests, but the final 
business decision was made by each company." 
    It noted the group had already announced that management at 
each affiliate would be led independently by their respective 
CEOs and boards. 
     
    "RATHER DISCONCERTING" 
    While Lee's detention appears to have had little impact at 
Samsung Electronics  005930.KS  - though its share price has 
dropped 9 percent from a record high in the past month - there 
are signs that future prospects for some businesses are being 
impacted. 
    South Korea's financial regulators this month cited the Lee 
trial when it delayed a review on Samsung Securities' 
 016360.KS  request to be allowed to sell short-term investment 
products - a key plank in the company's growth plan to expand 
its investment banking services.  urn:newsml:reuters.com:*:nL4N1KW1LM 
    "The current situation is rather disconcerting," said a 
spokeswoman for Samsung Securities. 
    Since group patriarch Lee Kun-hee was hospitalised following 
a heart attack in 2014, his son Jay Y. has led a restructuring - 
shedding non-core assets, mulling a capital injection for 
struggling Samsung Engineering  028050.KS , and creating a de 
facto holding company that tightened his grip.  
    The process has stalled this year with his detention - he 
said at his trial that he spends more than 90 percent of his 
time running Samsung Electronics. 
    Samsung insiders say the group is unlikely - if Lee goes to 
jail - to follow the example of SK, a telecoms-to-energy 
conglomerate, which relied on a "Supex" group leadership 
committee when its chairman Chey Tae-won was jailed. That group 
led CEO-level reshuffles in 2013-15 until Chey returned after a 
presidential pardon. 
    "I don't think (such) a management committee is likely. It 
would look as though the Corporate Strategy Office has returned, 
just after it was disbanded," one Samsung affiliate official 
said. 
    And nor is Lee Boo-jin, CEO of affiliate Hotel Shilla Co Ltd 
 008770.KS , expected to step up to fill her brother's role at 
Samsung Electronics or group-wide, people with knowledge of the 
matter said.  urn:newsml:reuters.com:*:nL3N1KB2BA 
    "The business division between the heirs is rather set," 
said an official at another Samsung affiliate. "The pre-set flow 
of reporting up and decision-making will not change easily," the 
person added, noting Lee Boo-jin's focus on hotel and duty-free 
operations and Jay Y. Lee's control of technology units.  
 
    SLOW MOVING 
    For some investors, the worry is that any extended absence 
of Lee could slow decision making and delay moves that are 
needed to secure future growth. 
    Samsung Electronics, for example, announced six M&A deals 
last year, including buying Harman, a U.S. maker of connected 
car and audio systems, for $8 billion.  urn:newsml:reuters.com:*:nL4N1DF2ZY 
    This year, there have been none. 
    "A big strategic change under Jay Y. Lee was to strengthen 
Samsung Electronics' B2B (business-to-business) portfolio 
besides semiconductors," said Park Ju-gun, head of research firm 
CEO Score.  
    "They were in the long-term process of changing all 
divisions into B2B, when Lee was detained. This could throw a 
spanner in its macro direction, and make it more difficult to 
decide on large-scale M&A."  
    A Seoul-based fund manager, who has invested in Samsung 
affiliates, said all Samsung businesses would be able to carry 
out their operations as usual, "but large M&A deals and 
decisions affecting long-term strategy ... will be difficult." 
    "We don't plan shifts in investment on this," said the fund 
manager, who is not authorised to speak to the media, so asked 
not to be identified. 
    "If Lee receives a ruling that finalises his detention, of 
course investor sentiment will be bad on the day, but I don't 
expect any lasting effect." 
    ($1 = 1,137.9700 won) 
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Samsung Electronics expects continued chip boom after record Q2 
profit       urn:newsml:reuters.com:*:nL3N1KI00K 
BREAKINGVIEWS-Samsung gambles on an heirless future    
 urn:newsml:reuters.com:*:nL3N1IX0VA 
If convicted, Samsung's Lee could be c/o Uijeongbu Prison    
 urn:newsml:reuters.com:*:nL4N1L85KD 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Reporting by Joyce Lee, with additional reporting by Soyoung 
Kim and Hyunjoo Jin; Editing by Miyoung Kim and Ian Geoghegan) 
 ((jungyoon.lee@thomsonreuters.com; +82 2 3704 5609; Reuters 
Messaging: jungyoon.lee.thomsonreuters.com@reuters.net)) 
 
Keywords: SAMSUNG LEE/