Samsung Punishment May Ease Political Pressure for Other Chaebol

(Bloomberg) -- Though the downfall of the man heading Samsung Group, South Korea’s most powerful conglomerate, may seem an ominous omen for the country’s family-run business empires, the jailing of billionaire Jay Y. Lee could end up offering some relief to chaebol dynasties.

That’s because Lee, who on Friday received one of the harshest sentences ever handed to a chaebol leader, could serve the role of sacrificial lamb. During the past year, Koreans have expressed outrage about the scandals that exposed the family-run groups, which dominate the nation’s business landscape, and their cozy ties with the government. That anger helped Moon Jae-in, an outspoken critic of the conglomerates, sweep into the presidency in May.

But Moon has yet to follow through on his anti-chaebol promises, focusing instead on more immediate concerns such as North Korea’s weapons program and U.S. President Donald Trump’s proclamations to rejig a five-year-old trade deal between the two countries. Now, the Korean president isn’t likely to make swift reform of the conglomerates a top priority, said Celeste Arrington, an assistant professor of political science and international affairs at the George Washington University, who described the issue as “off the front burner” following the conviction.

“It will certainly ease some of the pressure,” she said. “Moon Jae-in seems focused on the broader set of ambitious political, economic and social reforms that need to happen.”

End to Collusion?

Moon’s office said it hopes the ruling will help bring an end to collusion between big business and the government. The Korea Chamber of Commerce and Industry and the Federation of Korean Industries -- the lobbying groups of the chaebol -- declined to comment on the verdict.

Despite some skeptics, many in Korea expressed optimism that the ruling, which broke away from the tendency by the country’s courts to hand down suspended sentences to big business, will give Moon the momentum to push ahead with his scrutiny of the chaebol.

“I think the government will push chaebol reform even harder, if economic conditions improve," said Bruce Lee, CEO of Zebra Investment Management. "Clearly, there was a signal to the market that the chaebol has to be changed now.”

For Samsung, Lee’s five-year jail sentence threatens to prolong the vacuum atop one of the world’s biggest companies because his father, who’s been the group patriarch for three decades, remains incapacitated after suffering a heart attack in 2014. Controlled by the Lee family through a web of cross shareholdings, Samsung is Korea’s biggest conglomerate, comprised of more than 60 units selling everything from smartphones to life insurance, cargo ships and clothes. Its listed units have a market capitalization of more than $390 billion.

Still, the Lee family’s absence hasn’t spooked investors as the group’s most-prominent company, Samsung Electronics Co., posted record earnings and saw its shares climb to a record high last month. The younger Lee is vice chairman but spent the past six months in custody awaiting trial.

As to the chaebol, they weren’t always demonized. During the reign of President Park Chung-hee in the 1960s and 1970s, they were lionized for spearheading the rapid economic rise of a country that was poorer than North Korea. But as a decades-long, debt-fueled expansion caught up with the conglomerates, they started falling out of favor. The implosion of giants such as Daewoo Group prompted the International Monetary Fund to say family-run groups were largely responsible for the nation’s 1997-1999 economic crisis.

Since then, the staunchest critics of the chaebol were shareholder activists, who argued that chaebol families were running their businesses, which account for the bulk of Korea’s stock market, through an opaque maze of cross shareholdings and putting their interests ahead of those of minority shareholders.

Korea Discount

Investors agreed, making shares of large Korean companies trade at lower earnings multiples than their global peers -- a phenomenon labeled the “Korea discount.” Korea’s Kospi trades at nine times estimated earnings, the lowest among major Asian benchmark stock indexes and half the level the Nasdaq trades at.

The chaebol’s biggest thorns included two academics, Jang Ha-sung and Kim Sang-jo, who often stormed into annual general meetings of companies such as Samsung Electronics to complain about governance lapses -- sometimes stringing out meetings for more than 13 hours before being dragged out by security guards.

Today, Jang is Moon’s chief policy maker and Kim is the top chaebol cop as head of the Fair Trade Commission.

Though Kim has focused on fighting unfair business practices among retailers and fast-food chains, he’s also called on the Chung family’s Hyundai Motor Group to eliminate cross shareholdings, publicly urging the conglomerate to overhaul its ownership structure.

Moon, a former human-rights lawyer, also has shown a willingness to depart from conventional deference to the chaebol. On the Aug. 15 National Liberation Day holiday, the new left-leaning president skipped the custom of pardoning business executives convicted of white-collar crimes. In the past, many of those executives -- including the senior Lee -- were from the chaebol.

No Favors

Moon wants the chaebol to pay more taxes, too, with the finance ministry announcing plans on Aug. 2 to raise the nominal tax rate on big corporations to 25 percent, compared with the current 22 percent. The government also wants to cut tax credits for spending on factories and research by the largest companies.

“This government is clearly trying to level the playing field and change business practices to not give those large corporations any special favors,’’ said Tami Overby, senior vice president for Asia at the U.S. Chamber of Commerce and president of the Washington-based U.S.-Korea Business Council.

Special favors are what landed Jay Y. Lee in jail and got President Park Geun-hye, the daughter of former leader Park Chung-hee, impeached. Lee’s conviction for graft, embezzlement and perjury was the latest development in an influence-peddling scandal that led to the ouster of Park, who’s now standing trial for bribery -- charges both she and Lee denied. Lee will appeal.

Yet Moon may not have enough political capital to get his tax plan through parliament. His Democratic Party only controls 40 percent of seats in the National Assembly, though he did achieve a major victory last month when lawmakers approved an 11.2 trillion won ($9.9 billion) supplementary budget to stimulate economic growth and job creation.

Dealing With Trump

Moon may also need the chaebol’s cooperation fending off Trump, who denounced the U.S.-South Korean free trade agreement as a “horrible deal” and “a one-way street.” A group of chaebol executives accompanied Moon when he traveled to Washington in June to meet the U.S. president.

And with Lee facing a long jail sentence, the new president doesn’t have to worry about addressing popular outrage, said Clara Gillispie, senior director of trade, economic and energy affairs at the National Bureau of Asian Research, a think tank with offices in Washington, D.C. and Seattle.

“This could alleviate pressure on President Moon to take additional action to satisfy popular opinion,” she said. If there had been an acquittal, Moon might have felt the need to show that he’s tough on chaebol. “Now he doesn’t have to,” said Gillispie.

--With assistance from Jung Soo Maeng

To contact the reporters on this story: Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net, Sohee Kim in Seoul at skim847@bloomberg.net.

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net, Michael Tighe, Young-Sam Cho