Samsung chief stands down; sorry for tax scandal

SEOUL Tue Apr 22, 2008 6:04am EDT

1 of 2. Samsung Group Chairman Lee Kun-hee reacts during a news conference regarding his resignation at the company's headquarters in Seoul April 22, 2008.

Credit: Reuters/Jo Yong-Hak

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SEOUL (Reuters) - South Korea's most powerful businessman said on Tuesday he would step down after 20 years at the head of the giant Samsung Group following his indictment last week for tax evasion and breach of trust.

The televised announcement by Lee Kun-hee, 66, who has achieved almost heroic status in South Korea for his role in the fortunes of Samsung, came as a shock even in a society long used to its top businessmen being hauled into court.

But analysts pointed out Lee and his family still control the country's largest conglomerate, sometimes dubbed the "Republic of Samsung" and whose dozens of affiliates account for around a fifth of South Korea's exports. Its products and services range from computer chips and hospitals to handphones and supertankers.

"(I) deeply apologise for causing concern to the nation and will take full responsibility for that," an expressionless Lee said in a brief statement while dozens of senior group executives standing behind him watched on.

The group will dismantle its powerful strategic planning office, which critics say is an opaque organization able to wield influence across some 60 affiliates, including flagship company Samsung Electronics, a world leader in computer memory chips and flat display screens.

"I don't see anything more than a change of people in charge. There's no change at all in the fact that (the Lee family) will remain the owner," said Citibank economist Oh Suk-tae.

A Samsung spokesman told reporters the reshuffle was the start of a process that would give its companies more transparency, its management more autonomy and end a complicated cross-shareholding arrangement that gives Lee enormous power despite holding a tiny stake in group companies.

Lee's son, Lee Jae-yong, seen as being groomed to take over, will step down from his executive post and work abroad for the group in another, unspecified role.

Four other top executives also quit, including the head of the group's strategic division and the CEOs of Samsung Fire & Marine Insurance Co Ltd and Samsung Securities Co Ltd

Shares in affiliates such as Samsung Securities and Samsung Construction & Trading fell 4-8 percent on the news.

Samsung group firms account for 20 percent of total market capitalization on the main board of the South Korean bourse The group has more than 250,000 employees and its annual revenues of $160 billion are around the size of Singapore's GDP.

NO BANKING

Addressing two key issues, Samsung said it would not move into the banking sector, nor would it set up a holding company.

There has been widespread speculation that once the government eases restrictions, the major family-run "chaebol", or conglomerates, would snap up local banks.

"Expectations about a holding company transformation vanished, which sent shares (at some Samsung units) lower," said Chang In-whan, CEO of KTB Asset Management.

Analysts have long said Samsung would eventually have to adopt a holding company structure to give it more transparency and raise its value.

A special prosecutor in January launched a probe into corruption allegations after a former top legal executive at the group said some of its top management hid money and kept a slush fund to bribe politicians, prosecutors and officials.

The prosecutor indicted nine other top executives, but found no evidence to support the bribery allegation. If found guilty of tax evasion Lee could serve from five years to life in jail.

South Korean conglomerates powered South Korea from the ashes of the 1950-53 Korean War to become Asia's fourth-largest economy, but have been accused for years of creating impenetrable management structures.

Critics say few changes have been made over the years at the family-run business groups, despite a number of high-profile convictions of their leaders.

"This cannot be considered a major reform measure even with Lee stepping down, because the management structure of Samsung is built up so that he can influence it as he wishes anyway," said Park Won-suk, a senior official with the People's Solidarity for Participatory Democracy, a leading shareholders' activist group.

In contrast, pro-business groups have said the current management structure allows the group's leaders to develop long-term strategies largely free of the pressure from shareholders looking for big quarterly gains.

(Additional reporting by Kim Yeon-hee, Marie-France Han, Yoo Choonsik, Lee Jiyeon and Rhee So-eui, editing by Jonathan Thatcher, Keiron Henderson & Ian Geoghegan)

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