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Heir's arrest keeps Samsung off-balance
February 17, 2017 / 7:06 AM / in 9 months

Heir's arrest keeps Samsung off-balance

HONG KONG (Reuters Breakingviews) - There’s only so much even the most powerful executive can accomplish from behind bars. Samsung Group’s founding family heir Jay Y. Lee has been thrown into jail in an unprecedented corruption case. This kind of scandal could cost company bosses their jobs in other countries, but in South Korea, Lee’s position is probably not at risk. Nevertheless his physical absence will leave Samsung without anyone steering the wheel. The uncertainty threatens to hobble big changes at the group, including the restructuring advocated by activist investors.

Lee Jae-yong (C), vice chairman of Samsung Electronics, arrives to be questioned as a suspect in a corruption scandal that led to the impeachment of President Park Geun-Hye, at the office of the independent counsel in Seoul on February 13, 2017. REUTERS/Jung Yeon-Je/Pool - RTSYCLC

Less than a month after a special South Korean prosecutor unsuccessfully sought to keep Lee in custody, a Seoul court approved a second request to arrest him. Family-run local conglomerates, known as chaebol, have a long history of run-ins with the law. Even so, Lee, facing bribery allegations, is the first Samsung chief to sit in jail.

Company factories will keep running at full throttle no doubt. The daily operational role of Lee, who is vice chairman at Samsung Electronics, isn’t clearly defined anyway, and the three key divisions of Samsung Electronics, the $260 billion flagship unit, are run by a trio of veterans sharing the chief executive title. Investors know this already - shares in Samsung Electronics were down around 1 percent at midday on the news, but there’s been no panicked selloff.

But Lee’s participation is critical as the company tries to engage in a long-term strategic shift. Lee’s father preached against complacency, so the son is pushing Samsung into new businesses, such as biotechnology and automotive, while reviewing a restructuring proposal from activist U.S. hedge fund Elliott Management.

Any prolonged absence by Lee would be quickly felt. His sisters lack experience, so leadership might fall to an outsider. Choi Gee-sung, a high profile lieutenant and Lee mentor, might take up some slack, but probably not all of it.

There are signs of cracks already. Samsung Electronics has yet to finalize investment plans for 2017. An annual management reshuffle is on hold. Lee might make bail, but a long prison sentence is still possible, and would be a major hindrance. The deeper problem is the overdependence Samsung and its shareholders have on family leadership.

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