Samsung's Chairman to Resign

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Jo Yong-Hak / Reuters

Samsung Group chairman Lee Kun-hee during a news conference at the company's headquarters in Seoul on April 22

In what may prove to be a milestone for corporate reform in South Korea , the country's most powerful businessman on Tuesday resigned from his post as chairman of Samsung Electronics.

Lee Kun Hee, 66, stepped down after being indicted last week on charges of tax evasion and breach of fiduciary trust. Lee's son also resigned from his post at the company. "I have regrets," Lee said in a brief televised address broadcast on national TV. "But I think this is time for me to leave, taking all the mistakes of the past with me." Lee said he would "take full responsibility, both moral and legal."

Under Lee's guidance, Samsung transformed itself from a little-known purveyor of second-rate electronics into a major producer of mobile phones, LCD panels and memory chips with a globally recognized brand name. However, Lee also became a symbol of the difficulties Korea's major corporations have faced in modernizing their management practices. A shadowy figure rarely seen in public, Lee was treated as a demigod by Samsung employees but his actual role in managing the company remained opaque. Through complex networks of cross-shareholdings, Lee, the son of Samsung's founder, played a dominant role in directing the activities of the giant Samsung group of companies, with dozens of affiliates in insurance, securities, heavy industry, chemicals and even hotels. Samsung wields tremendous economic and political influence in South Korea. Its companies account for some 20% of the nation's exports. The charges against Lee are a result of an investigation started after a former Samsung counsel accused the group late last year of operating a slush fund to bribe politicians and bureaucrats. (Lee, however, wasn't charged with bribery.)

Samsung's bewildering management structure and its political influence have been common features of Korea's family-run business conglomerates, called chaebols. Over the past decade, several of the sprawling business empires have come under fire from minority shareholders, foreign investors and government prosecutors for dubious practices, forcing many chaebols to become more transparent. The family that controls the LG group of companies set up a holding company to clarify their shareholdings. Samsung has improved its corporate governance by, for example, allowing more independent directors, but the presence of Lee remained a question mark over its progress. Some of the current charges against Lee relate to allegations that he tried to pass control to his son through dubious financial deals.

According to Seoul analysts, Lee's departure may clear the way for a round of corporate reform within the Samsung conglomerate and possibly throughout corporate South Korea. Without Lee as an overarching force, executives of individual Samsung companies will gain more influence over their own operations. There is a persistent fear among investors that Samsung managers were more loyal to Lee than to shareholders.

Samsung also announced that it will abolish its Strategic Planning Office, which coordinated among the many Samsung affiliates. The company is "moving to the separation of ownership and management," says Thae Khwarg, CEO of fund manager SEI Asset Korea in Seoul. Lee's departure "will make managers more conscious that they have a duty to their shareholders." And with Samsung taking the lead, other chaebols may be forced to follow suit. "Samsung has set many standards," says Yoo Jung Sang, a managing director at Good Morning Shinhan Securities in Seoul. "There should be a spill-over effect to the conglomerates of Korea."

His resignation throws into question the future of the powerful Lee business clan. As a shareholder in Samsung affiliates, Lee holds the loyalty of many Samsung executives, and he is unlikely to vanish from the scene. He was widely expected to attempt to pass control of Samsung to his son, Lee Jae Yong. But that is looking increasingly difficult. The younger Lee resigned from his position as Samsung Electronics' chief customer officer though he will be given a new, yet-to-be-defined role in developing overseas business.