The Samsung Group decided to disassemble itself for the first time since its establishment 58 years ago. This is to forestall controversies over collusive links between politicians and itself, evasion of law and illegal acts. The decision made by Samsung Group chief Jay Y. Lee has astonished the entire business community as well as the Samsung Group itself.
The group announced the news on February 28, saying that it would disassemble its Future Strategy Office and presidential board. Experts point that this will mark the advent of New Samsung led by Jay Y. Lee.
Its plan for the overhaul of the group structure is to abolish the Future Strategy Office and presidential board, which have coordinated and managed its subsidiaries’ business, as mentioned above so that each subsidiary company can make an independent determination during the course of its business in the framework of its board of directors without being influenced by situations Samsung as a whole is involved in.
The Future Strategy Office has never been registered as an official corporation but it has functioned as the de facto control tower of the group coordinating the interests of Samsung subsidiaries. Although each subsidiary of Samsung has its own board of directors as its supreme decision-making body, it has been pointed out that the boards are subordinate to the Future Strategy Office. This is why the office has been praised as leading the rapid growth of Samsung and criticized at the same time as blocking transparent decision making and hiding group owners’ irregularities.
One of the main duties of the Future Strategy Office is lobbying in relation to the South Korean government, which is not easy for the individual subsidiaries. For this reason, the office has been regarded as the root of collusive ties between politicians and the group. Recently, the office has been blamed as the epicenter of corruption constituting the background of the Choi Soon-sil scandal.
Samsung’s recent decision for renovation reflects its chief’s will to build advanced management systems in compliance with the global standards and completely cut such collusive ties with the chief himself arrested due to the group’s involvement in the political scandal. Vice chairman Jay Y. Lee came to the front in 2014 and has focused since then on the creation of New Samsung by signing a series of M&A deals, promoting a flexible and horizontal organizational culture and adding to his responsibility for management by means of appointment as an inside director. “The vice chairman aims to convert Samsung from a rigid structure led by the single control tower to a true global player,” said a senior executive at Samsung, adding, “The disbanding of the office has been predictable in this context.”
New Samsung: Expectations and Concerns
Still, some in the business community are doubtful about the experiment of Samsung in that the largest conglomerate in South Korea that has 59 subsidiaries, 16 of which are listed, along with as many as 500,000 employees and no less than 300 trillion won in annual sales cannot be organized well without a control tower.
They are also concerned about repercussions of the experiment with the disbandment of the group somewhat underprepared and alternatives such as the adoption of a holding company structure being yet to be prepared.
According to them, the subsidiaries of the Samsung Group have been in perfect order under the control of the Future Strategy Office to achieve vertical integration and the absence of the office is likely to lead to a failure of coordination of their business and achievement of synergy effects.
“Information power obtained by a large organization and formulation of strategy and sharing of human and material resources based on it are the very source of a business group’s competitive advantage,” Seoul National University professor Song Jae-yong remarked, continuing, “If Samsung gets rid of its own control tower, who will be in charge of ensuring its future growth and cutting off non-core business units?”
Economics professor Sung Tae-yoon at Yonsei University echoed by saying, “Samsung’s will to reform its governance structure is something to be praised but it still needs a linchpin for inter-subsidiary coordination.”
The Solidarity for Economic Reform, which used to advocate the disbandment of the office, also made a comment against the decision. It mentioned that the key is to enhance the transparency of the Samsung Group, not to abolish the office, and the absence of a control tower in such a large organization is likely to result in confusion.
In the meantime, business administration professor Shin Dong-yup at Yonsei University put more weight on the positive effects anticipated from the decision, including a discontinuation of authoritarian management led by the owners and an increase in the transparency of decision-making processes.
“Ways of inter-subsidiary business coordination after the disbandment of the Future Strategy Office have yet to be discussed,” said a Samsung executive, continuing, “When it comes to its IT subsidiaries, Samsung Electronics may play a role as a coordinator as in the case of Hyundai Motor Company, which is in charge of planning and coordination in the vertically integrated Hyundai Motor Group.”
Future of Samsung
Every group-wide project and task of Samsung came to a halt this month as a result of the disappearance of the office. Instead, autonomous and individual management has been initiated in each of the 59 subsidiaries as of March 1.
It is pointed out that the CEO-based management of the subsidiaries may have a negative effect on long-term investment as the companies are put under pressure for short-term results. As is well known, a large investment immediately leads to a decline in operating profit. With the control tower absent, the subsidiaries may have a hard time actively responding to M&A issues, large-scale investments, etc. The CEOs of the companies are likely to be hesitant about investment in new projects.
Decision making not in the Future Strategy Office but in the boards of directors is predicted to result in a decline in boldness in that the former has changed the structure of the group by disposing of non-core assets such as its defense and chemical business units and making important decisions concerning new business and M&A in a decisive way. Samsung recently acquired Harman for US$8 billion and such a significant change in corporate structure is quite a tough decision for each subsidiary company to make.
Besides, investment via Samsung Venture Investment is insufficient for large-scale restructuring and global M&A. In other words, Samsung Electronics, which can prepare sizeable cash, is expected to take the lead in future M&A deals.
Synergy effects from inter-subsidiary collaboration are forecast to be dwindling, too. Some of the subsidiaries in more difficult situations, such as Samsung Heavy Industries, have to find ways to survive for themselves with group-wide support not available any longer.
At least some confusion is inevitable in terms of business coordination as well. Since that coordination by the office is not provided any more, duplicated investments may be made by multiple subsidiaries and these companies may misread market situations in moving ahead with similar projects and making similar investment decisions.
Various alternatives to the office as a coordinator have been suggested in this regard. One of the most promising is the function of coordination being divided into Samsung Electronics, Samsung C&T and Samsung Life Insurance. More specifically, it is based on a scheme in which Samsung Electronics takes the role in the group of the IT subsidiaries, Samsung Life Insurance plays the same part for financial subsidiaries and Samsung C&T takes care of the rest such as Samsung Heavy Industries, Samsung Biologics and Samsung Bioepis. In this case, seeking of new business, which used to be led by the Future Strategy Office, is borne by the three major subsidiary companies and the Samsung Advanced Institute of Technology can take the part in the case of Samsung Electronics.
Another current market consensus is that the establishment of a holding company by Samsung, which has been pursued mainly by the three major companies, is rather unlikely for the time being. This is because the complex cross-shareholding relationships among the subsidiaries have to be further addressed to that end and a large amount of shares have to be purchased for such a holding company.
“In the current situation, in which a bill is pending against split-off, holding company establishment by Samsung is close to impossible,” said Korea University professor Jo Myung-hyun, who is the head of the Korea Corporate Governance Service. He went on to say, “Then, Samsung subsidiaries will have to set up small-scale planning organizations reflecting their characteristics while concentrating on the transparency of decision-making processes.”
Another problem Samsung is currently facing is a weakening control over itself, which resulted from the arrest of the vice chairman for the political scandal and the subsequent delay of the transfer of management rights to the vice chairman from his father Lee Kun-hee.
The brand image of Samsung is predicted to be affected, too. For example, all of the homepages and blogs that previously had the name of Samsung Group are to disappear. Likewise, group-wide social contribution activities are to be discontinued. “Consumers’ loyalty to the single brand of Samsung and its attractiveness felt by investors are likely to decline,” Yonsei University professor Kim Jung-ho remarked.
Executive member appointment, employment, social contribution activities and all the other tasks of the office are scheduled to be handed over to the respective subsidiary companies. Regular recruitment for the first half of this year, which is scheduled for early this month, is expected to be underway by each company. The size of recruitment is forecast to decrease along with the employment of socially disadvantaged persons. The subsidiaries are planning to apply stricter rules to external contributions and donations for transparent management. For instance, money spent for the purposes is subject to board approval when it exceeds a certain amount.
Cooperation with government agencies, the National Assembly and the like is expected to be outsourced to external organizations like law firms after the disbandment of the office.
“Positive effects of the removal of the Future Strategy Office in the interest of transparency are beyond doubt and it is also true that some side effects will follow at the same time,” another Samsung executive explained, adding, “It is the subsidiaries’ role to minimize the side effects down the road.”
Change in South Korean Way of Business?
Meanwhile, increasing attention is being paid to how Samsung’s decision will affect the other South Korean conglomerates in that they have benchmarked the top business group for long in many cases. At present, SK, Lotte, Hanwha and many more are running their own bodies that have similar functions as the Future Strategy Office of Samsung.
According to many experts, Samsung’s experiment can be a starting point for a change in their way of business that has continued for more than 50 years. Since industrialization back in the 1960s, South Korean conglomerates have adhered to fleet-type management, that is, the heads and the central bodies leading dozens of subsidiaries under tight control unlike in foreign business groups led by their boards of directors. At the same time, they have received special favors via their organizations in charge of relations with the government.
“At this moment, most South Korean conglomerates are in a transition period when the control is handed over to third- and fourth-generation owners and this handover of the control cannot be smooth in view of huge inheritance taxes,” Hansung University professor Kim Sang-jo remarked, mentioning, “In this regard, their best option is to strengthen the role of the boards of directors and ensure autonomous management by subsidiaries, which Samsung is doing now.” On the contrary, Bae Sang-geun, vice president of the Korea Economic Research Institute, pointed out, “South Korean business groups have prospered by coming up with high-quality products and services based on the combined abilities of multiple subsidiary companies and this business model for achieving efficiency from strong ownership is still valid and effective.”
“The overhaul of Samsung is expected to be imitated and followed by an increasing number of companies in South Korea in the long term,” said an industry insider, adding, “This is because the public is placing an increasing demand on the transparency of management in the ongoing traumatic Choi Soon-sil scandal.”