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Why Samsung’s Jay Y. Lee needs to do his prison time

LiveMint logoLiveMint 28-08-2017 Michael Schuman

History was made in a Seoul court on Friday when Jay Y. Lee, scion of the family that founded the giant Samsung conglomerate, was convicted on bribery and embezzlement charges and sentenced to five years in prison.

In theory, the verdict should send a stark signal to the country’s politicians and business leaders that the corrupt shenanigans that have so plagued this otherwise outstanding economy must end. But that message will hit home only if one critical thing happens: Lee does his time, all of it.

Many conservative Koreans will argue that Lee is being made a scapegoat. After all, the Samsung executive found himself caught up in a scandal involving no less a figure than former president Park Geun-hye, who was impeached over her alleged role in the corruption scheme. The managers of South Korea’s big business groups, called chaebol, can ill-afford to stand on principle when presidential favour is at stake.

That’s beside the point, however. Too many excuses for bad business behaviour have been made in the past, with the result that Korean corporate titans found guilty of assorted crimes—including Lee’s illustrious father—have routinely been let off the hook.

Invariably, they’ve received suspended sentences or presidential pardons, and have slipped back into their corner offices as if nothing ever happened. The signal has been all too clear: executives can get into trouble for bribing politicians or stealing funds, but not that much. Such misguided leniency has encouraged scandal after scandal.

With Lee’s conviction, Korea has an opportunity to break this embarrassing cycle. The Samsung scion will certainly appeal his sentence, one of the harshest ever handed down to a top chaebol executive. Only by locking Lee up, though, and keeping him there for his full sentence, will the government and courts send a convincing message that corporate malfeasance will no longer be tolerated.

This is particularly important right now, for two reasons. Newly installed President Moon Jae-in campaigned as a crusader for reforming the chaebol. But his political party doesn’t control the national legislature, where any bold proposals will likely face stiff opposition from conservatives.

Moon’s choice to head the country’s Fair Trade Commission, known as a strident chaebol critic, has already started managing expectations, stating that the new administration doesn’t intend to break up the chaebol system and praising the conglomerates for starting to unwind some of the complicated cross-shareholdings through which families have traditionally maintained control over their companies.

Much more needs to be done to clean up those shareholding structures, strengthen corporate governance and break the stranglehold that the chaebol maintain over certain sectors.

But until Moon has the political capital to push through more extensive reforms, the best weapon he has is the threat to carry through the laws already on the books. Only if rich and powerful chaebol chiefs believe they’ll pay a price for corporate skulduggery will they begin to clean up their acts.

Equally importantly, ordinary Koreans need to see someone like Lee serving time. For too long, they’ve been told that these chaebol family-managers are critical to the nation’s continued economic prosperity.

Even Park, who came into office similarly promising to revamp the chaebol system, eventually succumbed to this specious argument and pardoned at least one prominent tycoon.

Yet one glance at the recent performance of Samsung Electronics Co. proves the company will be just fine—perhaps even better off—without Lee.

Since Lee’s arrest in mid-February, the company’s stock price has surged 24%. Last quarter, Samsung Electronics impressively posted record profits. The stellar performance provides evidence that in modern South Korea, the talented and experienced professional executives at its biggest corporations no longer require family patriarchs at the helm to achieve growth and profits.

In order to make this all stick, even jailing Lee may not be enough. Whenever he emerges from his cell, Samsung’s shareholders and managers shouldn’t welcome him back into the corporate fold. That would strengthen the message that criminal behaviour will no longer be tolerated in Korea’s business community.

For his part, Moon can break with his predecessors and avoid any pressure between now and then to pardon Lee. The Samsung scion may be a sacrificial lamb, but it’s a sacrifice that must be made. Bloomberg View

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