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Samsung’s Note 7 Crisis Sows Seeds of Rebellion on Home Turf (2)

Bloomberg logoBloomberg 25/10/2016 Hooyeon Kim

Samsung Group, for decades the corporate champion of South Korea, is now facing a revolt at home.

On Monday, hundreds of owners of Samsung Electronics Co.’s fire-prone Galaxy Note 7 filed a class-action lawsuit demanding compensation.

Hours earlier, a South Korean investment advisory firm recommended shareholders vote against Vice Chairman Jay Y. Lee joining the board, in the strongest public opposition so far to the heir-apparent’s ascension.

The twin setbacks come as the phonemaker grapples with the most serious crisis in its 47-year history, the debacle surrounding the global recall of a phone that’s been documented overheating and bursting into flame.

That brouhaha has pierced the company’s aura of invulnerability at home, and could prompt greater scrutiny of a national champion that once could do no wrong.

“Samsung may have become a bit too conceited over the years. A lot has happened that would never have happened at Samsung in the past,” said Park Ju-gun, president of corporate watchdog CEOSCORE in Seoul.

“It has caused a crack in the company’s confidence. Samsung worked hard to build up a premium image, but its reputation has been fractured.”

More broadly, South Korea’s long-established chaebol system has drawn fire in recent years for sustaining family-run fiefdoms at the expense of shareholders.

Samsung, as the largest of the chaebols, has attracted criticism from activist investors including Paul Elliott Singer, who last year launched one of the country’s biggest proxy fights when he contested the merger of two key Samsung Group affiliates.

BC-SAMSUNG-PROXY-1© Hooyeon Kim BC-SAMSUNG-PROXY-1 While that deal eventually went through, Singer is now pushing for more change at Samsung Electronics.

Sustinvest Inc., a Seoul-based proxy-advisory firm, said in a letter to shareholders that Lee isn’t qualified to be on the board because he benefited from “inter-affiliate” transactions at the Samsung group. 

Such transactions are common among local conglomerates but have come under increasing scrutiny because they are viewed as profiting insiders. 

That the firm singled out Lee is unusual: the vice chairman is considered corporate royalty in Korea. 

Samsung itself has long been held as a symbol of South Korea’s postwar economic ascendancy and today rakes in revenue equivalent to a quarter of the nation’s gross domestic product.

Lee, 48, who’s expected to succeed his hospitalized father and chairman Lee Kun-hee, was nominated to the board in September and will face a shareholder vote on Thursday.

But Sustinvest, which also recommended against last year’s merger of Samsung C&T and Cheil Industries, said in the letter Lee has been a “beneficiary” of inter-affiliate transactions, which “undermine corporate value because they exclude the possibility of better deals.” 

It’s unclear how much sway Sustinvest has with shareholders: the National Pension Service, Samsung Electronics’ biggest shareholder and the country’s largest pension fund, has already said it would vote for Lee’s directorship.

Lee’s “election to the board will allow him to more actively participate and take formal responsibility in the company’s important decision making, contributing to creating long-term, sustainable value for all of our stakeholders,” Samsung said in an e-mail.

U.S. proxy advisers Glass Lewis & Co. and Institutional Shareholder Services Inc. split on their view of Lee’s nomination.

In an Oct. 7 report, Glass Lewis recommended that shareholders vote against Lee’s election because the current board “does not have a sufficient number of independent directors.”

BC-SAMSUNG-HOMETOWN-REBELLION-2© Hooyeon Kim BC-SAMSUNG-HOMETOWN-REBELLION-2 The nominating committee should be held responsible for failing to put forward a sufficient number of independent directors, Glass Lewis said in the report.

ISS, however, advises shareholders to support Lee. While he has become more involved in the Samsung group of companies, Lee hasn’t taken any official board positions, which means shareholders are less able to hold him accountable, ISS said in an Oct. 11 analysis.

Adding Lee to the Samsung Electronics board would give him formal responsibilities to direct strategy and provide shareholders with “direct say on his reappointment,” according to the report.

Also unusual for Samsung is the magnitude of the public outcry in Korea since the Note 7 recall began, and the number of Note 7 owners demanding financial compensation is starting to rise.

A total of 527 smartphone buyers are demanding Samsung pay each plaintiff about 500,000 won ($440) for time and effort lost when the phones were first recalled, then scrapped.

Samsung said in an e-mail it will review the complaint and take appropriate action.

“We’re now planning to file a lawsuit every month,” said Ko Young-yeel, an attorney for Seoul-based Harvest Law, which filed the class-action lawsuit with the Seoul Central District Court Monday.

The firm took just five days to get more than 500 Note 7 owners sign up for the class-action lawsuit, he said. Consumers are “very angry.”

Samsung said it will take appropriate action once it receives the complaint.

Samsung has previously said the Note 7 fiasco, which originated in part because the company rushed a device to market ahead of arch-foe Apple Inc., will cost more than $5 billion and the phone unit will probably pay a steep price.

The division has often received the biggest bonuses within Samsung Group, typically about half of base salary, but employees now suspect they may get nothing. Some senior executives will likely lose their jobs too.

“Samsung is also often called a company of order and management. It is a very efficient and systematic organization; but that has also collapsed as well,” Park said.

(Updates with Samsung response to lawsuit in 16th paragraph.)

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