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Samsung in crisis after Lee's arrest

Tech giant in biggest shock in its 79 years of history

Published: 2017-02-17 16:26
Updated: 2017-02-17 20:02

The court’s decision to allow the arrest of Lee Jae-yong, the heir apparent of Samsung Group, on Friday brought the nation’s largest conglomerate into the biggest management crisis in its 79 years of history, suspending its restructuring plans aimed at a smooth leadership transfer.

Lee was arrested by a special counsel, on bribery and other charges related to the political corruption scandal involving President Park Geun-hye and her confidante Choi Soon-sil.

The de facto leader of Samsung is accused of paying nearly $40 million in bribes to Choi in pursuit of President Park’s support for his succession in the company.

Since late last year, Lee has been grilled several times over his alleged role in the scandal.

The 48-year-old, a key suspect, had avoided being arrested last month, with the court rejecting a request by the special counsel, citing insufficient evidence.

But the investigators Tuesday requested again to arrest him with more evidence collected in recent weeks.

Lee Jae-yong, the vice chairman of Samsung Electronics, is seen in his car heading to the Seoul Detention Center in Uiwang, Gyeonggi Province, Thursday night. (Yonhap)



Lee is the first Samsung chief to ever be arrested. The heir apparent being put behind bars has sent shock waves throughout the group, whose sales account for one-fifth of South Korea's gross domestic product.

Lee’s arrest is also expected to deal a severe blow to the group’s global reputation.

The group’s crown jewel Samsung Electronics is the world’s largest smartphone and chip maker. In a survey by Interbrand last October, Samsung Electronics ranked seventh in terms of its brand value out of 100 global businesses.

“The international community has strict standards on corrupt companies,” said Kwon Tae-shin, head of Korea Economic Research Institute. “In the worst-case scenario, Samsung could be excluded from biddings placed by international organizations.”

The company released a short public statement that said, “The group will do its best to reveal the truth at the trial.”

Samsung employees at its headquarters in southern Seoul (Yonhap)


Rank-and-file employees at Samsung Electronics and other subsidiaries, however, could not hide their embarrassment and frustration.

“Executives are remaining extremely silent about the news,” said an assistant manager at the company. “Employees at my level are trying to work as usual, but it is hard to say we are not concerned.”

Another manager-level employee at a Samsung unit said major projects have been stopped for a while.

“I am not sure whether it is related to the group issue or not, but things have been halted at my company for a while,” she said. “Major business projects have been in slow progress or have stopped due to delayed personnel reshuffles and related restructuring.”

The prevailing expectation had been that the special counsel’s request to arrest the Samsung heir apparent would be turned down by the court again, as the group had sternly claimed, “It is confident in proving an acquittal.” 

Due to the unexpected physical detention of its de facto chief, it seems inevitable for Samsung to postpone major restructuring planned for this year, including the disbandment of its Future Strategy Office and the establishment of a holding company system. 

Samsung Electronics' headquarters in southern Seoul (Yonhap)


Lee had pledged to disband the group’s control tower -- which allegedly served President Park and her friend -- as part of efforts to overhaul the group governance structure. Samsung had also been reviewing a plan to separate the electronics unit into an operating and a holding company at the request of its shareholder Elliott Management.   

The regular recruitment of new employees slated for March is highly likely to be put off, too.  

Until Lee is released on bail or wins the trial, the top brass of the Future Strategy Office led by Choi Ji-sung is expected to lead the group, filling the power vacuum.

“The Future Strategy Office has been on standby for the past few nights,” said a group official. “The top management members are bracing for an emergency system.” 

However, there remains the possibility that Vice Chairman Choi Ji-sung and President Chang Choong-ki could be charged without detention, which would be another obstacle to Samsung’s contingency plans.

“For the time being, it seems like the CEOs of each subsidiary will have to run their units in a careful manner,” said an official from a Samsung unit on condition of anonymity.

“A consultative group consisting of the subsidiary CEOs will have to deal with group issues.” 

Samsung may suffer greatly from Lee’s arrest, but the case could put an end to the decades-old collusive ties between businesses and politics, according to local experts.

“Lee’s arrest is the first case in Korea’s modern history that could put an end to years of cozy relations between the government and businesses,” said Park Ju-gun, the president of CEOScore.

“The case would also bring transparency in management, raising fundamental questions such as to whom the company should work for?” he said, adding that chaebol have been perceived as the possession of their owner families.

Samsung Group, as a whole, will face looming uncertainty, as the case hinders its years of efforts to increase its heir’s control over its business empire.

“It appears that Samsung may have planned to complete its succession scenario within the reign of the Park administration. But with the president facing impeachment and the transfer of political power being expected, Samsung seems to be facing unexpected difficulties, jeopardizing years of efforts to allow Lee Jae-yong to succeed,“ he said.


By Cho Chung-un (christory@heraldcorp.com) and Song Su-hyun (song@heraldcorp.com)

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