Samsung, corruption, and you
Samsung vice-chairman Lee Jae-yong arrives at court.Photo by Chung Sung-Jun / Getty Images
Today, hearings started for what promises to be one of the more extraordinary trials in the history of the tech industry. Lee Jae-yong was supposed to have it all as the anointed heir to the Samsung empire; instead he languishes in a Seoul detention center with little to do but watch an LG television.
The scandal that has engulfed Lee, Samsung, and South Korea at large is staggering, variously involving illicit horse purchases, shamanistic cult leaders, and the impeachment of a president. Here’s what you need to know.
Who is Lee Jae-yong?
Lee Jae-yong, better known in the West as Jay Y. Lee, is the vice chairman of Samsung Electronics and effectively controls the Samsung Group at large right now. At 48 years old, Lee is a Harvard-educated trilingual business magnate who, until recently, had been seen as a potential modernizing force within Samsung. Although he’s worked for the company since 1991, his first major role within Samsung Electronics was COO in 2009. He was named vice chairman in 2012, a move that was seen as confirming his status as heir, and became a board member last year.
Lee is a private person who almost never gives interviews and whose actual hands-on responsibilities at Samsung are vague, so it’s been difficult to get a picture of who he really is. The first venture he took control of was eSamsung, a short-lived internet business that ran things like network services and broadband cafes. Various profiles have credited him with spearheading Samsung’s expansion into OLED displays, reportedly after discussing the matter with Steve Jobs, who may have had an interest in the technology for an Apple television that never came to be.
More recently, Lee has kept up Samsung’s relationships with the likes of Apple CEO Tim Cook, Facebook CEO Mark Zuckerberg, and Alphabet CEO Larry Page, and he’s generally considered to be a mild-mannered, friendly character. A common view, however, is that he hasn’t been involved with anything public-facing because a slip-up on the scale of the Galaxy Note 7 disaster, say, could jeopardize his chances of becoming chairman if attributed to him.
So if Lee Jae-yong is the vice chairman, who’s the chairman, and why isn’t he in charge?
That would be Lee Jae-yong’s father, the infamous Lee Kun-hee. The older Lee has been incapacitated since suffering a heart attack in 2014; due to a tradition of filial piety, the role of chairman may not pass down to Lee Jae-yong until his 75-year-old father actually passes away. Lee Kun-hee himself first became chairman upon the death of his father, Samsung’s original founder Lee Byung-chul.
But if Lee Jae-yong is in custody, who’s actually running the place?
That question cuts deep at the heart of how Samsung as an organization actually operates, and the answer is that nobody’s really sure what specific roles Lee Jae-yong may or may not have that are going unattended right now. Samsung Electronics does have a conventional CEO, Kwon Oh-hyun; he was appointed to the role in 2012 and got two additional co-CEOs in JK Shin and BK Yoon in 2013.
“Samsung Electronics has a strong management team currently in place, led by its three co-CEOs,” a Samsung spokesperson told The Verge when reached for comment on the impact of Lee’s absence. “This team has delivered superior performance and will make their best efforts to lead our operations without disruptions.”
Kwon rose to the top role through Samsung’s semiconductor business, and his management chops are not in doubt. Lee Jae-yong’s responsibilities, however, are described by Samsung as “general business administration.” The chaebol is likely to keep on rolling without his input in the short term, in other words.
What is a chaebol, anyway?
Chaebol is the Korean term for conglomerate. The word comes from the same Chinese characters that form the Japanese term zaibatsu; that those characters roughly translate to “wealth” and “clan” should give you some idea as to how the concept came to be. Many of South Korea’s top conglomerates, like LG, Hyundai, SK, Lotte, and Hanwha, are family-run chaebol where power is traditionally passed down through generations.
Chaebol operate across multiple industries. In the case of Samsung Group, the chaebol comprises several affiliated businesses including life insurance, construction, shipbuilding, theme parks, advertising, textiles, and more. The largest and most important company within the group is, of course, Samsung Electronics.
What is Lee Jae-yong accused of?
Lee and four other Samsung executives are accused of offering bribes to South Korean president Park Geun-hye and a confidante of hers who has been at the center of a spiralling political scandal that engulfed the country last year. This confidante, Choi Soon-sil, is a close personal friend of Park’s and the daughter of Choi Tae-min, the controversial leader of a shamanistic Christian cult. Choi Soon-sil’s supposed Rasputin-like influence led to the president’s impeachment, and South Korea’s Supreme Court is set to rule tomorrow on whether Park should be reinstated or permanently removed from power.
What does any of this have to do with Samsung?
Prosecutors allege that Lee and the other executives gave 43.3 billion won (about $38 million) in bribes to organizations controlled by Choi. In a surreal twist, much of this was intended to be used to buy horses for Choi’s equestrian daughter Chung Yoo-ra, as well as including a payment of about $19 million to Core Sports, the German agency that sponsors her. Samsung is accused of covering these payments up by reporting them as funding for an official equestrian team, which turned out to consist entirely of Chung and her coach. In total, it’s alleged that nearly $26 million was embezzled from Samsung corporate funds.
Embezzlement is one thing, carrying a minimum prison sentence of five years when more than 5 billion won is involved, but the potentially bigger issue is why Samsung would do this in the first place — what it would get in return. Lee is directly implicated in one of the prosecutors’ most explosive claims, which is that this was done to help ensure his overall control of the company.
How would that work?
With Lee Kun-hee technically still in charge, Lee Jae-yong only holds less than a 1 percent stake in Samsung Electronics. The $8 billion 2015 merger of two Samsung Group affiliates, Chiel Industries and Samsung C&T, was seen as a way for the younger Lee to solidify his path to succession. After the merger, Lee Jae-yong took a 16.5 percent stake in the newly formed Samsung C&T, which owns 4.1 percent of Samsung Electronics. The merger was extremely controversial, with hedge fund investors and critics of the hereditary leadership system outspoken against it, but President Park is accused of having directed aides to ensure that it would succeed. Shareholders eventually approved the deal.
What does Samsung say to all of this?
Lee denied all the charges made against him today, and Samsung is unsurprisingly standing by its man. “Samsung has not paid bribes nor made improper requests seeking favors,” a spokesperson tells The Verge. “Future court proceedings will reveal the truth.”
What’s going to happen?
It’s hard to say. The case against Lee and Samsung does look credible, and Lee admits to at least some wrongdoing. “I was told there were inevitable circumstances,” he testified regarding the payments to the nonexistent equestrian team. “But I admit that the deal was done in an inappropriate way and regret that I didn’t look into it more thoroughly.”
Even if Lee is found guilty, though, that may not torpedo his chances of eventually succeeding his father. Lee Kun-hee, remember, has been separately convicted of tax evasion and bribery, receiving two presidential pardons for his troubles. The latter pardon, from President Lee Myung-bak in 2008, allowed Lee Kun-hee to remain on the International Olympic Committee and help lead South Korea’s successful bid for the 2018 Winter Olympic Games in Pyeongchang; he returned to Samsung as chairman a year later.
And Lee Kun-hee is just one of a long list of chaebol chairmen to receive pardons. Hyundai, SK, and Hanwha’s heads have all been granted clemency over the years, and in the most recent example President Park last year pardoned the CJ chief Lee Jay-hyun — who happens to be Lee Kun-hee’s nephew.
With precedent like that, it’s not hard to imagine Lee Jae-yong’s current predicament as a minor blip in the long run. The importance of Samsung itself also works in his favor; the group accounts for about a fifth of South Korea’s GDP, and the country’s special prosecutor even admitted to considering the potential economic impact before deciding whether to arrest Lee in the first place.
But the mood is different in South Korea these days. There’s always been public opposition to corruption and nepotism in the country’s chaebol conglomerates, but the country has never seen anything like the massive protests that swept the streets last year and helped drive President Park’s approval rating down to 4 percent. In a climate like this, where widespread outrage can lead to the impeachment of a president, even a Samsung chairman might have reason to worry.