Spotlight: Samsung Electronics (July 24, 2007)

Originally published in the July 24, 2007 issue of In Focus, Governance Metrics International’s newsletter.

Spotlight: Samsung Electronics

South Korea’s most famous blue chip company, Samsung Electronics, has suffered a spectacular decline in value over the last two years. While the KOSPI composite index rose by 27 percent over the last year, Samsung’s shares fell 4 percent. Samsung used to dominate the Korean exchange with 25 percent of its total market capitalization. Today, Samsung accounts for only 8 percent of the market capitalization of the Korean bourse.

Governance is an issue here. Although the company blames the usual culprits of low-cost competition from China and irregular dynamics in the memory chip market, Samsung’s problematic governance is a likely additional drag on share price performance. GMI currently rates Samsung 2.0 on a scale of 1.0 to 10.0, with 10.0 being the highest relative to other emerging market companies, and 1.5 globally. GMI also has flagged the company in three out of six research categories.

Samsung’s governance structure is marked by a web of cross-holdings which ensure the control of the Lee family over the Samsung conglomerate. The Lees’ influence was evident in January 2007, when the company appointed Lee Jae-yong, the 39-year-old son of the family patriarch, to the newly created position of chief customer officer. The appointee’s prior business experience was a failed internet venture. In May 2007, the Seoul appeals court upheld the convictions of two executives of a Samsung affiliate for breach of their fiduciary duties because they helped Mr. Lee Sr. transfer control of the company to his children. These and other governance issues not only hamper the ability of outsiders to exercise control over the company, they also act as disincentives to challenge the company’s internal dynamics, which will be necessary to spur product and marketing innovations.

South Korea’s largest daily newspaper, Chosun Il Bo, quoted an anonymous Samsung executive on July 13 as saying that U.S. investor Carl Icahn might make a hostile takeover bid for the company. Samsung’s stock rose on this news, despite a 36 percent fall in quarterly operating profit announced the same day. On July 17, Icahn denied the report as “erroneous rumors.”