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Photo Credit: NBBJ (via http://www.nbbj.com/work/samsung-r5-research-building-and-landscape/#)

On February 28, 2017, Samsung unveiled the “Business Renovation Proposal” (The Proposal, hereinafter) on its official website. The Proposal contains several measures aimed at strengthening Samsung’s transparency and compliance mechanisms, as a result of the conglomerate’s involvement in the recent political scandal in South Korea. Samsung is suspected to have illegally given approximately $37.8 billion to Soon-Sil, Choi (who allegedly engaged in improper relations with the South Korean government by influencing her “friend”, Former President Geun-Hye, Park.) in order to garner business benefits from the former President.

In the Proposal, there are three notable provisions regarding compliance for Samsung. First, Samsung subsidiaries would engage in self-management, focusing specifically on their own board of directors. This suggests there wouldn’t be any interference from the Samsung Group on their subsidiaries’ business activities. In the same context, Samsung closed their Future Strategy Office, which worked as a control tower (as a large conglomerate, Samsung had a special decision-making unit that crucially affects all subsidiaries in the Group… It has been documented that the control tower took charge of vast areas of the Group’s business such as strategy, planning, HR, etc.) that engaged in the business of all subsidiaries and directed giving illegal support to Choi. Second, Samsung decided to shut the unit that has worked with public officials because it has been often pointed out to be a source of political corruption and has engaged in inappropriate “lobbying”. Third, execution of donations must be approved by the board of directors or its affiliated committee, when the donation amount exceeds a certain line (approximately $0.89 million).

How can we evaluate these new Samsung measures? Sang-Hak Lee, Director of Transparency International’s Korea chapter commented on the Proposal stating, “Samsung’s reform proposal, in terms of direction, could be understood to be positive. However, what counts is what they do from now on. Whether they have a true will to conduct reform should be watched over time”. He also expressed his opinion regarding the three main issues of The Proposal (mentioned in the above paragraph). “I’m not sure if that kind of work (“lobbying” public officials) would disappear, though the unit interacting with public officials will be shut (down). I guess more basic problems might be the strong power of government, the high level of dependence of corporations to governmental policy, and the mechanisms operated in various ways that continue the cozy relationship between government and business”. He continued. “Regarding self-management, some people express that it’s the de facto dissolution of the (Samsung) Group, but I think the problem still exists as there’s no change in the management structure of the Group. I expect true reform should accompany the change in the management structure. Of course, as Samsung suffers from the damage of their image and judicial punishment, measures to alleviate problems regarding the scandal would be taken from various angles”. He also said, “Corporate transparency could be the most important way to prevent corruption, so I think strengthening decision-making duties regarding donations is meaningful. However, in order to establish their status as a global company, endeavors should be taken to fulfill the international criteria of corporate transparency from now on. ”

In addition, there are remaining questions to be answered regarding the impact of Samsung’s under-investigation scandal. These issues include the application of the Foreign Corrupt Practices Act (FCPA), small and medium sized enterprises (SMEs) in Samsung’s value chains, and the overall impact of the scandal on the business climate of Korea.

First, can the FCPA be applied to Samsung? Opinions from local experts vary. Lawyer Sung-Jae, Choi, of the law firm Darae, stated in the local newspaper Chosunbiz that “there is a possibility that the FCPA would be applied to Samsung, because Samsung exports to subsidiaries in the U.S. from Korean headquarters, and benefits from bribery could be regarded as an assisting factor in doing business in the U.S.” However, Professor Hyung-Goo, Moon mentioned in the local newspaper Ohmynews that “As this matter is related to a political issue, there could be diplomatic and political difficulty for applying the FCPA to this scandal“ and “if this provision is applied literally, companies that do substantial business in the U.S. would be included, too. Then it could be regarded that the U.S. punishes companies from every country with the FCPA, which could bring about a jurisdictional controversy”.

While many people worry that an FCPA penalty would do serious harm to Samsung, professor Se-Don, Shin mentioned in a radio broadcast that “past cases show that the (FCPA) penalty doesn’t usually exceed ₩ 500 billion to ₩ 1000 billion (approximately $0.44 billion to $0.89 billion). Some people mention that it’s a tremendous penalty. Of course the penalty is not a small amount, however, it’s hard to expect that Samsung will suffer serious damage from it, considering Samsung’s large scale”. So far, Jae-Yong, Lee (Vice president and heir of the Samsung Group) has not faced trial yet and therefore, whether the FCPA could be applied to Samsung can’t be answered right now.

Second, would there be any impact on SMEs in Samsung’s global value chains? Since Samsung is a global company currently entrenched in a bribery scandal, many people might be reminded of the similar case of Siemens in 2006. Siemens introduced a code of conduct to its suppliers to prevent any further corruption problems, after it was revealed that board members and many employees used bribery to win contracts. Siemens also implemented several anti-corruption measures, which included employing compliance officers and conducting anti-corruption education sessions for employees. However, there is a big difference between the Siemens and Samsung cases. While the former case is related to transactional corruption in the business field, the latter is related to political corruption, involving top management members. As Samsung’s Proposal shows, there doesn’t seem to be specific and direct measures that can influence companies in Samsung’s value chain. Measures to ensure their compliance seem to focus on issues within Samsung.

Lastly, how would the birth of the “New Samsung” affect the business climate in Korea? Since Samsung has been a major representative corporation in Korea for many years, Samsung’s reforms might affect many companies in Korea. Like Samsung, many big companies in South Korea – often referred to as “Chaebols” (family-ruled conglomerates in Korean) – own a number of subsidiaries. Because of this reason, control towers exist in many Chaebol companies to manage their whole groups, however as part of the new reform efforts Samsung shut theirs down. One article analyzed possible impacts of this measure on other companies, as well as the business climate of Korea. The overall impact would vary between companies that already have a holding company system (a company that owns another companies’ outstanding stock… It allows for the reduction of risk for the owners and can allow the ownership and control of a number of different companies) and companies that don’t, such as Samsung. For companies that don’t have a holding company system, their personnel which performed the role of a control tower might lose their function substantially, as criticism over conglomerates’ control towers has risen domestically. For example, Samsung’s Proposal mainly intends to get rid of interference from the control tower that could direct political corruption and instead encourage self-management for subsidiaries through transparency. On the other hand, companies that are already equipped with a holding company system would not go through a drastic change, because a holding company can still act as a control tower, being free from criticism of “unaccountable control towers with no legal entity”, which described Samsung’s former control tower. Therefore, some experts expect that Samsung would also adopt a holding company system, however, on March 24, vice president of Samsung Electronics mentioned that a transition to holding company system would not be easy to implement at present this time.

The Korean press have come out with a number disputing articles about the ‘New Samsung’, the current situation and the expected impact. However, no one can surely foretell what these measures would bring about for Samsung and the overall business climate of Korea. This is because Samsung is taking the road that has not been taken before. As a so-called representative corporation of Korea, their reform efforts would be a benchmark for other companies in Korea, if they succeed. Many people hope their new efforts bear fruitful, so that Samsung can restore their creditability and be once again respected for their contribution to society. The world is keeping an eye on Samsung’s new way.

Taewan Jung is an ASAN Academy fellow at CIPE