South Korea Faces Question Of Corporate Control

SEOUL — It was a scene that stunned South Korea. Lee Kun-hee, the reclusive chairman of Samsung Group, the conglomerate that dominates this country’s dynamic economy, abruptly resigned amid criminal indictments, apologizing in disgrace.

Mr. Lee’s resignation Tuesday on live national television marked more than just the downfall of one of the most-powerful figures in South Korea, a billionaire who has been heralded as a technological visionary and vilified for his secretive control of the country’s largest industrial group.

It also forced South Korea to again confront one of the most paradoxical legacies of its economic miracle: how this fast-rising $960 billion economy that supplies the world with semiconductors and supertankers is still largely controlled by a handful of family-owned corporate groups like Samsung. According to the Bank of Korea, the 30 largest family-run groups, known as chaebol, control almost 40 percent of the economy.

The question now is whether South Korea is finally moving to weaken family control of the chaebol, or at least expose that control to greater scrutiny. Speaking last week after Mr. Lee was indicted on charges of tax evasion and breach of trust, South Korea’s president, Lee Myung-bak, vowed to bring global standards to the country’s corporate governance. The president is himself a product of a chaebol, a former executive at several subsidiaries of Hyundai.

“This is progress,” said Kim Joongi, a law professor at Yonsei University in Seoul. “The family ownership system here is finally maturing. This is part of a shift toward greater transparency and accountability.”

Criticism of the chaebol families has been widespread. To many South Koreans, the chaebol are reminders of the old authoritarian era when the industrial groups worked closely with military rulers. The chaebol’s secretive ways seem anachronistic in a vibrant and open nation that seized democracy in the early 1990s.

At the same time, the groups are considered the crown jewels of one of Asia’s most spectacular economic successes. It was the drive and ambition of family groups like Samsung, whose electronics company got its start selling cheap televisions under Japanese brand names to countries like Panama, that lifted this country from the ashes of the Korean War.

Today, South Korea has the world’s 13th-largest economy, with glittering skyscrapers, boutique-lined boulevards and some of the region’s highest living standards. Samsung Electronics is by some measures the largest electronics company in the world, with about $150 billion in sales. Its blue oval logo is globally known, and its wafer-thin cellphones and flat-panel TVs now set world standards.

So while South Korea has grown less tolerant of its family groups in the last decade, it still seems uncertain how much pressure it wants to put on them.

Last year, Chung Mong-koo, the chairman of the sprawling Hyundai industrial group, which includes Hyundai Motor, was sentenced to three years for embezzlement. But Mr. Chung was soon released by an appeals court that suspended his sentence, citing his importance to the national economy. A court also suspended a three-year sentence for accounting fraud given to the chairman of the SK Group, another chaebol.

In the indictments last week of Samsung’s Mr. Lee, prosecutors dropped the most damaging part of their investigation, into whether he had a slush fund to bribe government officials, for lack of evidence.

Mr. Lee’s downfall began in October, when a former Samsung lawyer turned whistle-blower staged a dramatic news conference at a Catholic church in Seoul to accuse Mr. Lee of having such a slush fund. After a three-month investigation, prosecutors charged Mr. Lee with illegally transferring group assets to his son and evading taxes on $4.5 billion reportedly stashed in secret accounts.

Mr. Lee faces up to life in prison if found guilty, but given the light sentences actually served by other chaebol heads, the chances of a long prison term are unlikely. He will pay some $110 million in owed taxes, the Samsung group said, but has denied helping his son. The group did not name a new chairman to succeed Mr. Lee.

Many had expected Mr. Lee to stay on at Samsung while fighting the charges, as he had done before. Instead, South Koreans were surprised on Tuesday when the grim-faced industrialist came out of his usual seclusion to relinquish his 20-year reign. Lined up behind him were top executives from many of his 59 group companies, who bowed in contrition before TV cameras.

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