Samsung merger should come with greater social responsibility

The merger of Cheil Industries and Samsung C&T Corporation, two key affiliates of the Samsung Group, represents an extraordinary change for the South Korean economy.

Not only does it simplify the control structure at the Samsung Group, South Korea’s biggest chaebol, but it greatly increases Samsung Electronics Vice Chairman Lee Jae-yong’s control of the group. In short, we can say that the general outline of Lee’s succession has now come into view.

Samsung has long needed to break the loop of cross investments in which Cheil Industries holds shares in Samsung Life Insurance, which holds shares in Samsung Electronics, which holds shares in Samsung C&T Corporation, Samsung Electro-Mechanics, and Samsung SDI, which hold shares in Cheil Industries. This merger will result in a simpler control structure at the group, with Samsung C&T Corporation (the name of the merged company) acting as a holding company that controls Samsung Life Insurance and Samsung Electronics.

It will also increase the founding family’s control of the group. After the merger, Samsung Chairman Lee Kun-hee and other members of the family together will hold more than 30% of shares in Samsung C&T.

The greatest beneficiary of the change will be Lee Jae-yong himself. At present, Lee is the primary shareholder in Cheil Industries but does not own any stock in Samsung C&T. Through this indirect means of Cheil Industries’ merger with Samsung C&T, which has more than a 4% share in Samsung Electronics, Lee will instantaneously increase his control over Samsung Electronics and other group affiliates.

Following Lee’s appointment as chairman of the Samsung Life Public Welfare Foundation and Samsung Foundation of Culture on May 15, it is appropriate to view the decision to merge the two companies as part of efforts to hand the group to the third generation.

Of course, we understand why Samsung is accelerating the process of succession. Group Chairman Lee Kun-hee has been an invalid for more than a year, and it must be conceded that there is little to no chance that he will return to managing the group and making appointments.

Samsung Electronics, a key subsidiary of the group, is fighting an uphill battle in the Chinese smartphone market, and the group has had little success in carving out new business areas. There is no denying the need for even greater unity in the group considering that the market environment is undergoing an industrial paradigm shift.

But even as Samsung makes rapid progress on reorganizing its control structure, it has been failing to meet expectations in the area of increasing corporate social responsibility (CSR).

Lee is troubled by the original sin of having purchased convertible bonds (CB) at Samsung Everland and bonds with warrants (BW) at Samsung SDS for a huge discount. Considering that Lee earned trillions of won in unfair profits, the public hopes that Lee will take measures to increase the group’s CSR before he assumes control.

A compromise plan is supposed to be announced next month, but the issue of leukemia cases at Samsung Electronics still needs to be addressed. As was illustrated by executives at several Samsung affiliates who had private citizens and labor unions leaders trailed and investigated, the relationship between labor and management at the group is still backward.

Hastening to reorganize the group’s control structure without taking action that makes a clear break with the past is no more than a flashy ruse to ease transition to the third generation. Samsung needs to note that the South Korean people are watching.

-The Hankyoreh