SEOUL — The arrest on Friday of Lee Jae-yong, the de facto head of the Samsung group, has thrown the South Korean conglomerate into a crisis for the first time in its corporate history.
The incident is a huge blow to Samsung Electronics, the key unit where Lee serves as vice chairman. It is likely to stymie corporate governance reforms at the conglomerate, including plans to reorganize the group under a holding company, as well as the selection of top management for group companies. Special prosecutors, meanwhile, hope to take advantage of the arrest to delve deeper into allegations surrounding South Korean President Park Geun-hye.
In late November, Samsung announced plans to reorganize group companies under a holding company and overhaul operations to put shareholders first, with a primary focus on increasing dividends significantly. The dividend increase was officially decided on in late January, when the company announced group earnings for 2016. The company said the structural reorganization would take about six months.
Samsung has been criticized by foreign investors for its complicated web of cross-shareholdings between group companies. The plan to reorganize the group under a holding company is designed to make Samsung Electronics’ power structure within the group more transparent to outsiders.
But the reform process appears to have stalled after Lee was summoned to South Korea’s parliament for questioning in connection with graft allegations. Samsung’s legal department and other related departments have been busy responding to the situation. It now looks difficult for Samsung to draw up its reform plans by May or June, as it had originally planned.
Lee’s arrest will also probably affect Samsung’s top-level personnel decisions, which are crucial in determining the group’s future course. In recent years, Samsung made such personnel decisions each December for group companies, including key subsidiaries such as leading battery maker Samsung SDI and organic light-emitting diode panel maker Samsung Display. But last December, it put off the decisions.
When the first request for an arrest warrant for Lee was rejected by a court last month, rumors emerged that Samsung might make a personnel announcement in March or April. But with the arrest of the vice chairman, who has the power to make such decisions, those expectations are now all but dashed.
For the prosecutors, the arrest is a major step forward. Since the previous request for a warrant was turned down, they have struggled to make progress, failing to conduct a search of Park’s office or to make arrangements for questioning the president face-to-face.
Given Lee’s arrest, and considering that Park’s presidential immunity will expire when she leaves office, the prosecutors are likely to push Park more strongly.