SAMSUNG SOARS DESPITE WOES
A scandal involving a top executive hasn’t turned off investors, Joe Chidley writes.
Pop quiz: What happens to a company’s stock when its leader ends up in the dock?
Well, let’s look at history. Remember former Tyco CEO Dennis Kozlowski, he of the $6,000 shower curtain, who more than a decade ago was convicted for fraud, larceny and other crimes? Or how about Jeff Skilling, of similar vintage, whose handling of Enron ended with his trial and conviction on felony charges?
In both cases, scandal led to plummeting stock prices, and corporate bankruptcy. So the answer to this quiz is painfully obvious, right? Well, maybe not. Consider the curious case of Samsung Group and its leader, Lee Jae-yong, who’s at the centre of what some are calling South Korea’s trial of the century.
It was set to begin Thursday in Seoul. The 48-year-old vice chairman of Samsung stands accused of giving or promising a close associate of Korean President Park Geun-hye the equivalent of about $50 million, in return for political favours. Park, if you’ll remember, was impeached last December amid a mounting corruption scandal that has sparked public outrage; she may well face criminal charges of her own this week.
Lee hasn’t been convicted of anything, and has vowed to clear his name. Still, what would you expect to happen to the shares of Samsung’s many constituent companies? Disaster, right?
Wrong. Lee was arrested on Feb. 17. Since then, shares in Samsung Electronics, the conglomerate’s flagship unit and Korea’s largest publicly traded company, are up more than six per cent. The stock is currently trading on the Korea Exchange above two million won (about $2,335) — an all-time high. (It also trades as a global depositary receipt on the London Exchange, and is a major constituent of Korea index funds and of some emerging market funds.)
That would be remarkable enough, but alleged malfeasance in the executive offices isn’t Samsung’s only challenge. For one, there was that little problem of the exploding Galaxy Note 7’s last year, which forced the company to recall millions of phones and cost it billions of dollars. More recently, documents released by WikiLeaks suggest that the CIA might have been spying on folks through Samsung Smart TV sets.
None of that has mattered much to investors, apparently. Sure, the stock took a dip after the recall, but over the past three months, Samsung Electronics is up 13 per cent. Over the past 12 months, it’s up 68 per cent.
What gives? Well, part of the reason for the run-up is that the company just seems to be run so damned well. Take the Note 7 issue: it acted quickly on the recall, its leadership made bows and apologies, and the world moved on. Meanwhile, its parts business, which provides components for other companies’ smartphones (including Apple’s), is going gangbusters. In January, Samsung Electronics recorded profit growth of 20 per cent for fiscal 2016, despite the phone blow-up.
So that’s one reason. The other might have to do with the trial itself, which is taking place in the context of something like a popular revolt against business as usual in South Korea.
A bit of history: In the 1960s, the military government encouraged the development of family run conglomerates by trading market protections and guaranteed loans in return for investment, export-heavy industrial production and, eventually, political support. The resulting system, called chaebol (literally “rich clan”), was instrumental in the country’s renaissance after the Korean War.
But there’s been a downside: a massive concentration both of economic activity and of wealth, fuelling popular resentment. Today, something like 80 per cent of Korea’s economy is controlled by a handful of family run conglomerates, which operate in everything from electronics and automobiles to insurance and fashion.
The individual units’ ownership structures are often convoluted, to say the least, as ruling families cobble together control through a combination of direct ownership, non-voting shares and cross-ownership among businesses and affiliated organizations. Samsung Group is the biggest of the chaebol, whose various activities comprise more than 10 per cent of Korea’s GDP. For instance, among Samsung Electronics’ common stockholders of record are Samsung Corp., Samsung Life Insurance and Samsung Fire & Marine Insurance, as well as the Samsung Foundation of Culture and the Samsung Welfare Foundation.
Not surprisingly, given the close ties among related companies, and between government and chaebol, the system has often made South Korea the target of criticism, from both within and without, on the grounds of poor corporate governance and widespread corruption. Market-watchers have long talked about a “Korea discount” to the nation’s publicly traded companies.
To market optimists, then, Lee’s legal woes are a sign that things might be about to change: his trial, to them, is in fact a trial for the entire chaebol system, whose demise, among other things, would be to the benefit of stock valuations.
Well, maybe. The history of chaebol-related prosecutions is not exactly favourable — Lee’s father, who ceded power to his son after a heart attack in 2014, was twice convicted of tax evasion and bribery, but never jailed. And even if there were some massive corporate reform program, it would be neither easy nor smooth, given how intrinsic the chaebol system is to the Korean economy. Disrupting it too much, or too fast, could provide the world with a new defining example for the phrase “too big to fail.”
So maybe the Korea optimists are engaged in wishful thinking. Or maybe they should be careful what they wish for. For now, Samsung investors aren’t complaining.
Lee hasn’t been convicted of anything, and has vowed to clear his name. Still, what would you expect to happen to the shares of Samsung’s many constituent companies? Disaster, right? Wrong.