In recent years CMG has been tracking developments with the Lee family in South Korea. It’s part of our ongoing interest in learning about iconic business families around the world – and then sharing insights with the families (and advisors) we’re privileged to support here at home.
The Lees are controlling shareholders of Samsung Electronics Co. – a $400 billion conglomerate now diversified in 62 different affiliates. Its businesses include consumer electronics, shipbuilding, hospitality and resorts, construction, advertising, and even life insurance. Samsung alone accounts for nearly 20% of South Korea’s GDP.
And it’s now possible that the Lee family’s ownership is coming to an end, primarily due to a prohibitive estate tax bill of nearly $7 billion.
Jay Y. Lee, the unofficial head of Samsung, announced in early May that he has no intentions of handing management control of the company – founded in 1938 by his grandfather – to his children. If Lee follows through on his decision, it would mark the end of three generations of Lee family control of one of the world’s largest technology companies.
First, the backstory:
- Our original profile of the Lee family highlighted some of its challenges – including the incapacitation of Samsung chairman Lee Kun-hee, the 77-year-old son of the company’s founder, father of Jay Y., and South Korea’s wealthiest person. Lee Kun-hee’s current health remains uncertain today – six years after his 2014 heart attack – and he hasn’t been seen in public during this time. Many in South Korea even wonder if he’s still alive.
- When Lee Kun-hee’s death is official, his heirs will face an enormous estate bill, due largely to South Korea’s 50% estate tax rate, second-highest in the world after Japan. Settling this tax will complicate the family’s control of Samsung, as it might be necessary for Lee’s beneficiaries to sell off pieces of the company in order to cover the bill. This would dilute their stake in Samsung.
- Jay Y. Lee’s pledge in early May was somewhat predictable, given that South Korea’s strict inheritance tax laws have made it increasingly difficult for founding families to maintain control of their empires – and he probably knows it won’t get any easier for future generations of his family. (The tax rate of 50% rises to 65% if the beneficiary becomes the largest shareholder of the family business.)
What Lee’s announcement means:
- Jay Y.’s declaration that Samsung ownership won’t transfer to his children has already created questions in South Korean business circles. Will he really follow through? (Jay Y’s children are still young and who knows if he’ll stand by his commitment when the time comes 15 or 20 years from now?) And, if he does, will such a move have any ripple effects?
- The announcement has created particular worries among the small number of families that run business groups known as “chaebols” in South Korea. Keeping control in the family has enabled these chaebols to compete with larger rivals around the world. And it has been good for the business of South Korea too. The chaebols’ growth in recent years has helped make the country’s economy the 4th largest in Asia.
- These family-controlled enterprises have significant power and influence in South Korea, and a move by the Lees to cede control may create the expectation that other families should follow suit. So other chaebols are watching carefully. Hyundai Motor is an example of one chaebol that’s on the brink of its own succession. The LG family group (electronics) is another.
- Some wonder if Lee’s promise to give up family control isn’t just a smoke screen to divert attention away from the company’s ongoing bribery and corruption scandals. These legal battles have plagued Samsung for much of the past decade and dented the company’s reputation in South Korea, though not necessarily its business results.
- If Lee really does intend to sever his family’s control of Samsung, governance experts predict he’ll need to announce a more precise plan for divesting the family’s shares in its holding company, Samsung C&T. Lee hasn’t yet done this.
So where does this all leave the future of the Lee family and its 82-year-old business?
Time will tell.
In the meantime: