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Samsung and Chaebol Systems of Governance

January 10, 2017


Recent events involving South Korean company Samsung Electronics are shedding light on the system of corporate governance known as “Chaebol” governance. Chaebols such as Samsung are family-owned business conglomerates that dominate South Korea’s export-driven  economy. They are typically built on one large corporation, though some are comprised of several smaller groups sharing the same name. 

Chaebol Characteristics

Chaebols tend to be distinct in terms of corporate governance from other organizations in Asia. Characteristics of chaebols and their management styles include: 

  • Close links with government (most were very dependent on government loans/loan guarantees in their formative years)
  • The largest 10 chaebol conglomerates account for more than half of the nation’s total stock market capitalization
  • They are largely prohibited from owning private banks; chaebols do not all have their own financial institutions
  • Rather than employing outside contractors, chaebols instead tend to form subsidiaries to produce components for exports

Perhaps the main characteristic of the chaebol business model is that they tend to rely on complex structures of interlocking ownership. This allows the owner to leverage control of multiple subsidiaries through the assistance of family members and family-owned channels. However, chaebol models have drawn criticism in many regards due to various governance-related issues. 

Chaebol Corporate Governance Issues and Criticisms

Chaebols have been subject to ongoing scrutiny and criticism. On one hand, many chaebols have experienced rapid growth and expansion on account of top-down decision-making from founders who are widely popular and charismatic. On the other hand, one of the main limitations of such tightly controlled top-down management is that senior managers can sometimes lack the proper skills, especially in the absence of the direction of their higher-ups. This often gets compounded by the element of familial preference in operations. 

Other concerns associated with chaebols include:

  • A lack of transparent corporate governance which can foster fraud, corruption, bribery, embezzlement, and other issues
  • Excessive power wielded by chaebol chairmen, often with little legal restraint
  • Poor shareholder accountability: for instance, the “Korean discount” is a frequent occurrence (shares of the Chaebol trading for less than their value)
  • Chaebol strategy sometimes favors international and foreign customers at the expense of domestic clientele

All of these factors can create unique risks to investors that may not always be present outside of a top-down management style. 

Samsung’s Response to Galaxy Note 7 Recall Measures

An example of the limitations of chaebol-style governance can be seen in recent incidents involving Samsung Electronics. In the wake of a global recall of Galaxy Note 7 smartphones due to battery explosions, Samsung’s management structure is also being called into question. 

As mentioned, chaebol senior managers can sometimes demonstrate a lack of risk management skill in the absence of top management’s direction. Indeed, in the Samsung case, the issue with the Galaxy phones occurred during a period of absence for Samsung chairman Lee-Kun Hee. Some analysts characterize the management during this period as clumsy, and it may also have caused serious hazards for investors and shareholders. Samsung’s response with replacement phones was also considered to be haphazard.

In the wake of these events, Samsung is considering splitting into two in response to pressure from foreign investors to improve its corporate governance. The split would create a holding firm and a productions/operations unit. Such a split would serve to increase dividends for shareholders. The split would also allow Vice Chairman Lee Jae-Yong tighter control over operations as his father Lee-Kun Hee steps out of the picture.

Revised Chaebol Laws and Guidance

In other related news, a newly revised law in South Korea aims to examine chaebol conglomerates to ensure the stability of their financial subsidiaries and help reduce risks to investors. Under the revised laws, controlling shareholders might see their voting rights placed under restriction for up to five years if they violate financial laws. Chaebols would also become subject to the same laws as other financial institutions. 

In addition, the Financial Services Commission will be screening the heads of 64 South Korean financial firms, looking retroactively into the controlling shareholders for alleged discretions. The review should be completed by May 2017, and will also take place every two years to monitor changes in ownership structures. Such processes would be positive steps toward increasing transparency in operations and governance. 


Chaebol hierarchy and structure are not entirely to blame for any shortcomings. As with any activity of this magnitude, there are many, many complex factors intersecting all at once. For instance, the crisis conditions present in some South Korean chaebols are more the result of generally poor business decisions, rather than any issues related to management style. 

Moving forward, steps toward streamlining chaebol governance would include stricter anti-violation standards, as well as creating guidelines for director capabilities. These would allow for greater transparency while still retaining the benefits of chaebol leadership, such as company loyalty and brand recognition. 

Issues such as corporate governance, shareholder engagement, and financial regulations can be complex. If you have any questions or concerns involving shareholder rights, contact us at Kessler Topaz. We are dedicated to promoting policies that encourage corporations to adopt transparent and shareholder-friendly governance practices.