Review of Samsung’s Governance Principles

Corporate Governance at Samsung Group

'Corporate governance' refers to a corporation's control, supervision methods and processes, and management accountability. Corporate Governance, worldwide, doesn't merely cover legal controls set by local companies, or by national legislations, or by common international regulations; its scope is much broader, going beyond legal aspects to cover accountability as well, with regard to both legal restraint, and best practice norms and self-regulation (Australian Insitute of Business, 2014).

In Korea, corporate governance once again assumes prominence as a major social and political subject. Corporate giants such as Samsung Group (called 'Chaebols' in Korea) have, all through Korea's past, dominated its economy. While Korean companies' corporate governance has, on the whole, improved considerably in the past few years, Chaebols still dominate the country in terms of political and economic power; in fact, their dominance has intensified over the years. Samsung Group is in the midst of controversy. Despite Samsung being a private group, comprising of private and public companies, its governance has been closely monitored by politicians, the public, and the media alike. This is because Samsung heavily impacts the nation's markets and economy. Samsung, however, cannot ascribe its achievements in global markets to its governance, which has been quite controversial. With the company facing succession issues, its corporate governance holds as much significance as its new services and products (Kim, 2014).

A majority of company boards find it daunting to counterbalance 'conformance' roles that offer assurance to stakeholders on the basis of executive accountability in terms of conformity to rules and regulations, guaranteeing implementation of best practices in governance and executive's overall supervision, (IFAC, p. 6) with 'performance' roles that guide organizational decision-making through a focus on strategy, risks and opportunities, fiduciary responsibility and value creation (IFAC, 2009 p. 7).

All through the year 2012, Samsung Group was condemned severely for its child labor linkages, substandard work conditions at supplier factories, anti-competitive business practices and national legislation breaches. LG Electronics and Samsung Electronics were together fined a total of44.64 billion South Korean Won (KRW), on charges of anti-competitive business practices with regards to home appliances by the South Korean Fair Trade Commission (IFAC, 2009). The charges claimed that both electronics giants conspired and fixed prices of home appliances like washing machines, laptops and flat panel televisions from 2008 to 2009 (REPRISK, 2013).

Numerous published reports accused Samsung suppliers (like HTNS Shenzhen and HEG Electronics) of child labor, exploiting students for labor, and other labor law violations. Other charges made against suppliers included discrimination in employee recruitment, coerced overtime, unhealthy and over-long working hours, poor remuneration, punishments and legal issues pertaining to contracts. Additionally, reports condemned supplier factories' hazardous and tough working conditions, which caused employee injuries. Samsung Electronics, in response to one such report, conducted an audit of company suppliers in China; audit reports confirmed clear violations in 105 out of 249 suppliers (REPRISK, 2013).

Background of the organization

Samsung Group was instituted in the year 1938 by South Korean entrepreneur, Lee Byung-Chull. Now a multinational corporation, Samsung initially began its business with just about 40 employees. Currently, it sells numerous electronic merchandise and related services, which are similar to those marketed by electronic firms like Apple. The corporate giant claims to hold its people, products and business approach to the top-most standards, in order to more efficiently contribute to making the world a better place (Samsung, 2012). This statement serves to reinforce Samsung's professional approach and business-mindedness.

Samsung's televisions, tablets and cell phones can be counted among its most noteworthy products. The 1980s saw Samsung Group directing a large amount of funds towards research and development (R&D); this move contributed to Samsung's ascension in international markets as a key player during the start of the 90s. With its founder's demise, Samsung Corporation got segregated into 4 groups. By the year 1992, the company became the leading memory-chip manufacturer in the world, as well as the second-largest producer of computer chips, further contributing to its popularity. Since the advent of the 21st century, Samsung continues to be a pioneer in the electronics industry. Samsung became the largest phone maker in the world by March 2012, with some of its most popular Smartphone series being Note series, Galaxy S series, and Nexus series (Samsung History and Product Description, 2015).

Illinois State filed a lawsuit against Samsung Electronics and other electronics firms in September 2012 over allegations that the firms overstated computer monitor and TV costs from 1995 to 2007, earning billions of dollars in profits. Samsung, ultimately, faced numerous class action charges in the United States, accusing the company of price-fixing. Electronics consumers voice their belief that electronics companies have together controlled the global market of rechargeable batteries ever since the year 2000. Five electronics corporations, including Samsung SDI were fined a record charge of 47 billion Euros by the EU for alleged anti-competitive business practices like price fixing, in relation to cathode ray tube manufacture from 1997 to 2006 (REPRISK, 2013).

Bases or criteria for the review of the organization's governance

Ownership structure

For an accurate review of any company's governance, determining its ownership structure should be one of the foremost considerations. Samsung Group's corporate governance appraisal is conducted by taking ownership structure as the foremost criteria or principle. Ownership of a company is a key influence in corporate governance. Though corporations may have different kinds of owners, a majority of researches explore influence of owners on a specific company outcome individually. While corporate governance, in the popular press's view, deals with a company's board, there are several mechanisms for regulating, or controlling, executives' actions. Some internal mechanisms include the firm's board of directors and management compensation (Connelly, Hoskisson, Tihanyi, & Certo, 2010).

Board responsibilities

Public company boards are primarily responsible for selecting the company's chief executive and overseeing senior managers and CEO in the organization's ethical and competent routine operations. Furthermore, company management, under board supervision, is in charge of operating the company ethically and efficiently for generating long-term shareholder value. Company directors and managers must demonstrate commitment to integrity, honesty, openness and ethical behavior, thereby establishing a company culture of integrity and legal compliance. They must ensure that personal interests never get in the way of company interests (Noked, 2012).

Corporate directors' actions and duties define company activities; hence, in order to review corporate governance, the firm's duties must also be evaluated for ascertaining if directors competently perform their duties.

Board accountability

Company directors ought to be meticulous in their duties, and strive to remain properly informed; board access to timely, relevant and correct information is important. Performance of board members (its chairman, individual directors, subcommittees (if appropriate, etc.) has to be assessed on a regular basis; any problems identified in the analysis have to be appropriately dealt with.

Review of the organization's governance

Ownership

Samsung Electronics' total number of shares, as of 30th December 2014, was 170,132,764. Of these outstanding shares, 86.6% or (147,299,337 in number) were ordinary shares and the remaining 13.4%, (22,833,427 in number), were preference shares. The corporation's overall treasury stock is 11.9% (20,205,684 in number), with 17,094,741 ordinary shares (i.e. 11.6% of outstanding ordinary shares) and 3,110,943 preference shares (i.e. 13.6% of outstanding preference shares).

Board Composition

Samsung's Board of Directors (BOD) comprises of 5 independent directors and 4 executive directors. The reason behind maintaining a majority of independent directors in the company's board is to ensure board transparency and independence. Additionally, the Board's decision-making system is of a transparent nature; the board seeks the input of out-of-company experts from various fields. In accordance with the Corporate Charter, Samsung has a recommendation committee that initially chooses independent director candidates from a vast pool of experts belonging to the fields of economy, business management, law, accounting, technology, corporate social responsibility, etc., and having profound expertise and experience in their respective fields. This group of independent directors holds separate meetings (without participation of executive directors) for promoting free discussions with regards to all facets of the organization's management. No directors can take part in business, within the industry, unless they have the board's approval. This condition is stipulated with the intention of preventing conflicts of interest, as stated in the company's Corporate Charter and Korean Commerce Act (Samsung, 2015).

Chairman of the Board

According to Article 5 of Samsung's BOD Regulation, the board's chairman must be the individual holding the designation of representative director; the chairman should preside over board meetings. Incase the firm has numerous Representative Directors, Vice Chairman and Representative Director is appointed as Chairman; if this individual is incapable of serving as Chairman, the board can collectively appoint a Director for him. Samsung CEO and Vice-Chairman, Mr. Oh-Hyun Kwon, has, since 2012, been acting as the BOD Chairman for the company (Samsung, 2015).

Election of Directors

Article 24 of Samsung's Corporate Charter specifies regulations with regards to BOD elections, tenure and election following vacancy. It declares that the corporation shall have 3 to 14 directors, who will be appointed during a general shareholder meeting; however, the independent directors will be chosen from among nominees suggested by its Independent Director Recommendation Committee. In accordance with Article 25, all members of Samsung's BOD, appointed at its annual general meeting, hold office for a period of 3 years. On completion of their term, members can be reelected at the annual general meeting. The board screens eligible candidates, and elects one, from among the Executive Directors, to fill the post of Co-Representative Director or Representative Director, who holds the responsibility of representing the Company; when there are two or more representative directors, all will represent the firm (Samsung, 2015).

Independence of directors is dictated by the Commercial Code, Korean Stock Exchange independence conditions, and other relevant regulations. A director who meets even one criterion under relevant standards won't be considered independent. In accordance with Article 26 of Samsung's Corporate Charter, any BOD vacancy will be filled during a general shareholder meeting. However, in case the number of members in the board doesn't fall below that required under Article 24, and the vacancy doesn't cause any problems in administration, the foregoing will not apply.

Responsibilities and Duties

Directors are accountable for fulfilling their duties for the organization, faithfully, in keeping with applicable laws and Directors' Fiduciary Duty (Article 27-2 of Articles of Incorporation). In accordance with Article 32 Prohibition of Competition by Directors, directors aren't allowed to participate in any business transaction that comes under the same business category as Samsung without the Board's permission, or the permission of any committee the Board authorizes, except if the Director is voted into office in spite of knowing that the business he conducts competes with the firm. Furthermore, directors have to relinquish their post if they serve a rival company, or become public officials. There are relevant laws to support the latter condition of giving up directorship (Samsung Inc., 2015).

Board Committees

Management Committee: As per Samsung's Articles of Regulation, Association, and Resolution by the BOD, company directors are tasked with discussing and making decisions on matters the BOD commissions. The BOD will elect a total of 2 to 6 members into the committee. Committee decisions and resolutions will depend on majority of attending members and their majority agreement.

Audit Committee: As per paragraphs 11 & 12 of Article 542, Korean Commercial Law, Samsung maintains an Audit Committee, whose members are chosen through a general shareholder meeting resolution, in keeping with the Audit Committee's regulations and rules.

Related Party Transactions Committee: This Committee holds the responsibility of setting up the company's fair training observance program, as well as supporting related party transactions' transparency. The activities the committee participates in include determining related party transactions' current status and investigating these transactions, in addition to correcting and reporting irregularities and violation with regards to related party transactions to company directors.

Outside Director Candidates Recommendation Committee: Outside directors who make up Samsung's Board are first nominated by this Recommendation Committee; candidates are then voted during the General Meeting of company shareholders, suggested by internal directors of the company. As per paragraph 8 of Article 542, Korean Commercial Law, at least 50% of the Outside Director Candidates Recommendation Committee must consist of outside directors.

Compensation Committee: The Board of Directors sets up and operates the Compensation Committee, which deliberates on director compensation ceiling for ensuring transparency with regards to directors' compensations. The composition of the Compensation Committee is as follows: 1 internal company director and 2 outside directors. The committee's Chairman is selected through a resolution among the outside executives (Samsung SDI, 2015).

Recommendation for suggested improvements based on your review

The following recommendations can facilitate the company in maintaining much- needed corporate governance transparency, as demanded by the public;

1. Serious consideration has to be given to the idea of forming the following sub-committees within the company's board of directors, including independent non-executives:

Nomination Committee: This committee may be instituted for the purpose of fixing a limit to the number of times a committee or board member can be reelected. Other duties of the committee may include establishing performance targets for every service period, suggesting new committee and board members having relevant qualifications, and time management abilities needed for achieving the aforementioned targets. Lastly, this committee may supervise executive managers' acquisition.