Corporate Governance at Samsung Group: Review & Recommendations

Introduction to Corporate Governance and Samsung Group

Corporate governance refers to a corporation's control and supervision methods, processes, and management accountability. Worldwide, corporate governance does not merely cover legal controls set by local companies, national legislation, or common international regulations; its scope is much broader, extending beyond legal aspects to encompass accountability with regard to both legal restraint and best-practice norms and self-regulation (Australian Institute of Business, 2014).

In South Korea, corporate governance has once again assumed prominence as a major social and political subject. Corporate giants such as Samsung Group — called chaebols in Korea — have dominated the country's economy throughout its modern history. While Korean companies' corporate governance has, on the whole, improved considerably in recent years, chaebols still dominate the country in terms of political and economic power; indeed, their dominance has intensified over time. Samsung Group sits at the center of this controversy. Despite being a private group comprising both private and public companies, its governance has been closely monitored by politicians, the public, and the media alike, because Samsung so heavily impacts the nation's markets and economy. Samsung cannot, however, ascribe its achievements in global markets to its governance record, 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 challenging to balance conformance roles — which offer assurance to stakeholders on the basis of executive accountability, conformity to rules and regulations, and the guaranteed implementation of governance best practices and overall executive supervision (IFAC, 2009, 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).

Throughout 2012, Samsung Group was severely condemned for its links to child labor, substandard working conditions at supplier factories, anti-competitive business practices, and breaches of national legislation. LG Electronics and Samsung Electronics were together fined a total of 44.64 billion South Korean Won (KRW) by the South Korean Fair Trade Commission on charges of anti-competitive practices in relation to home appliances. The charges alleged that both electronics giants conspired to fix prices of home appliances — including washing machines, laptops, and flat-panel televisions — between 2008 and 2009 (REPRISK, 2013).

Numerous published reports accused Samsung suppliers — such as HTNS Shenzhen and HEG Electronics — of child labor, exploiting students for labor, and other labor law violations. Additional charges made against suppliers included discrimination in employee recruitment, coerced overtime, unhealthy and excessively long working hours, poor remuneration, unlawful punishments, and contract irregularities. Reports also condemned hazardous and harsh working conditions in supplier factories, which caused employee injuries. In response to one such report, Samsung Electronics conducted an audit of its suppliers in China; audit findings confirmed clear violations in 105 out of 249 suppliers (REPRISK, 2013).

Background of Samsung Group

Samsung Group was founded in 1938 by South Korean entrepreneur Lee Byung-Chull. Now a multinational corporation, Samsung initially began operations with approximately 40 employees. It currently sells numerous electronic products and related services comparable to those offered by firms such as Apple. The company claims to hold its people, products, and business approach to the highest standards, in order to contribute more effectively to making the world a better place (Samsung, 2012).

Samsung's televisions, tablets, and cell phones rank among its most notable products. During the 1980s, Samsung Group directed substantial funds toward research and development (R&D), a move that contributed to the company's rise as a key player in international markets at the start of the 1990s. Following its founder's death, Samsung Corporation was divided into four groups. By 1992, the company had become the world's leading memory-chip manufacturer and the second-largest producer of computer chips. Since the beginning of the 21st century, Samsung has continued to be a pioneer in the electronics industry. By March 2012, Samsung had become the largest phone maker in the world, with its Galaxy S series, Note series, and Nexus series among its most popular smartphone lines (Samsung History and Product Description, 2015).

In September 2012, the state of Illinois filed a lawsuit against Samsung Electronics and other electronics firms, alleging that they overstated computer monitor and television costs from 1995 to 2007, earning billions of dollars in excess profits. Samsung ultimately faced numerous class-action charges in the United States accusing the company of price-fixing. Electronics consumers alleged that several companies had collectively controlled the global rechargeable battery market since 2000. Five electronics corporations, including Samsung SDI, were fined a record 47 billion Euros by the European Union for alleged anti-competitive practices — including price-fixing — in relation to cathode ray tube manufacture from 1997 to 2006 (REPRISK, 2013).

Criteria for Reviewing Samsung's Governance

For an accurate review of any company's governance, determining its ownership structure is among the foremost considerations. Ownership of a company is a key influence on corporate governance. Although corporations may have different types of owners, most research explores the influence of owners on specific company outcomes individually. While the popular press tends to equate corporate governance with a company's board, several mechanisms exist for regulating or controlling executive actions. Internal mechanisms include the firm's board of directors and management compensation (Connelly, Hoskisson, Tihanyi, & Certo, 2010).

Public company boards are primarily responsible for selecting the company's chief executive and overseeing senior managers and the CEO in the organization's ethical and competent day-to-day operations. Company management, under board supervision, is charged with operating the company ethically and efficiently in order to generate 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, and ensuring that personal interests never interfere with company interests (Noked, 2012).

Because corporate directors' actions and duties define company activities, any governance review must also evaluate directors' fulfillment of those duties to determine whether directors competently perform their responsibilities.

Company directors should be meticulous in carrying out their duties and should strive to remain properly informed; board access to timely, relevant, and accurate information is essential. The performance of board members — including the chairman, individual directors, and subcommittees where appropriate — must be assessed on a regular basis, and any problems identified must be appropriately addressed.

Review of Samsung's Governance Structures

As of December 30, 2014, Samsung Electronics had a total of 170,132,764 outstanding shares. Of these, 86.6% (147,299,337 shares) were ordinary shares and the remaining 13.4% (22,833,427 shares) were preference shares. The corporation's overall treasury stock stood at 11.9% (20,205,684 shares), comprising 17,094,741 ordinary shares (11.6% of outstanding ordinary shares) and 3,110,943 preference shares (13.6% of outstanding preference shares).

Samsung's Board of Directors (BOD) comprises five independent directors and four executive directors. The majority of independent directors is maintained to ensure board transparency and independence. The board's decision-making system is likewise designed to be transparent, and the board seeks input from external experts across a range of fields. In accordance with the Corporate Charter, Samsung has an Independent Director Recommendation Committee that initially selects independent director candidates from a broad pool of experts in fields including economics, business management, law, accounting, technology, and corporate social responsibility. This group of independent directors holds separate meetings — without the participation of executive directors — to promote open discussion on all aspects of the organization's management. No director may participate in business within the industry without board approval, a condition stipulated to prevent conflicts of interest under both the Corporate Charter and the Korean Commerce Act (Samsung, 2015).

According to Article 5 of Samsung's BOD Regulation, the board's chairman must be the individual holding the designation of Representative Director, and the chairman presides over board meetings. When the firm has multiple Representative Directors, the Vice Chairman and Representative Director is appointed as Chairman; if that individual is unable to serve, the board may collectively appoint an alternative Director. Samsung's CEO and Vice-Chairman, Mr. Oh-Hyun Kwon, served as BOD Chairman from 2012 (Samsung, 2015).

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

Independence of directors is governed by the Korean Commercial Code, Korean Stock Exchange independence requirements, and other relevant regulations. A director who meets even one disqualifying criterion under the applicable standards will not be considered independent. In accordance with Article 26 of Samsung's Corporate Charter, any BOD vacancy will be filled at a general shareholder meeting; however, if the number of board members does not fall below the minimum required under Article 24 and the vacancy does not impair administration, this requirement may not apply.

Directors are accountable for fulfilling their duties faithfully in keeping with applicable laws and Directors' Fiduciary Duty (Article 27-2 of the Articles of Incorporation). In accordance with Article 32 — Prohibition of Competition by Directors — directors are not permitted to participate in any business transaction within Samsung's business category without the Board's permission or the permission of any committee the Board authorizes, except when a Director is elected with the Board's knowledge that the business he conducts competes with the firm. Furthermore, directors must relinquish their post if they serve a rival company or become public officials (Samsung Inc., 2015).