Samsung Electronic Corporation: Governance of Chaebols

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CASE:

SAMSUNG ELECTRONIC CORPORATION: GOVERNANCE OF CHAEBOLS

Copyright: Prof. Florencio Lopez-de-Silanes

Professor Florencio Lopez-de-Silanes and Rakhi Kumar, Yale MBA02 prepared this case as the basis for class discussion rather than to illustrate the effective or ineffective governance of an organization.

Prof. Florencio Lopez-de-Silanes INTRODUCTION

Case: Samsung Electronics

Prior to the Asian currency crises, South Korea was an investment destination for several institutional investors and emerging market funds. Throughout the early nineties the country experienced an economic boom. South Korean conglomerates, locally know as chaebols, had diversified into various industries from cars to microchips. Samsung
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However, the globalization strategy was not well planned. Chaebols held onto the management strategy that they had been practicing over the last thirty years: growth in size ignoring profitability; financial structure with high debt-to equity ratio and cross debt guarantee among affiliated companies.4 By 1997 there were over fifty chaebols in South Korea, each with a myriad of affiliated companies all linked to one another through a complex network of cross-holdings. Ownership and affiliation details of twenty chaebols are provided in Exhibit 1.

Family-Based Business Groups: Degeneration of Quasi-Internal Organizations and Internal Markets in Korea by Sang-Woo Nam, December 2001. 3 Ibid. 4 Corporate Governance and Economic Development: The Korean Experience by Ha Sung Jang.

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Prof. Florencio Lopez-de-Silanes THE SAMSUNG GROUP: It is all in the family.

Case: Samsung Electronics

Founded in 1938 by Mr. Byung Chul Lee, Samsung Group’s original line of business was exporting dried fish, vegetables and fruits produced around Korea to Manchuria and Beijing in China. Within a few years of incorporation, the company expanded its operations to include manufacturing and sales when it set up a flourmill and bought confectionary machines. In
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