At Samsung Electronics, Lee signals more board power in nod to investors

EghtesadOnline: Jay Y. Lee, de facto head of South Korea's sprawling Samsung Group, accelerated taking a board seat at flagship unit Samsung Electronics partly because of investor pressure to improve governance, two people familiar with the matter said.

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10 November 2016

Samsung Group narrowly survived a bid by U.S. activist hedge fund Elliott Management last year to block a controversial merger of two group businesses, Samsung C&T and Cheil Industries. The deal sparked criticism that the Lee family put its interests ahead of those of shareholders, Reuters reported.

In its latest campaign, Elliott, which owns 0.62 percent of Samsung Electronics, is calling for the world's biggest smartphone maker to be split in two, and for shareholders to be handed a 30 trillion won ($26 billion) dividend.

"Over the past couple of years, there were repeated requests from internal and external board members for Lee to join the board, which he had persistently resisted," said one of the people, declining to be named as he is not authorized to speak publicly. "But the (2015) attack from Elliott was one of the triggers that prompted him to take a board seat earlier than planned, and consider governance issues more seriously."

Samsung Electronics said in October it will respond to Elliott's latest proposals by the end of this month.

Lee, 48, the conglomerate's unassuming heir-apparent had previously orchestrated operations from behind the scenes after his father Lee Kun-hee was hospitalized in 2014 following a heart attack. He had finally been persuaded to stand for a seat on Samsung Electronics' board at next year's March shareholder meeting, people familiar with the matter told Reuters.

But the sale of the company's printer business to HP Inc (HPQ.N) required investor approval, triggering a shareholder meeting last month, and a chance to get Lee on to the board ahead of schedule.

"He felt it was time and he was ready," said the second person familiar with the issue.

Samsung Electronics said Lee was nominated for the October meeting rather than March so he could participate more actively in important decisions such as the composition of the management team and acquisitions. The board seat also gives Lee formal responsibility for the company's management, it said.

In a nod to the chorus for more transparency and shareholder handouts, Samsung has been streamlining its complex group ownership structure and boosting payouts. Samsung Electronics has bought back 11.4 trillion won ($9.9 billion) worth of its own shares since last year and may repurchase more to appease investors after the expensive collapse of its Galaxy Note 7 smartphone.

"It shows that he wants to have a more global standard of board governance," said another person familiar with the matter, who declined to be named due to the sensitivity of issue, adding Lee wants the board to be the key decision-making body. "I imagine there will be more happening in board empowerment."

RE-ELECTION RISK

By taking a seat on the board of the group's crown jewel, Lee is signaling to investors he is ready to be put in the spotlight, and for them to judge his performance.

As a director, Lee will have to stand for re-election in three years, making him accountable to shareholders for the company's performance. Those votes will be litmus tests on how confident investors are in his business acumen.

"So far, he wasn't in a position to officially display his leadership, but he's now finished his lesson," said a fourth person familiar with the matter. "He now has greater official responsibility."

With Lee previously calling the shots as non-executive vice chairman, Samsung has accelerated its restructuring; selling non-core chemicals and defense assets in a marked departure from his father's regime. Samsung Electronics has more aggressively chased businesses as it looks for new growth drivers.

Investors will be watching Lee as he steers Samsung Electronics through the Note 7 debacle, with some expecting sweeping managerial changes. He also now has to manage allegations the company may have been involved in a broad influence-peddling scandal that has gripped South Korea. Prosecutors raided Samsung Electronics offices on Tuesday as part of their investigations.

Kim Hyun-su, a fund manager at IBK Asset Management, said Lee's biggest challenge will be to turn around the smartphone business next year. He said the Note 7 crisis is a chance for Lee to prove his mettle.

"Regardless of whether people change or not, the (next generation) Galaxy S8 needs to hit the market for Samsung to get beyond the crisis. The company will put all its efforts behind the product to regain consumer trust," he said.

"It doesn't matter how much Lee holds in the company, in the end what's important is good management."

Lee is said to have maintained his low profile at his first board meeting last week. "He did not make any notable remarks," said one of those familiar with the matter.

($1 = 1,154.3000 won)