Samsung’s Fate to an Unconstitutional Body?... Governance Structure Is a Corporate Choice

Economic Theory Warns of Moral Hazard in the Professional Manager System

Samsung Biologics, a Good Example of Shareholder Management ... Corporate Value Soars Through New Drug Development

The activities of the Samsung Compliance Committee are unconstitutional. Article 126 of the Constitution clearly states: “Except in cases prescribed by law due to urgent necessity, private enterprises shall not be nationalized or socialized, nor shall their management be controlled or administered.” Yet the Samsung Compliance Committee was created through arbitrary judicial pressure without any legitimate legal basis. Such a body is forcing Samsung to act against corporate interests, including demanding that Lee Jae-yong, Vice Chairman of Samsung Electronics, make a “public apology.”

On May 6, Vice Chairman Lee Jae-yong announced that “there will be no fourth-generation succession.” In effect, he waved the white flag to the ruling political camp and civic groups that have long demonized so-called “family-run management.” These groups spread the dogma that the professional manager system is absolutely superior to family management, and that continuing family management is nothing more than “clinging to an outdated evil practice.” Up to this point, the issue may not seem grave. What is truly serious, however, is the attitude of using this dogma to judge and manipulate the management of private companies they do not even own.

In fact, both owner-led management and the professional manager system have their merits. Since each company faces different circumstances, firms should choose the model most suitable to their own conditions and management environment. It is not something that should be forced on them as though one model were unconditionally better than the other.

If the professional manager system were truly so superior, private companies would all have adopted it. A company is, by nature, willing to hire anyone—foreign or otherwise—if that person is more productive. But we should ask why the professional manager system has not become as widespread in Korea as it has in countries such as the United States. The reason is simple: Korea has not established the institutional environment necessary for a professional management system. As a result, Korean firms have evolved in a way that allows owners and professional managers to divide roles and function together.

Economic theory warns of the moral hazard problem inherent in the professional manager system. A representative example is U.S. corporations, which often lack controlling shareholders because stock ownership is widely dispersed, and therefore suffer greatly from the moral hazard of professional managers. To address this, they have strengthened corporate governance. In Korea, however, some interest groups have manufactured the myth that professional management is inherently better and that stock prices rise only when companies pay out large dividends. Politicians, meanwhile, have passed laws that weaken shareholder authority and increase moral hazard. Worse still, without any legal basis, they are explicitly intervening in the management of private companies by mobilizing the National Pension Service. Who, exactly, benefits from shaking the shareholders’ control rights? Look at the large corporations called “national companies,” those with no owner. Most of them keep an eye on political power while turning away from consumer interests. Companies without controlling shareholders and run by professional managers are highly likely to become prey to greedy political power and the forces colluding with it.

Korea’s economic development was led by countless owner-managed firms, both large and small. The advantages of shareholder management are also evident at Samsung Biologics. Samsung Biologics is securing growth engines through bold investment and active market development. Through contract development and manufacturing agreements, it is increasing the chances of new drug development in a short period of time while boosting sales. Samsung Bioepis, in which Samsung Biologics has invested, has also sharply raised its corporate value through new drug development. During the COVID-19 crisis as well, it responded swiftly and won a contract to produce a COVID-19 treatment.

It is already widely known that the professional manager system can generate moral hazard and jeopardize corporate development. There are many cases in which the populist management of professional managers has brought about corporate insolvency and undermined competitiveness. A representative example is Kia Motors, which went bankrupt in 1997. At the time, Chairman Sunhong Kim, a professional manager, failed to find new growth engines and instead relied on past prosperity, thereby worsening the company’s weaknesses.

If we truly want Korea to develop, this wasteful debate over corporate governance must end. Governance structures should be chosen by the companies themselves. If pressure from political power determines how firms are run, companies cannot succeed. Businesses must take risks, find growth engines, and discover future sources of prosperity. At a time when low growth is becoming entrenched, forward-looking judgment is needed more than ever. If the rule of law collapses, our economy will collapse as well.

Junmo Yang

Professor, School of Economics, Yonsei University

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Original title: 삼성의 운명을 위헌 조직에?...지배구조는 기업 선택이다

Author: Jun-mo Yang

Date: 2020-05-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=21&idx=22628