The Uncomfortable Truth Behind the Samsung Bio Trial

Eun-kyung Kwak, Director of the Corporate Culture Office at the Center for Free Enterprise (CFE)

An ideological frame that treats family management as evil and ownerless corporations as best

Would professional managers make future-oriented investments that produce losses for years?

A company’s management style is the embodiment of its corporate culture. Firms have evolved in ways best suited to achieving their fundamental purpose of generating profits. Companies that perform exceptionally well in the market are also regarded as superior to their competitors in terms of organizational culture. Samsung, too, has demonstrated the excellence of its organizational culture through outstanding performance. Even so, controversy over Samsung’s corporate culture continues. The essence of the current Samsung Biologics issue, likewise, can be said to lie in criticism of Samsung’s management style.

Family management is often viewed with hostility, and the professional management system is presented as the alternative. Both family management and professional management have clear strengths and weaknesses. Which approach is appropriate inevitably differs depending on a company’s circumstances. Each firm should be able to decide what best fits its situation and enhances its chances of survival, and the results can be verified through business performance.

In the case of family management, the owner exercises strong control, making long-term investment possible. At the same time, there is the side effect that management decisions may become arbitrary. It is widely believed that Anglo-American companies are rarely passed down within families, but in fact many firms have achieved major long-term success under family management. Representative examples include Walmart, Ford, BMW, Henkel, Carrefour, Michelin, Wallenberg, and Heineken.

The professional management system is not perfect either. It does not rely on a single owner, but CEOs tend to focus only on short-term performance in order to generate profits during their tenure. Some companies achieved strong results under outstanding professional managers such as Jack Welch of GE and Alfred Sloan of GM, while Enron and WorldCom went bankrupt. Toyota and Volkswagen likewise faced crises such as massive recalls and fraud controversies under professional managers.

In Korea in particular, the social structure allows the advantages of the family management system to be fully realized. In a situation where government-directed control is clearly present, companies run under a professional management system generally perform worse than those under family management. This is because organizations in which ownership and management are separated—in other words, organizations without an owner—are more easily swayed by political influence than by the company’s essential goal of profit generation. This is easy to understand from past cases such as POSCO, Kookmin Bank, and Daewoo Shipbuilding & Marine Engineering. The CEOs of such firms become more preoccupied with reading political power than with improving business performance. In particular, in the case of Daewoo Shipbuilding & Marine Engineering, where state-run banks directly intervened, heavy involvement by political figures resulted in declining profitability.

It is most efficient and most conducive to strong performance when each company is allowed to decide for itself which management style is appropriate. In fact, as Samsung’s bio business has come onto a stable growth track, Samsung Biologics’ market capitalization surged to 41.6 trillion won as of the closing price on the 2nd, making it the third-largest mega-cap company in Korea. The global success of Samsung Bio is an achievement that stems from the strengths of the family management system and an outstanding decision-making structure. At a time when manufacturing and construction had hit growth limits, the owner judged the bio sector to be a future growth engine and invested in it over the long term. Under a professional management system, it would have been difficult to achieve such results because of the burden of years of losses.

The problem is the current inheritance tax system, which effectively makes family management impossible. To inherit a large corporation, one must pay an inheritance tax of no less than 65%. To that extent, corporate continuity is under threat. Beneath this world-leading inheritance tax rate lies the belief that the inheritance of management control in large corporations is somehow evil. In other words, the idea is to block the family management system even by mobilizing a high-tax regime that runs counter to the constitutional value of protecting property rights. The desire to pass on to one’s descendants a company built through one’s own blood, sweat, and toil is fully consistent with the nature of business management. This has been the secret to the success of many entrepreneurs and a driving force of development. The controversy surrounding Samsung Biologics, which began with political motives, also needs to be approached from this perspective. Rather than fueling controversy that threatens corporate competitiveness, the proper solution lies in reforming the irrational inheritance tax system.

The survival and achievements of companies benefit the economy as a whole. For example, if Samsung posts strong performance, the resulting economic gains do not accrue only to the owner family that holds management control. They bring positive results to all 60 affiliates of the Samsung Group and its 500,000 workers. Moreover, consumers who use Samsung’s products and services also clearly benefit. In addition, Samsung’s high profits lead to corporate tax revenue, which forms the basis for state operations and welfare policy.

The average lifespan of a listed company in Korea is only 33 years. Of the top 100 companies in 1965, only 12 survived 44 years later. Management in the real world is that competitive. Regardless of whether a family business succession takes place, business leaders are engaged every moment in a war without gunfire against competitors in the market, struggling to satisfy consumers. If more companies are to survive in such an environment, it is necessary to open the way for each firm to determine its own management style and governance structure.

Eun-kyung Kwak, Director of the Corporate Culture Office at the Center for Free Enterprise (CFE)

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Original title: 삼성바이오 재판에 담겨 있는 불편한 진실

Author: Eun-kyung Kwak

Date: 2020-06-03

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=21&idx=22796