South Korea's Corporate Culture Goes on Trial

 | Mar 09, 2017 | 10:00 AM EST
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The chummy ties between South Korea's massive chaebols and its government are effectively in the dock, as the bribery and embezzlement trial of Samsung leader Jay Y. Lee begins in Seoul. Although it's not unusual for top executives to be convicted of crimes in Korea -- it's happened to Lee's father -- they're inevitably pardoned by the president and don't see any jail time.

That looks unlikely if the younger Lee, who is already in custody, goes down. That's because this time around, the president is also ensnared in the same case. Korea's first female president, Park Geung-hye, has already been impeached and will hear on Friday whether she should be reinstated to the country's top post or removed permanently from office.

Lee is one of four Samsung executives on trial, charged with funneling $37 million in bribes to Park's close friend, Choi Soon-sil. Prosecutors say that was part of many more millions Choi, who has no elected office and operated in the political shadows, extorted from the bulk of Korea's chaebols, or conglomerates. Those "charitable" donations she then turned into political favors, the allegations state.

All involved, including Lee, Park and Choi, deny the charges. But the lead prosecutor in Park's impeachment, Kweon Seong-dong, calls Park and Choi "enemies to democracy." He aims to drive a stake permanently between commerce and state.

In Lee's case, the claim is that in return for the donations, he gained support from the mammoth National Pension Service of Korea for a merger of two Samsung companies that helped him consolidate power at Samsung.

The cross-holding structures of many Asian conglomerates are intricate and arcane. Suffice to say, the holdings inevitably leave power in the hands of members of the founding family. They often run the companies like their own corporate kingdoms, even though they're more than happy to take on the money of public shareholders.

Lee is the acting head of Samsung Electronics (SSNLF) and its partner companies, after his father suffered an incapacitating heart attack in 2014. Besides bribery, prosecutors say he also perjured himself when he told a parliamentary hearing that Choi extorted unwilling payments out of him and his company.

His questioning and subsequent arrest sent shockwaves through the nation, as I explained in January, since Samsung is its corporate flagship and by far its best-known brand. The company's sprawling operations account for 15% of the country's entire economy and 20% of its exports.

Although prosecutors have started at the top by taking on Lee and the president, they have also questioned executives at many of Korea's biggest companies, including Hyundai Motor (HYMTF) , LG Display (LPL) and Lotte Holdings, which has a host of subsidiaries listed in Seoul. That suggests they will move on to other chaebol that funneled cash to Choi if the courts give them any encouragement.

Prosecutors are basically taking on Korea's corporate and political establishment. For decades, close collusion between the two has essentially gone unchecked, although almost every Korean leader has vowed to put it to an end. Maybe that will really happen this time around.

Following the path to power of most Asian female leaders who make it to the top, Park comes from the political elite. She is the daughter of a former president and military dictator of South Korea, Park Chung-hee, who was assassinated in 1979. If the ruling from the Constitutional Court, coming just two days after International Women's Day, goes against his daughter, she would be the first democratically elected Korean president to be forced to step down.

South Korea's story of recovery was nothing but exceptional after the Korean war wound down in the early 1950s. The North and South are still technically at war, but there's no doubt who won economically. Its $1.3 trillion economy amounts to $25,745 per head. North Korea's $40 billion economy equates to $1,800 per person, and at the worst times only the world's largest standing army has enough to eat.

Only since 1987 has the South Korean government been free of either direct or indirect rule by the military. So for two generations, nobody questioned that business and power should be conjoined twins.

That has changed. Public unrest over that connection has grown and grown, leading to recent demonstrations calling for the head of both Park and Lee. The current scandal has done little to disrupt Samsung's operations or share price, as my colleague Vicky Huang at TheStreet explained at the end of last month. But the end result of a successful prosecution could force a sea change.

The Lee family is Asia's richest, according to Forbes, worth $29.6 billion. Samsung generates around $340 billion in annual sales as the world's largest maker of smartphones and TVs, with operations in industries as diverse as food, entertainment and paper production.

The man on trial, known as Lee Jae-yong in Korea, is the 48-year-old grandson of Samsung's founder, Lee Byung-chull, and Samsung's clear heir apparent as his father's only son. But Park last year pardoned the founder's oldest grandson, Lee Jay-Hyun, of his conviction for embezzlement and tax evasion. He had inherited the CJ Group KR:001040, which is Korea's largest food-and-beverage supplier, and split from Samsung in 1997.

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