Samsung Heir's Bribery Conviction Leaves Void at the Top

Samsung, one of the world's biggest business empires, faces a deepening leadership crisis after its heir and de facto head Lee Jae-yong was found guilty of bribing South Korea's former president and sentenced to five years in prison.

While less than the 12 years sought by prosecutors, the jail term for the 49-year-old grandson of Samsung's founder and the vice chairman of Samsung Electronics Co., risks stymieing decision making across a conglomerate that spans smartphones, theme parks and biopharmaceuticals and accounts for nearly one-third of South Korea's stock-market value.

The Lee family has shaped the company's vision and made major strategic decisions, such as moves into chips and phones that initially were loss-making but later helped drive record profits.

The conglomerate contains dozens of affiliates, which each have their own CEOs and management teams. Samsung Electronics, the world's largest smartphone maker, generates much of its profits. Mr. Lee focuses almost entirely on that business, he has said, but he also serves as the unifying figure -- and ultimate decision maker -- of the disparate enterprise.

His time away threatens to temporarily halt Samsung's efforts to modernize its hierarchical, secretive culture and pursue acquisitions, which Mr. Lee has made priorities. Beijing is pumping billions of dollars into semiconductors, a threat to the South Korean company's current cash cow, while Samsung is also seen as being a step behind its Silicon Valley peers on software development.

Since Mr. Lee's February imprisonment, Samsung hasn't pursued a major deal, according to people familiar with the company's thinking. That followed a string of acquisitions in 2016 that included the $8 billion purchase of auto-parts maker Harman International Industries Inc.

Mr. Lee, the only son of Samsung Chairman Lee Kun-hee, doesn't have an obvious replacement within the Lee family. He has two sisters but neither have much experience with smartphones or electronics.

Samsung Electronics is still deliberating who, if anyone, will take Mr. Lee's place, according to people familiar with the matter. As recently as this week, the full board of Samsung Electronics hadn't been briefed on scenarios in which Mr. Lee would remain behind bars for an extended amount of time, according to a person familiar with the board's thinking.

If upheld, the verdict signals South Korea's efforts to depart from the traditionally close and symbiotic relationship between the government and large family-run conglomerates known as chaebols. It also fortifies left-leaning President Moon Jae-in's pledge to untangle government and business.

Before a packed courtroom in Seoul on Friday, Mr. Lee was found guilty of bribery, embezzlement, hiding assets abroad, concealing criminal profits, and perjury.

Samsung had acknowledged it agreed to pay about $38 million to various entities, which Samsung said it didn't know at the time were linked to a close friend of the former president. Samsung previously denied the payments were in return for favors.

Of the agreed payment, the judge ruled Samsung embezzled $7.2 million, while the bribery sum was $7.9 million.

Under South Korean law, Mr. Lee will have to serve a third of his sentence term before he could win parole. Just after Friday's ruling, Mr. Lee's lawyer said outside the courtroom that he would appeal the ruling "immediately." Unless the appeals court changes the five-year sentence, Mr. Lee's release could fall around autumn 2018 if his parole is granted.

Separately on Friday, the court convicted four other Samsung executives involved in the same case, with two receiving four-year sentences and two receiving suspended sentences. They faced similar charges as Mr. Lee, except for perjury; all had denied wrongdoing.

Ms. Park, the former president, was removed from office following a unanimous vote by the Constitutional Court in March. She is facing a separate trial on 18 charges, including bribery and coercion. She has denied wrongdoing.

Samsung Electronics shares fell 1% on Friday, as investors had largely factored in an extended absence. Despite last year's Galaxy Note 7 recall and Mr. Lee's corruption trial, Samsung has delivered its biggest-ever quarterly profits and shares are near record highs.

"It's rare to see the absence of a conglomerate head impact business performance," said Ryu Young-jae, head of Sustinvest Inc., a proxy advisory firm based in Seoul. "In most cases, business remains the same or improves."

During the four-month trial that raised questions about his role, Mr. Lee testified that about 95% of his role was dedicated to Samsung Electronics. Other lieutenants said during the trial that they handled conglomerate-wide matters -- including organizational restructuring and most interactions with the South Korean government.

Few major moves advance without Mr. Lee's signoff and the Samsung heir's personal relationships with Silicon Valley leaders is critical given that the South Korean firm both competes with -- and supplies electronics components to -- their biggest rivals, according to people who know him.

Mr. Lee and Samsung now must grapple with the question of whether a family-driven structure is appropriate for a global company like Samsung Electronics, whose shares are majority-owned by foreign investors.

"One person should not be making all the decisions," said Park Yoo-kyung, a Hong Kong-based director at a subsidiary of the Netherlands-based Stichting Pensioenfonds ABP, Europe's largest pension fund, which owns Samsung Electronics shares. "Jay Y. has to let something go," referring to Mr. Lee's Western-style name.

For generations, the Lee family steered the Samsung conglomerate to success. Founder Lee Byung-chull, with the urging of his son, Lee Kun-hee, approved an expensive foray into semiconductors in the late 1970s.

Lee Kun-hee, the second-generation leader and current chairman who has been incapacitated since a 2014 stroke, moved to make Samsung a global player, elevating it from a maker of cheap electronics to a technology powerhouse. Those decisions required large initial capital investments.

The decision about Mr. Lee's replacement would receive significant input from Mr. Lee himself, according to people familiar with the matter. South Korea has a history of large conglomerate heads running their businesses from behind bars.

Kim Eun Mee, a former independent director at Samsung Electronics and a dean at Ewha Womans University in Seoul, said that Mr. Lee's absence would make it harder for Samsung to take riskier business decisions in areas where success is uncertain.

Samsung has dealt with a Lee family absence before, but never with its leader sentenced to prison. Mr. Lee's father, chairman Lee Kun-hee, resigned from his role for nearly two years after he was indicted in 2008 of embezzlement and tax evasion and convicted the following year. He resumed his role in 2010 after receiving a presidential pardon.

Behind the scenes, Samsung Electronics Chief Executive Kwon Oh-hyun has taken a larger role in steadying the company after Mr. Lee was first detained in February, according to people familiar with the matter.

(END) Dow Jones Newswires

August 25, 2017 13:47 ET (17:47 GMT)