Three actions for Samsung Electronics JY Lee and his team
- Better accountability is needed for JY Lee and his direct reports
- Given JY Lee’s decision not to pass over management control to his children, Samsung should openly discuss plan for CEO succession
- To overcome "Samsung's crisis," improving governance and achieving alignment is essential
The Financial Supervisory Service's disclosure revealed that Samsung Electronics CEO and Vice Chairman Han Jong-Hee purchased 10,000 shares of the company on September 5th amounting to W730 million. Subsequently, over a period of one month, 33 Samsung Electronics executives have rushed to make similar purchases, even amidst a plummeting share price, like a moth jumping into the flame. While the intent behind these purchases may have been to demonstrate commitment, the purchase leads us to believe whether Samsung understands the roots of the current crisis. Meanwhile, Silicon Valley companies typically compensate employees with own shares, avoiding the need for employees to purchase their own shares in the market. In general the Big Tech in the US offers restricted stock units (RSUs) even to new engineers fresh out of college. Tesla goes a step further by giving new engineering hires the option of choosing between RSUs and stock options to fast an entrepreneurial spirit and avoid bureaucratic culture.
Samsung Electronics' compensation system is not competitive on a global scale, especially when it comes to attracting and retaining top talent. The company's outdated compensation system has led to a loss of talent and a decline in morale, ultimately impacting the semiconductor business's core competitiveness. Studies have consistently shown that RSUs effectively incentivize employees to align their interests with those of the company's, resulting in improved overall performance. Despite the widespread adoption of equity-based compensation in Silicon Valley, Samsung Electronics continues to rely 100% on cash compensation for its executives, including the CEO. Companies like Nvidia, Apple, and Meta have embraced the concept of ‘equity culture’, where long-term employees become significant shareholders, allowing them to benefit directly from the company's success. This is considered a cornerstone of American capitalism. Without an equity reward plan, Samsung Electronics should struggle to recruit, retain, and incentivize key talent for the long term. Samsung Electronics must urgently adopt a company- wide equity compensation program to ensure that employee interests are aligned with shareholders. This will motivate top-tier talents and encourage them to stay rather than seeking opportunities elsewhere locally and overseas.
Research by Credit Suisse highlights that family businesses can offer numerous benefits, as long as the interest of minority shareholders is protected. The same research shows that family businesses often face challenges maintaining the same level of success under third-generation leadership. The Korean proverb, "Wealth cannot last beyond three generations," reflects this trend. With Samsung and Hyundai Motor now in the hands of their third-generation leaders, this is a pivotal moment for both these companies and the Korean economy.
The recent 30% decline in Samsung Electronics' share price over the past three months has sparked widespread criticism of the JY Lee and his management team. A comprehensive evaluation of JY Lee’s leadership at Samsung Electronics, as seen through the eyes of minority shareholders, should center around the Total Shareholder Return (TSR) over long-term. This metric, combined with a benchmarking against global competitors and an assessment against Samsung's cost of capital, offers a comprehensive evaluation framework. TSR is explicitly mentioned in the recent Korean government's Value-up guidelines. Samsung Electronics has consistently underperformed against shareholder required rate of return or cost of equity capital. The annualized TSR for common share has been negative 11% over the past year, negative 3% over the past three years, and positive 6% over the past five. Over the past decade, the annualized TSR has been 10%. This reflects the market's growing concerns over the company's deteriorating technological competitiveness, incompetent management, and diminishing prospects for future profitability. TSMC, a direct foundry competitor to Samsung Electronics and a global industry bellwether, has significantly outperformed Samsung in terms of TSR, recording annualized returns of 135%, 22%, 41%, and 26% over the past year, three years, five years, and decade, respectively. The stark contrast in their stock price performance is undeniable.
Total Shareholder Return (TSR; Annualized) |
| 1 year | 3 years | 5 years | 10 years |
Samsung Electronics | -11% | -3% | 6% | 10% |
TSMC
| 135% | 22% | 41% | 26% |
To successfully navigate its current challenges, Samsung Electronics must undergo a comprehensive transformation that extends beyond technological advancements. This includes revamping leadership, organizational culture, compensation system and the board of directors. Samsung Electronics needs a drastic transformation, reminiscent of the radical changes demanded by the late Chairman KH Lee in the Frankfurt Declaration of 1993 with the infamous quote "Change everything except your wife and children,". As evidenced by the stock price gap with TSMC, Samsung must reassess all aspects of its business.
We would like to propose three key recommendations to help Samsung establish a best-in-class corporate governance model that can serve as a benchmark.
1. It's been four years since the pledge to forgo fourth-generation family management. Now is the time for Samsung to consider adopting a professional management structure similar to Apple and Microsoft, where ownership and management are separated. As a first step, the company should significantly reduce the business executives that accounts for 36% of the top 25 executives (with President title or higher), including business support task forces, management support, legal, communication, and corporate relations. Instead, Samsung should focus solely on technology and prioritize its engineering and design talent.
2. The board should be upgraded to consist primarily of leading experts, and ensure its independence. What role has the all-Korean board played thus far, particularly during times of crisis? The number of internal directors should be reduced, and the board should be restructured to include mainly foreign leaders in IT (AI, software, etc.), strategy, and governance. Samsung Electronics should learn from TSMC's global board structure and consider listing its shares on the US stock market to overcome the limitations of the domestic capital market.
3. Implement a compensation system that aligns the interests of employees, shareholders, and the board. Given the high global demand for Samsung’s key talent, it is crucial to adopt a competitive compensation package. Immediate implementation of a stock-based compensation plan, such as Restricted Stock Units (RSUs) is recommended to retain top-tier talents.
While Chairman JY Lee is regarded as head of Samsung Electronics, Vice Chairman Chung Hyun-Ho, head of the Business Support Task Force, is widely believed to be making key decisions on behalf of Mr Lee. Despite holding the official title of "CEO Assistant," Vice Chairman Chung is reported to be coordinating between Samsung Electronics and its affiliates. Given that directors are held accountable for their actions, it is expected that executives who exercise significant authority should be held accountable as well. However, as Vice Chairman Chung is not a registered director, he has not been held accountable for recent management failures, which is inconsistent with good corporate governance.
Silicon Valley IT companies prioritize technology and heavily favor technical personnel, such as researchers, designers, and engineers, in terms of promotions, compensation, and overall career development. In contrast, departments like management support and sales/marketing, often referred to as "business" in the US, are seen as superior to technology functions at Samsung Electronics. A significant 36% (9 out of 25) of top executives (President title and above) is responsible for administration, government relations, communication and public relations. This is a stark contrast to the lean and focused organizations common in Silicon Valley.
Professor Chung Joon Hyug of Seoul National University Law School contributed a column to a local economic magazine titled "Let's have Korea prepare for next generation without a controlling shareholder." The core argument of the column is that, (as exemplified by the case of Korea Zinc,) multiple inheritances can lead to a dilution of the controlling family's ownership stake, resulting in management decisions that prioritize the interests of the controlling shareholders over those of minority investors. The Lee family's direct ownership of Samsung Electronics shares stands at a mere 4.3%. Additionally, Chairman Lee formally announced in 2020 his intention to forego fourth-generation management, signaling a potential shift in the company's ownership and control structure.
According to Institutional Shareholder Services (ISS) 2024 voting guidelines, directors and executives with criminal records involving bribery, embezzlement, or insider trading should be dismissed. Chairman Lee, who was paroled in 2021 after serving about 60% of his sentence, has been perceived more as a diplomat than a decisive leader of a chaebol. In the fast-paced IT industry, delays in critical decisions such as restructuring and strategic choices can have significant consequences. Chairman Lee's reluctance to address these challenges head-on has been a major concern. Critics argue that he is shielded from accountability. To restore public and economic trust, it is essential to select top management based on their abilities. Perhaps it's time to consider a scenario where Chairman Lee steps down from all official roles and hands over full management authority to a highly skilled professional manager with an engineering background. Apple's appointment of Tim Cook as CEO after Steve Jobs' death marked a new era of success. Similarly, Microsoft has transformed into an AI and cloud powerhouse under Satya Nadella. Lisa Su, an engineer and business manager of a Taiwanese descent, became CEO of AMD in 2014 and grew its market cap from $3bn to $270bn. Given the success of TSMC under professional leadership, Samsung might benefit from a similar approach, in our opinion.
Jun Young-hyun, the Vice Chairman who is currently spearheading efforts to revitalize the semiconductor business, joined Samsung Electronics at the age of 40 after a career at LG Semiconductor. Given the company's current challenges, considering an outside candidate for the CEO position to drive a turnaround may be an option, we believe. Despite recent declines in employee morale, Samsung Electronics boasts a significant pool of IT experts and technical talents, including more number of PhDs than prestigious Seoul National University.
We believe one of the reasons for Samsung Electronics' current crisis is the lack of independent directors who can provide critical feedback to management on key issues such as rapid changes in AI, a declining staff morale, and capital (mis)allocation. Samsung's board composition is far from ideal for a global IT company. All ten board members are Korean, and four out of the six independent directors lack IT expertise. For an export-oriented company like Samsung, the board should be global, with meetings conducted primarily in English. The company's practice of recruiting domestic "yes-men" has contributed to its current challenges, in our opinion. By conducting a global search for top-tier outside directors, Samsung could attract AI and software leading experts, as well as former CEOs of multinational companies from Silicon Valley, Canada, the UK, China, and Taiwan. TSMC, which has been listed on the NYSE since 1997, exemplifies excellent governance with a global board. Of its ten board members, only one is an insider (the CEO), while six are foreign nationals. By recruiting former CEOs and industry leaders such as the former president of MIT and the former CEO/chairman of British Telecom, TSMC has effectively leveraged their expertise to drive growth and manage business risks. Samsung should consider following TSMC's example by listing on the US stock exchange to become a truly global company. To restructure its board, Samsung should reduce the number of inside directors to one (the CEO only) and appoint a majority of independent directors who are foreign experts in IT, strategy, and governance.
Silicon Valley companies, including major U.S. tech firms, are known for their intense work culture but also for their efforts to create exciting and rewarding workplaces. We would like to inquire about the steps Samsung Electronics' management and board have taken to foster a similar culture. There's a global trend towards implementing equity-based compensation plans, particularly RSUs, to enhance long- term performance and attract, retain, and motivate top talent. SK Hynix, for example, awarded 50% of its 2022 CEO performance bonuses in RSU, requiring a three-year lock-up. The company also offers stock options to CEOs and key executives, and stock appreciation rights to other executives. Samsung should follow suit by introducing a broad-based equity rewards plan, especially for technical roles like engineers, scientists and designers, to boost morale and align employees' interests with those of its shareholders. Furthermore, to solidify its position as a technology- driven company, Samsung should prioritize compensation for technical personnel over administrative and support roles, mirroring the Silicon Valley model.
October 16, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Three actions for Samsung Electronics JY Lee and his team
- Better accountability is needed for JY Lee and his direct reports
- Given JY Lee’s decision not to pass over management control to his children, Samsung should openly discuss plan for CEO succession
- To overcome "Samsung's crisis," improving governance and achieving alignment is essential
The Financial Supervisory Service's disclosure revealed that Samsung Electronics CEO and Vice Chairman Han Jong-Hee purchased 10,000 shares of the company on September 5th amounting to W730 million. Subsequently, over a period of one month, 33 Samsung Electronics executives have rushed to make similar purchases, even amidst a plummeting share price, like a moth jumping into the flame. While the intent behind these purchases may have been to demonstrate commitment, the purchase leads us to believe whether Samsung understands the roots of the current crisis. Meanwhile, Silicon Valley companies typically compensate employees with own shares, avoiding the need for employees to purchase their own shares in the market. In general the Big Tech in the US offers restricted stock units (RSUs) even to new engineers fresh out of college. Tesla goes a step further by giving new engineering hires the option of choosing between RSUs and stock options to fast an entrepreneurial spirit and avoid bureaucratic culture.
Samsung Electronics' compensation system is not competitive on a global scale, especially when it comes to attracting and retaining top talent. The company's outdated compensation system has led to a loss of talent and a decline in morale, ultimately impacting the semiconductor business's core competitiveness. Studies have consistently shown that RSUs effectively incentivize employees to align their interests with those of the company's, resulting in improved overall performance. Despite the widespread adoption of equity-based compensation in Silicon Valley, Samsung Electronics continues to rely 100% on cash compensation for its executives, including the CEO. Companies like Nvidia, Apple, and Meta have embraced the concept of ‘equity culture’, where long-term employees become significant shareholders, allowing them to benefit directly from the company's success. This is considered a cornerstone of American capitalism. Without an equity reward plan, Samsung Electronics should struggle to recruit, retain, and incentivize key talent for the long term. Samsung Electronics must urgently adopt a company- wide equity compensation program to ensure that employee interests are aligned with shareholders. This will motivate top-tier talents and encourage them to stay rather than seeking opportunities elsewhere locally and overseas.
Research by Credit Suisse highlights that family businesses can offer numerous benefits, as long as the interest of minority shareholders is protected. The same research shows that family businesses often face challenges maintaining the same level of success under third-generation leadership. The Korean proverb, "Wealth cannot last beyond three generations," reflects this trend. With Samsung and Hyundai Motor now in the hands of their third-generation leaders, this is a pivotal moment for both these companies and the Korean economy.
The recent 30% decline in Samsung Electronics' share price over the past three months has sparked widespread criticism of the JY Lee and his management team. A comprehensive evaluation of JY Lee’s leadership at Samsung Electronics, as seen through the eyes of minority shareholders, should center around the Total Shareholder Return (TSR) over long-term. This metric, combined with a benchmarking against global competitors and an assessment against Samsung's cost of capital, offers a comprehensive evaluation framework. TSR is explicitly mentioned in the recent Korean government's Value-up guidelines. Samsung Electronics has consistently underperformed against shareholder required rate of return or cost of equity capital. The annualized TSR for common share has been negative 11% over the past year, negative 3% over the past three years, and positive 6% over the past five. Over the past decade, the annualized TSR has been 10%. This reflects the market's growing concerns over the company's deteriorating technological competitiveness, incompetent management, and diminishing prospects for future profitability. TSMC, a direct foundry competitor to Samsung Electronics and a global industry bellwether, has significantly outperformed Samsung in terms of TSR, recording annualized returns of 135%, 22%, 41%, and 26% over the past year, three years, five years, and decade, respectively. The stark contrast in their stock price performance is undeniable.
Total Shareholder Return (TSR; Annualized)
1 year
3 years
5 years
10 years
Samsung Electronics
-11%
-3%
6%
10%
TSMC
135%
22%
41%
26%
To successfully navigate its current challenges, Samsung Electronics must undergo a comprehensive transformation that extends beyond technological advancements. This includes revamping leadership, organizational culture, compensation system and the board of directors. Samsung Electronics needs a drastic transformation, reminiscent of the radical changes demanded by the late Chairman KH Lee in the Frankfurt Declaration of 1993 with the infamous quote "Change everything except your wife and children,". As evidenced by the stock price gap with TSMC, Samsung must reassess all aspects of its business.
We would like to propose three key recommendations to help Samsung establish a best-in-class corporate governance model that can serve as a benchmark.
1. It's been four years since the pledge to forgo fourth-generation family management. Now is the time for Samsung to consider adopting a professional management structure similar to Apple and Microsoft, where ownership and management are separated. As a first step, the company should significantly reduce the business executives that accounts for 36% of the top 25 executives (with President title or higher), including business support task forces, management support, legal, communication, and corporate relations. Instead, Samsung should focus solely on technology and prioritize its engineering and design talent.
2. The board should be upgraded to consist primarily of leading experts, and ensure its independence. What role has the all-Korean board played thus far, particularly during times of crisis? The number of internal directors should be reduced, and the board should be restructured to include mainly foreign leaders in IT (AI, software, etc.), strategy, and governance. Samsung Electronics should learn from TSMC's global board structure and consider listing its shares on the US stock market to overcome the limitations of the domestic capital market.
3. Implement a compensation system that aligns the interests of employees, shareholders, and the board. Given the high global demand for Samsung’s key talent, it is crucial to adopt a competitive compensation package. Immediate implementation of a stock-based compensation plan, such as Restricted Stock Units (RSUs) is recommended to retain top-tier talents.
While Chairman JY Lee is regarded as head of Samsung Electronics, Vice Chairman Chung Hyun-Ho, head of the Business Support Task Force, is widely believed to be making key decisions on behalf of Mr Lee. Despite holding the official title of "CEO Assistant," Vice Chairman Chung is reported to be coordinating between Samsung Electronics and its affiliates. Given that directors are held accountable for their actions, it is expected that executives who exercise significant authority should be held accountable as well. However, as Vice Chairman Chung is not a registered director, he has not been held accountable for recent management failures, which is inconsistent with good corporate governance.
Silicon Valley IT companies prioritize technology and heavily favor technical personnel, such as researchers, designers, and engineers, in terms of promotions, compensation, and overall career development. In contrast, departments like management support and sales/marketing, often referred to as "business" in the US, are seen as superior to technology functions at Samsung Electronics. A significant 36% (9 out of 25) of top executives (President title and above) is responsible for administration, government relations, communication and public relations. This is a stark contrast to the lean and focused organizations common in Silicon Valley.
Professor Chung Joon Hyug of Seoul National University Law School contributed a column to a local economic magazine titled "Let's have Korea prepare for next generation without a controlling shareholder." The core argument of the column is that, (as exemplified by the case of Korea Zinc,) multiple inheritances can lead to a dilution of the controlling family's ownership stake, resulting in management decisions that prioritize the interests of the controlling shareholders over those of minority investors. The Lee family's direct ownership of Samsung Electronics shares stands at a mere 4.3%. Additionally, Chairman Lee formally announced in 2020 his intention to forego fourth-generation management, signaling a potential shift in the company's ownership and control structure.
According to Institutional Shareholder Services (ISS) 2024 voting guidelines, directors and executives with criminal records involving bribery, embezzlement, or insider trading should be dismissed. Chairman Lee, who was paroled in 2021 after serving about 60% of his sentence, has been perceived more as a diplomat than a decisive leader of a chaebol. In the fast-paced IT industry, delays in critical decisions such as restructuring and strategic choices can have significant consequences. Chairman Lee's reluctance to address these challenges head-on has been a major concern. Critics argue that he is shielded from accountability. To restore public and economic trust, it is essential to select top management based on their abilities. Perhaps it's time to consider a scenario where Chairman Lee steps down from all official roles and hands over full management authority to a highly skilled professional manager with an engineering background. Apple's appointment of Tim Cook as CEO after Steve Jobs' death marked a new era of success. Similarly, Microsoft has transformed into an AI and cloud powerhouse under Satya Nadella. Lisa Su, an engineer and business manager of a Taiwanese descent, became CEO of AMD in 2014 and grew its market cap from $3bn to $270bn. Given the success of TSMC under professional leadership, Samsung might benefit from a similar approach, in our opinion.
Jun Young-hyun, the Vice Chairman who is currently spearheading efforts to revitalize the semiconductor business, joined Samsung Electronics at the age of 40 after a career at LG Semiconductor. Given the company's current challenges, considering an outside candidate for the CEO position to drive a turnaround may be an option, we believe. Despite recent declines in employee morale, Samsung Electronics boasts a significant pool of IT experts and technical talents, including more number of PhDs than prestigious Seoul National University.
We believe one of the reasons for Samsung Electronics' current crisis is the lack of independent directors who can provide critical feedback to management on key issues such as rapid changes in AI, a declining staff morale, and capital (mis)allocation. Samsung's board composition is far from ideal for a global IT company. All ten board members are Korean, and four out of the six independent directors lack IT expertise. For an export-oriented company like Samsung, the board should be global, with meetings conducted primarily in English. The company's practice of recruiting domestic "yes-men" has contributed to its current challenges, in our opinion. By conducting a global search for top-tier outside directors, Samsung could attract AI and software leading experts, as well as former CEOs of multinational companies from Silicon Valley, Canada, the UK, China, and Taiwan. TSMC, which has been listed on the NYSE since 1997, exemplifies excellent governance with a global board. Of its ten board members, only one is an insider (the CEO), while six are foreign nationals. By recruiting former CEOs and industry leaders such as the former president of MIT and the former CEO/chairman of British Telecom, TSMC has effectively leveraged their expertise to drive growth and manage business risks. Samsung should consider following TSMC's example by listing on the US stock exchange to become a truly global company. To restructure its board, Samsung should reduce the number of inside directors to one (the CEO only) and appoint a majority of independent directors who are foreign experts in IT, strategy, and governance.
Silicon Valley companies, including major U.S. tech firms, are known for their intense work culture but also for their efforts to create exciting and rewarding workplaces. We would like to inquire about the steps Samsung Electronics' management and board have taken to foster a similar culture. There's a global trend towards implementing equity-based compensation plans, particularly RSUs, to enhance long- term performance and attract, retain, and motivate top talent. SK Hynix, for example, awarded 50% of its 2022 CEO performance bonuses in RSU, requiring a three-year lock-up. The company also offers stock options to CEOs and key executives, and stock appreciation rights to other executives. Samsung should follow suit by introducing a broad-based equity rewards plan, especially for technical roles like engineers, scientists and designers, to boost morale and align employees' interests with those of its shareholders. Furthermore, to solidify its position as a technology- driven company, Samsung should prioritize compensation for technical personnel over administrative and support roles, mirroring the Silicon Valley model.
October 16, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee