Corporate Governance Issues in Samsungs Corruption and Embezzlement Scandal - Case Study Example

Corporate Governance Issues in Samsung’s Corruption and Embezzlement Scandal By (Student) (Course) Instructor: Institution: Date: Introduction Corporate governance is increasingly becoming an area of major concern for governments, business leadership and interested parties including the public through such agents as civil society and political representatives [Zim07]. This has particularly been the case due to numerous and almost catastrophic scandals arising from the failure of responsible corporate governance. As noted by Manacorda, Francesco, & Forti, (2014), the global economic scandal of 2008 and the Enron fraudulent accounting scheme are arguably some the best indicators of how corporate governance failure can result in grave consequences for shareholders and society at large. Corporate governance impacts several aspects of the business including leadership, ethics, sustainability and human rights [Cra16]. In light of this understanding, this paper details and analyses an article detailing corruption and embezzlement of funds at Samsung Group involving its head, Lee Jae Yong. The paper will aim to link critical corporate governance theories relating to transparency, corruption and misuse of shareholder funds with evidential literature in the Samsung Scandal. The use of financial advantage by big corporate bodies to influence regulatory decisions is not only an undesirable act, but a major contributor to potential economic shocks and growth of monopolies in domestic and international markets (Manacorda et al., 2014). Outline and summary of arguments in the article About Samsung The Samsung Group is a 70 year old multinational conglomerate headquartered in South Korea. Samsung’s interests span advanced technology, electronics, hotels, petrochemicals, semiconductors, medicine, finance and real estate. Samsung electronics including its Galaxy smartphones, laptops, TVs, are major source of revenue for the company [Sam17]. In 2017, Samsung generate $178 billion in revenue. Samsung is a major source of GDP in the South Korean Economy. This means that its operations are of great interests to the government. The company’s founding family still holds significant influence over Samsung’s operations and strategies [Jae17]. In 2015, Samsung sought to merge its two affiliates, Samsung C&T and Cheil Industries. The motive was to give Lee more power to run the merged conglomerate. Shareholders including hedge fund Elliott Associates protested the move claiming it undervalued Samsung C&T. the complainant further accused the family of attempting to gain stronger control of the company. Despite such protests, Samsung successfully lobbied shareholders including the government through the National Pension Service that owns 11.9% to approve the merger [McC17]. Article arguments According to an article that appeared in The Guardian on February 17, 2017, “Samsung head arrested over South Korean Choi-gate corruption scandal”, the head of the Samsung Group was arrested after prosecutors had successfully satisfied the court that the company’s chief had a case to answer in relation to corruption and embezzlement of funds. Lee became Samsung Group’s head after taking over from his father who was incapacitated in 2014 due to a heart attack. According to the accusations, Lee allegedly paid bribes worth £30 million to foundations associated with South-Korean president, Park Guen Hye, who has since been impeached. In return, Lee expected the government to approve a merger between two Samsung affiliates in 2015. While the company has acknowledged paying the pledges, it denied that the chief was engaging in corruption. If the accusations are proved true, the shareholder’s resources at Samsung were used to corrupt regulators to get a favourable treatment. Lee is further accused of hiding assets overseas and lying to the court under oath. Apparently, it appears that Samsung had at its highest level of leadership adopted a policy of using financial strength and influential status in the South-Korean economy to influence critical stakeholders into supporting its strategies against the law. The company did acknowledge the wrongdoing but fell short of admitting that it was actually a case of corruption, misuse of shareholder funds and a successful policy that was irresponsible towards upholding social norms. Corporate governance issues raised in the article Bribery The major corporate governance issue raise by the article is the involvement of Samsung in corruption to gain favourable treatment from the government. Samsung allegedly pledged £30 million to a foundation that is linked to a close confidant of the president of South Korea. By doing so, Samsung hoped to influence the executive into accepting to support its bid to merge its affiliates. This is unethical, illegal and an example of poor corporate governance. According to the Oxford English Dictionary, corruption is the dishonest or fraudulent conduct by those in power [Oxf17]. The definition further states that corruption typically involves bribery. In essence, corruption is the undue use of power in form of financial strength or constitutional authority to influence decisions in a manner that is wrong, illegal, immoral or unethical. Incidences of corruption involving private companies and government officials are not a new development in the global contexts. In fact, several big businesses have paid costly penalties for bribing public officials to get a decision made in their favour. In 2017, Rolls Royce was ordered to pay £671 million to UK, US and Brazil for engaging in bribery to win contracts and to avert probes [Hol17]. In 2006, the Compass Group, a multinational UN-registered Food vendor paid £40 million in settlement of lawsuits linking it corruption to win supply tenders [Ald06]. In 2012, reports emerged that Wal-Mart in Mexico had bribed Mexican officials to build a store near the pyramids of Teotihuacán [Dav121]. These cases indicate that it is not uncommon for big corporations to use bribery as a means of influencing decisions by governments and other powerful bodies. According to a report by OECD, more than 50% of bribery by multinationals involves senior officials who are either aware or authorized it. The report observes that major impediments to the campaign against corporate corruption are weak laws and vested interests among the political class. In the case of Samsung, the company accounts for about a fifth of the country’s GDP [OEC14]. This means that the government often applies a somewhat lenient response to misconduct cases involving Samsung. Sound corporate governance practices demand that a company should not engage in bribery to achieve a goal. However, several big corporate have failed to uphold such values by actively encouraging corruption as a means to achieving success. Some structural weaknesses have also contributed to weak corporate governance mechanism [Man14]. This is particularly the case in highly centralized Korean businesses such as the Samsung Group that is run through a hierarchical system with Lee at the top (Albrecht, Turnbull, Zhang, and Skousen, 2010). Such a structure makes it impossible for employees at the lower ranks to make independent decisions that are lawful and ethical. Notably, investigations into corruption at Rolls Royce also cited hierarchical organizational structure as a major contributor to corporate corruption in the company [Hol17]. Clearly, the board at Samsung failed to develop a strong value system that prohibits engagement in corruption. Embezzlement and leadership failure The Samsung board also actively engaged in embezzlement of shareholders funds for personal gain. The acting chairman, Lee, sought to consolidate his power at Samsung by merging its two affiliates to be the supreme head. To achieve his ambition, the chairman approved pledges to a foundation linked to the president in order to get the government’s support in the merger quest. This is likely a case of embezzlement of shareholders funds as it involved a consequence that did not benefit them or increase the value of their holdings. Embezzlement of funds by board members is a major challenge to strong corporate governance particularly in companies where a few people hold significant influence and power over the decision-making process [Koc11]. This also exposes lack of responsible leadership of the board’s Chairman. Mr Lee was well aware of the illegality and unethical nature of bribing government official to gain a favourable treatment. However, the chairman somewhat allowed the wrong to persist to protect his interests. This may have encouraged junior officials to tolerate corruption and misuse of shareholders funds at Samsung. Therefore, it is fair to observe that leadership failure led to embezzlement of funds and promotion of a corrupt culture at Samsung. Relevance of Samsung’s corporate governance issues to business and general public It is critically important that a company develops strong structural and policy measures to prevent engagement in corruption in the day-to-day functions of the business. Such measures should outline the responsibility of every person from the lowest ranks to top management in upholding integrity and transparency [Bis09]. This ensures the business avoids costly legal processes where the company may be forced to defend itself from accusations of corruption. Such accusations warrant court proceedings in cases where the management pays money suspiciously to a third-party and fails to give a convincing reason. This is particularly the case with Samsung’s pledges to a foundation linked to the South-Korean president. Apart from the legal expenses, a company such as Samsung may be required to pay a penalty for violating the country’s constitution. Corruption scandals also generate a negative perception among the public due to intense media focus on arrests of top leadership and gravity of accusations levelled against them. This may damage the reputation of the company and the positioning of the brand in the market [Eng10]. Social sustainability is emerging as a critical marketing factor in the world today as consumers demand more accountability from businesses and governments in fighting corruption and exploitation [Koc11]. Consequently, a business such as Samsung may lose consumers who are highly sensitive to matters such as corporate corruption. The business may further suffer from limited financing sources if institutional investors fail to take up its stocks or offer debt. Such investors are increasingly coming under close scrutiny as authorities and lobby groups demand that they only fund businesses that are not involved in corruption. Clearly, corruption weakens a business’s competitiveness and damages its reputation thus making it hard to access financing (Williams, 2007). This in turn affects employees who stand to lose jobs and the general public that may no longer enjoy provision of innovative or affordable goods. Embezzlement of shareholders funds damages the trust between investors and the leadership of a company [Bis09]. The board is entrusted with protecting the interests of the shareholders of a company. The shareholders lose faith in the board and the management when there appears to be some collusion between the board and the management to embezzle funds for selfish gains. As for the case of Samsung, the business may find it very difficult to raise more funds from the shareholders and prospective investors in the stock market. In any case, it could also lead to loss of significant amounts of money thereby diluting the value of share value. Bishop and Hydoski (2009) further note that lack of responsible board leadership also jeopardises the businesses quest to implement its strategic plans. This also exposes the business to the risks of losing money through embezzlement, legal penalties and poor decisions. Such poor leadership exposes shareholders to the potential of sustaining significant losses should the business collapse or fail to meet its financial obligations [Cra16]. It is important for a business to have a responsible leadership that establishes and maintains accountability and transparency in its dealings to continuously assure its shareholders of the safety of their stocks. This will guarantee the long-term growth of the business. Conclusion From the literature analysed thus far, it is evident that corruption, embezzlement of funds and poor leadership can have adverse effects on the stability of a business entity due to the financial and reputation costs involved. Good corporate governance demands that a business establishes and actively implements structural and policy frameworks that guide the board of directors, management and employees on how to fight corruption, wastage of resources and unethical decisions. Despite the overwhelming body of evidence on how corruption destroys businesses, more businesses and including large conglomerates have failed to completely avoid being involved in corrupt dealings. This may be attributed to stiff industry competition and personal ambition of individuals in management. It is critically important for business leaders to understand that they are responsible for their actions as they have a direct implication on shareholder wealth, brand value and company reputation. Corruption and embezzlement of shareholder funds should be blamed on management’s laxity of deliberate failure of those in leadership positions. Companies such as Samsung should strive to institute strong governance structures that help to identify and remedy potential lapses that may encourage corruption and misuse of shareholders funds. This will ensure the shareholders can remain assured that their wealth is being utilised responsibly. The business will be able to attract investor money to fund its growth plans. Such strong governance systems will also help the management to uphold integrity and promote sustainability of the business for the common good of the public in terms of provision of goods/services and employment to the masses. References Albrecht, C., Turnbull, C., Zhang, Y. and Skousen, C.J., 2010. The relationship between South Korean chaebols and fraud. Management Research Review, 33(3), pp.257-268. Zim07: , (Zimmerli, et al., 2007), Cra16: , (Crane & Matten, 2016), Sam17: , (Samsung, 2017), Jae17: , (Jaewon, 2017), McC17: , (McCurry, 2017), Oxf17: , (Oxford University Press, 2017), Hol17: , (Hollinger & Belton, 2017), Ald06: , (Aldrick, 2006), Dav121: , (Barstow, 2012), OEC14: , (OECD, 2014), Man14: , (Manacorda, et al., 2014), Koc11: , (Kochan & Goodyear, 2011), Bis09: , (Bishop & Hydoski, 2009), Eng10: , (Engen, et al., 2010), Appendix Analysis Article: Zim07: , (Zimmerli, et al., 2007), Cra16: , (Crane & Matten, 2016), Sam17: , (Samsung, 2017), Jae17: , (Jaewon, 2017), McC17: , (McCurry, 2017), Oxf17: , (Oxford University Press, 2017), Hol17: , (Hollinger & Belton, 2017), Ald06: , (Aldrick, 2006), Dav121: , (Barstow, 2012), OEC14: , (OECD, 2014), Man14: , (Manacorda, et al., 2014), Koc11: , (Kochan & Goodyear, 2011), Bis09: , (Bishop & Hydoski, 2009), Eng10: , (Engen, et al., 2010), Read More