What Lee’s imprisonment means for Samsung: two crises at once

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A 30-month prison sentence for Samsung Group Chairman Lee Jae-yong forced the South Korean conglomerate into another crisis. And as if that wasn’t bad enough, the timing of this ordeal means its consequences could be amplified by another crisis which the company has been navigating since early 2020.

That would be the COVID-19 thingy; you probably heard something about it by now.

Crisis management in crisis

Following yesterday’s court ruling, Samsung’s top brass promptly declared another state of emergency. Lee already spent a year in prison for bribery of state officials and embezzlement, but a successful appeal saw his five-year sentence cut in half and suspended for four years, resulting in his immediate release in early 2018.

The Supreme Court then overturned the remedy and ordered a retrial at the Seoul High Court in 2019. The Monday verdict was based on an expanded probe of the same corruption scandal that also resulted in former Korean President Park getting sentenced to 25 years in prison.

Will Samsung’s COVID-19 recovery efforts fall apart?

Identical emergency operations were already in place at Samsung throughout Lee’s first year of imprisonment. Except that business was booming back then, so Samsung avoided the direst possible consequences.

As for now, sources close to the situation claim Samsung’s management was shocked by the outcome, counting on Lee getting a suspended sentence instead. Meaning they were also completely unprepared to deal with the aftermath. After all, they’ve been occupied with the aftermath of a global pandemic that crippled the entire planet, Samsung included. They still are, in fact, and the Monday ruling delivered a sizable blow to their success chances on that front.

Moving forward, the leadership of Samsung’s largest affiliates is planning emergency executive meetings to discuss the rapidly worsening situation in the coming days. Samsung’s leadership structure was already highlighted as one of its key corporate weaknesses during Lee’s original prison stint. A highly centralized decision-making process system isn’t necessarily worse than any other, but it doesn’t mix well with a decentralized business.

While Lee did receive briefings and voted on some issues from behind bars, Samsung halted virtually all merger and acquisition activity during this period. The same is now expected to happen again, just for a significantly longer stint. 2.5 times longer, to be exact, though the prosecution demanded nine years, so there’s that.

Is there ever a good time for serving a 2.5-year prison sentence?

During the past two years, Lee has been actively trying to make Samsung more synergistic and even started decentralizing it, thus vowing to be the last in the three generations long royal line of business moguls. And even before his release, the third-generation Chairman decided to dismantle the chaebol’s Future Strategy Office, which was at the center of the scandal leading to the current predicament.

Another major decision he made during imprisonment was ordering Samsung’s blockbuster investments in semiconductors totaling in excess of $27 billion. This is what caused the many consecutive record-breaking R&D budgets to get approved. But those will only continue throughout this year. Anything beyond that is uncertain and unfortunately for Samsung, Lee is now set to remain in prison for far longer.

Samsung’s last major M&A activity happened in 2016, which is when it broke the record for its largest foreign acquisition by purchasing Harman International Industries for $8 billion. That record probably won’t be getting tested anytime soon, as the terms of his renewed prison sentence won’t allow him to be involved to the point of essentially setting up an office in prison. After all, office hours dwarf visitation hours by several orders of magnitude in most parts of the world, South Korea included.

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