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(News Focus) Samsung's governance change looms after scion joins board

All Headlines 14:18 October 21, 2016

By Kim Deok-hyun

SEOUL, Oct. 21 (Yonhap) -- Potential plans to turn Samsung Electronics Co. into a holding company structure are likely to take shape after heir apparent Lee Jae-yong joins the electronics giant's board of directors next week, according to some analysts on Friday.

The 48-year-old Lee, the only son of the ailing Samsung Electronics Chairman Lee Kun-hee, was nominated to join the board last month and his nomination will be subject to approval at the shareholders' meeting next Thursday.

Joining the board suggests that the younger Lee, currently vice chairman of Samsung Electronics, takes formal responsibility for Samsung's business decisions for the first time.

It also signals that the succession of control of Samsung Group, South Korea's largest conglomerate, from the ailing Lee, who has been hospitalized since 2014 after suffering a heart attack, to his son is expected to speed up.

Besides Samsung Electronics, the conglomerate has about 70 affiliates with their business interests ranging from shipbuilding, construction to life insurance.

Samsung Electronics Vice Chairman Lee Jae-yong (Yonhap file photo)

In the short term, the younger Lee is expected to focus on helping Samsung Electronics limit the damage done by the unprecedented discontinuation of the Galaxy Note 7 over safety concerns.

But the heir apparent is facing another uphill task in changing the group's governance structure to improve shareholder values.

At the same time, U.S. activist hedge fund Elliott Management has called for Samsung Electronics to split itself into two publicly listed firms -- a holding company and an operating company.

Elliott also urged Samsung Electronics to pay a special dividend worth about US$27 billion to "remedy" the company's "excessive and inefficient capital structure."

Seoul citizens pass by a Galaxy Note 7 billboard in downtown Seoul on Oct. 14, 2016. (Yonhap)

Lee Sang-heon, an analyst at HI Investment & Securities, said a shake-up in Samsung Group's governance structure should be met with the interests of foreign shareholders of Samsung Electronics. Foreigners account for about half of the electronics giant's shareholders.

"The necessary and sufficient conditions for a change in Samsung Group's governance structure are vice chairman Lee Jae-yong's management capability as well as a positive response from foreign shareholders," the analyst said in a report.

As Elliott Management, one of the foreign shareholders of Samsung Electronics, made the proposals about a change in Samsung's governance structure, the analyst expected foreign shareholders to positively respond to the proposals.

"When the process of naming vice chairman Lee Jae-yong to the board is completed, a change in governance structure is expected to take shape," the analyst said.

While Samsung officials have denied that the younger Lee may be promoted to chairman anytime soon, attention is focused on how he will increase his shareholding in the electronics giant.

The younger Lee owns a 0.59 percent stake in Samsung Electronics, a 17.23 percent stake in Samsung C&T and a 9.2 percent stake in Samsung SDS. Samsung C&T holds a 4.1 percent stake in Samsung Electronics.

To increase the younger Lee's shareholding in Samsung Electronics, many market watchers have speculated that Samsung Group could be transformed into a holding company system.

(News Focus) Samsung's governance change looms after scion joins board - 3

According to the speculation, the younger Lee can raise his stake in Samsung Electronics by integrating non-financial affiliates, including Samsung C&T, into the electronics giant.

Financial affiliates of Samsung Group may be integrated into Samsung Life Insurance.

Oh Jin-won, an analyst with Hana Financial Investment, said the proposals by Elliott Management are likely to accelerate a shake-up in the governance of Samsung.

"Besides a split of Samsung Electronics, there would be no alternative measure for the founding family to expand its control over Samsung Group," Oh said.

South Korea's National Pension Service (NPS), the single biggest shareholder of Samsung Electronics, said this week that it will vote in favor of the nomination of the younger Lee to the board.

The NPS holds an 8.38 percent stake in Samsung Electronics.

A proxy-advisory firm Institutional Shareholder Services is also said to have sent a report to major shareholders of Samsung that it recommended shareholders approve of the nomination.

Samsung officials said the younger Lee is unlikely to attend next week's shareholder meeting, saying it has been customary for a board member not to attend a meeting when shareholders vote on his or her nomination.

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