Both the business and the family will do well if the family serves the business. Neither will do well if the business is run to serve the family. The controlling word in "family-managed business" is not "family." It has to be "business."
Peter Drucker may have died in 2005 but one can almost see him shaking his head in disbelief at the ongoing soap opera over at Samsung. Before we get too much into that Samsung melodrama, however, it's worth looking back at what Drucker had to say about the DuPont chemical company, which survived and prospered as a family business for as long as it did because it faced up to the problem of employing members of the family by introducing something of a genetic meritocracy.
All male DuPonts were entitled to an entrance job in the company. Five or six years after a DuPont had started, his performance would be carefully reviewed by four or five family seniors. And if this review concluded that the young family member was not likely to be top management material ten years later, he was eased out.
This past week, of course, brought the resignation of Samsung's chairman Lee Kun-Hee after a series of scandals involving slush funds, bribery and sneaky attempts to slide his son, Lee Jae-Yong, into the driver's seat of Korea's most powerful conglomerate.3 If he were alive today, Drucker would rightly be asking what Samsung could learn from DuPont. How would Lee Jae-Yong stand up under similar scrutiny? Not very well it seems, according to this article in the Korea Times:
In 2000, Jae-yong led 14 Internet venture companies, including e-Samsung as the largest shareholder, but the companies became insolvent after just one year, with e-Samsung suffering 20 billion won in losses. Nine other Samsung affiliates purchased stocks in 2001 to make up for the loss and Samsung's crown prince did not suffer any financial damage.
If, as the Chinese proverb has it, failure is the mother of success, then Lee Jae-Yong stands to succeed mightily in the coming years, but in a company like Samsung - with the cream of Korea's executive crop - it's a mystery to me why he, of all the capable candidates, deserves to sit at the controls.
But, of course, to quote Snoop from The Wire, "deserve got nuthin' to do with it."
This sort of torch-passing may have made sense in Old Korea, where a son - usually, but not always, the first - was expected to carry on the family name and protect the family jewels, as it were. Lee Kun Hee (the third son, incidentally) took over the company upon the passing of his father, Lee Byung-Chul, in 1987 and deserves credit for salvaging the Samsung brand. Still, what's the likelihood of Lee Kun-Hee being as lucky with his son as a businessman as Lee Byung-Chul was with his? It's a question investors are asking.
The "Korea Discount" - the amount by which investors undervalue Korean stocks - has become primarily a product of poor corporate governance, which has come to overshadow the country's militant labor unions, antsy regulators, and the threat from North Korea. For its part, says Tariq Hussain, Samsung is currently accepting a 10-20% discount of its own as a price for keeping management in family hands, which Samsung does not do simply for a lack of better options.
Samsung has built a solid bench of highly qualified leaders - clearly the strongest in Korea. Yet none of them will take over the leadership of the group. That position will be reserved for chairman Lee's son, Jae-Yong. Chairman Lee has made sure that his son receives more rigorous training than the average chaebol "prince." Lee Jae-Yong is described as a talented and open individual. Yet whatever his skills, he has not truly proven himself as a business leader. And given Samsung Electronics' global reach and significance, investors can only doubt whether he is the right person to take over the group. When Lee Jae-Yong ascends to power, some shareholders and NGOs will howl and scream. The only way to justify his appointment would be to truly drive change from within: by cleaning up Samsung's portfolio, transforming its command and control culture, and establishing a world-class corporate governance system.4
There's the rub: "change from within." This much-needed transformation of Samsung is not something that government regulators ought to be pushing (nor should bribed government officials be helping to forestall the change). Rather, if and when Samsung decides that it's ready to join the ranks of the world's best companies, it will make the changes of its own accord. And as Don Boudreaux points out, self-interest - and the consternation of shareholders - will ultimately drive Samsung in the right direction.
In private markets, Smith spends only Smith’s money. Smith profits or loses depending on the prudence of his choices. This tight connection between each person’s actions and the consequences that he or she bears provides remarkably effective carrots and sticks encouraging private persons to behave responsibly.
The question, however still remains: with Lee Kun-Hee out of the chairman's seat, will Samsung continue in a business model that relies on bribing government officials, rather than competing solely on the merits of its products and services? And who will be steering the company through this transition?
"We shall see," said the blind man, "what we shall see."
1 Lee Kun Hee photo courtesy of Chung Sung-Jun/Getty Images.
2 All Peter Drucker quotes are from "Managing the Family Business," an essay from Managing in a Time of Great Change.
3 As Martin Fackler notes in the IHT, however, Lee Kun Hee won't lose actual control of the Samsung Group, as he and his family remain, in serpentine fashion, the dominant shareholders:
Lee's family controlled the group by holding a big stake in its amusement-park operator, Everland, which holds a stake in Samsung's life insurance company, which owns shares of Samsung Electronics, which in turn has a stake in the credit card company. The credit company owns a stake in Everland.4 Tariq Hussain, Diamond Dilemma. Page 97.