What impact will the Samsung chief's arrest have on the company?

The arrest of Samsung’s vice chairman and acting head Lee Jae-yong, son of currently incapacitated chairman Lee Kun-hee, is possibly the biggest company scandal in the last, I don’t know, four months?

Samsung has gone out of the frying Note 7 pan and into the fire as its future boss was yesterday arrested on charges of embezzlement, bribery, perjury, concealment of criminal proceeds and illicit transfer of assets abroad. But what effect is this going to have on the company as a whole?

Business

According to The Korea Herald, “major business projects” have already slowed or stopped entirely and Samsung’s Harman International acquisition is in question (Lee was arrested a day before Harman shareholders were expected to vote on the acquisition).

Other investments are also going to be a bit trickier to finalize, as there are limits to what Lee’s stand-in can do “when pursuing a major investment or business project.” Samsung’s share prices also fell in the wake of Lee’s arrest.

Further, considerable internal restructuring planned for 2017 will likely be halted, including the dissolution of Samsung’s Future Strategy Office (FSO), which is currently seen as the “control tower” of the company and is deeply implicated in the scandal.

The FSO is home to an estimated 250 employees and has traditionally been where crucial company decisions are made. It was speculated that Samsung Electronics would later take on that office’s responsibilities though this may no longer go ahead without Lee spearheading the dismantling efforts.

There’s no telling how the continuation of the Future Strategy Office will affect business operations at this point, but it likely means we’re in for more of the same from Samsung, rather than dramatic shifts in process. Choi Ji-sung, the leader of that office, is said to be filling in for Lee while he’s locked up.

Other analysts, meanwhile, suggests day-to-day operations at Samsung won’t be affected at all. So what can history tell us about what’s going on now?

PR

In 2008, Lee Kun-hee left Samsung after being indicted and found guilty of tax evasion and embezzlement — he was given a three-year suspended sentence. However, Lee Kun-hee received a presidential pardon soon after and returned to work as the Samsung Electronics chairman a year later.

Given that Lee Kun-hee was able to elevate Samsung to great heights when the public knew he’d narrowly escaped jail time (twice), perhaps Lee Jae-yong’s arrest won’t impact the brand name at all.

In an article from The Verge in 2012, writer Sam Byford asserts: “Affection for Samsung runs deep in South Korea, and an assault on the company’s culture can almost be seen as an attack on the country itself — even when [Lee Kun-hee] is a convicted fraudster.”

With this in mind, and given that Lee Kun-hee was able to elevate the company to such great heights while the public knew he’d narrowly escaped jail time (twice), perhaps Lee Jae-yong’s arrest won’t impact the Samsung brand name at all.

The counter argument is that the official arrest of a company leader, and particularly one from the Lee family, can’t go down well. The shame culture in East Asia carries significant weight, and reputation and honor are of paramount importance.

Lee’s arrest casts a shadow over the entire Samsung company and, when Samsung has only recently had to apologize for supplying devices which were certifiably dangerous, Samsung may struggle to regain its reputation in the short term. But that’s not its only problem.

Politics

Major corporations buying favors isn’t an uncommon practice, and in South Korea, where a handful of chaebol families dominate, it’s said to be particularly prevalent. Though Samsung and other megacorporations have for years been considered too big to fail, with presumed political power that would make them near untouchable, 2017 could be the year that sees the tides turn.

The disempowerment of the country’s largest corporations could completely destabilize the economy. Is that what South Korea is in the midst of?

The arrest of Lee follows the impeachment of South Korean President Park Geun-hye, herself believed to be corrupt (as seven of the last eight South Korean presidents are said to have been). With support for the current power structures in South Korea waning, the landscape could be reshaped, and Samsung — along with the South Korea’s other tallest trees — could fall hardest.

But that’s just conjecture: the disempowerment of the country’s largest corporations could completely destabilize the economy. Is that what South Korea is in the midst of? Or are these just a few more scandals which will blow over? It’s impossible to predict how Samsung’s political power will be affected in the wake of a situation that led to the impeachment of a President and the first-ever arrest of a Samsung figurehead.

Wrap up

To brings things back to our consumer level, Samsung is relying on its upcoming flagship, the Galaxy S8, to deliver as the company rebounds from the Note 7 disaster. Though there’s concern about how this situation will impact its development, it’s unlikely that Lee’s absence would cause any significant delay in the delivery of Samsung’s next flagship. The S8 is well underway and Samsung would have been preparing for this possibility for months.

That said, Lee has guided the company to great financial success recently — Samsung even managed to increase profits in Q4 2016 after cancelling one of its biggest phones of that year (no small feat). Should Lee lose his position permanently, Samsung could face some of its toughest years as the company seeks out a new leader: especially if it no longer receives the allegedly underhanded support of the government.

Lee is currently being detained with his trial expected to begin sometime in the next 18 months. What are your thoughts on the scandal? Let us know in the comments.