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Corporate Scandal Analysis – Samsung Group

In: Business and Management

Submitted By kjocma
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Re: Corporate Scandal Analysis – Samsung Group
Introduction
This report examines Samsung’s corporate scandal using three elements of the fiasco: unethical practices, poor internal controls, and the dysfunctional behaviours of corporate managers. The report includes recommendations on what counter measures should be in place to prevent future fiascos of Samsung Group.

About Samsung Group

The Samsung Group is the Korean’s largest conglomerate. The $160 billion Samsung Group is a source of Korea’s pride, accounting for 16.5% of the country’s total exports (1). Samsung Electronics, the world’s largest maker of memory chips, liquid-crystal-display panels and TVs, and the largest cell-phone maker.

Samsung’s corporate scandal in Year 2008

Lee Kun Hee, Chairman of Samsung Group, stepped down after being charged with tax evasion and breach of fiduciary trust in April, 2008 (2).

Assessing unethical practices

Lee Kun Hee, Chairman of Samsung Group, owned $4.5 billion worth of stock in Samsung Life and Samsung Electronics that were hidden in 1,200 brokerage accounts in the name of former and current executives (3). Such holdings were kept secret to avoid paying hefty taxes. This example of unethical practice is related to conflict of interest that is one of the four related sources of unethical decision making (Mahzarin R. BanajiMax, 2003).

Assessing poor internal control

The powerful Samsung’s Strategic Planning Office (SPO) arranged an illegal transaction to give the junior Lee and his sister a combined 64% stake in Samsung Everland, which was made a holding company of Samsung Group. Lee Jae Yong and his three sisters paid $9.9 million to exercise warrants converting bonds they held into shares of Samsung Everland at just one-eleventh of the market value. This illegal transaction was caused by the lack of control system to support the code of ethics. The SPO’s employees were not trained to recognize moral issues and to apply the rules or ethical principles in the organization’s code of ethics (CMA).

Assessing the dysfunctional behaviours of corporate managers

Lee family’s near-absolute control of Samsung’s 59 affiliates ranging from insurance and credit-card services to shipbuilding is one of the main issues in Samsung’s governance system. Lee family’s control via tangled cross-shareholdings of affiliates pushed SPO’s corporate managers to arrange illegal business deals to benefit the Lee family at the expense of other shareholders. This family’s contol allowed Samsung’s environment to reinforce a bias.

Recommendation

It is recommended that Samsung Group builds a sustainable system enforcing transparency and accountability through ethics-training programs for corporate managers & employees. The employees must be trained to recognize the moral issues and to apply the rules of the organization’s code of ethics.
In addition, Samsung boards need to establish a separate governance committee with responsibility for completing the compliance & internal control review.

--------------------------------------------
[ 1 ]. Mahzarin R. Banaji, Max H. Bazerman, and Dolly Chugh, How (Un)ethical Are You?
[ 2 ]. Society of Management Accountants of Ontario, Ethics
[ 3 ]. Mahzarin R. Banaji, Max H. Bazerman, and Dolly Chugh, How (Un)ethical Are You?
[ 4 ]. CMA Canada, Corporate Governance: The Role of Internal Control

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