Samsung, Shame, and Corporate Atonement

Samsung, Shame, and Corporate Atonement
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For the past several months, South Korea has been roiled by accusations of corruption in its government and major businesses. The role of the country’s family-run businesses, and whether or how they are held to account for wrongdoing, is under intense scrutiny.

In February Samsung’s de facto leader Lee Jae-yong was arrested on bribery charges. Lee is accused of donating $36 million to nonprofit foundations operated by a friend of the former president in return for political favors. Lee has denied the charges. Then, in March, South Korea’s president, Park Geun-hye, was removed from office, in part because of accusations that she helped a friend, Choi Soon-sil, pressure companies into making donations to nonprofits controlled by Choi and gave her access to secret government documents. The outrage at these and similar scandals helped propel liberal candidate Moon Jae-in to the presidency; he campaigned on promises to clamp down on the country’s family-controlled business dynasties in the wake of Park’s cronyism and corruption scandal.

Many South Koreans feel envy and resentment toward family-run conglomerates such as Samsung, SK, LG, and Hyundai. Known as chaebol, these businesses make up more than half the value of the companies traded on South Korea’s stock exchange. However, their contribution to the world’s 11th-largest economy is overshadowed by repeated cases of bribery, weak corporate governance, and complicated shareholding plans that help the families accumulate wealth and inherit management. (Most of the chaebol are in their third generation of family control.) Moon has vowed to stop families from using such methods to keep control of these ostensibly public companies.

The political scandal and ensuing election rekindled the public’s anger at the chaebol for previous misdeeds; many people feel they never properly sought redemption. But to rectify that and repair their reputations, Samsung and others need to chart a different path than their Western corporate peers. The hidden rules of atonement differ greatly across cultures.

Redemption in Guilt Culture

In guilt culture, which exists mainly in Western countries, redemption derives from the individual’s recognition that their conduct has violated the laws of society. When the individual believes they are innocent, denial and proving their innocence in court is expected. However, if they are found guilty, jail time serves to make things right.

That’s why in some major corporate scandals in the United States people expect executives to serve jail time to make amends. For example, after the Enron scandal former CEO Kenneth Lay was convicted of fraud and conspiracy and received a 45-year sentence. Former president and CEO Jeffrey Skilling appealed to shorten his 24-year sentence. Andrew Fastow, the former CFO, was sentenced to six years in prison.

Admittedly, guilt culture showed little enthusiasm for criminally sanctioning executives involved in the 2008 banking crisis. For example, nine years after Lehman Brothers went bankrupt, former CEO Richard Fuld is a free man; in fact, no executives were jailed for their role in the U.S. financial crisis. Three former Anglo Irish Bank executives were sentenced to just a few years for conspiring to mislead investors, depositors, and lenders. (The fraudulent €7.2 billion transaction eventually led to Ireland’s financial crisis.) In the UK, a few former executives of Royal Bank of Scotland and HBOS were stripped of their knighthood but avoided criminal charges.

Sometimes the absence of criminal prosecutions can be attributed to unease over the wider implications such actions would have on the national economy. Other times, it seems that, in guilt culture, you can hate the crime and still respect the criminal. The UK’s Financial Services Authority declared that it would be unjust to single out individual wrongdoers for punishment; that the bankers’ actions around the financial crisis were the product of a pervasive culture; and that a one-off symbolic punishment would be of little significance.

Even so, in guilt culture the punishment of serving prison time is still seen as a way for individuals to “pay their debt to society.” Similarly, companies can be hit with big fines or settlements by government regulators. Time behind bars for executives and big-figure forfeitures such as Volkswagen’s $4.3 billion guilty plea act as targeted punishments that restore the corporate reputation.

Redemption in Shame Culture

By contrast, in places like South Korea and Japan, CEOs are not often sent to jail. Toshiba’s former CEO Hisao Tanaka and the other executives who resigned over $1.2 billion in financial fraud received only suspended prison terms. Similarly, Hyundai Motor chair Chung Mong-koo, Samsung chair Lee Kun-hee (the father of the arrested Lee Jae-yong), and SK former chair Chey Jong-hyun were each convicted on separate occasions of corruption but were granted presidential pardons.

If a business executive is accused of a crime, punishment begins as soon as the suspicion is made public, through the photos in handcuffs or sensationalized news stories about their detention. That’s because, in shame culture, face metaphorically means honor. The more an unethically behaving CEO gets shamed, the more the public is prepared to forgive. A leader recovers honor more sincerely through a deep, bowing apology than through a multiyear jail term.

In extreme cases in shame culture, losing face can even lead to suicide. For example, former South Korean president Roh Moo-hyun threw himself off a cliff in 2009 after his wife was accused of receiving payments from businesses, while he claimed he was transforming the chaebol. His suicide changed his status from criminal to hero, and the investigation was closed. This is usually only possible in a shame culture.

The need for people in many Asian countries to save face and avoid shame is often difficult for Westerners to understand. For example, researchers have found that, in Japan, an apology is a sign of personal remorse; in the U.S., it’s more likely to be seen as an admission of culpability.

Samsung’s Situation

What could Samsung do to improve its reputation in its home country? The corporation needs to actively accept moral and social responsibility beyond defending itself in court.

Following the arrest of Lee Jae-yong, Samsung decided to disband its Future Strategy Office, considered the family’s most loyal body — and that’s a good start. But it’s not enough. The company’s existing social contribution department, which focuses on marketing activities, should also be overhauled. A more authentic CSR program and a more public commitment to ethical leadership by the controlling Lee family would signal to the government and the public that Samsung is taking change to heart.

To see such reforms through, Samsung could draw on a historic strength: its superior internal reputation. My research work suggests that Samsung’s superior employee loyalty was key to surpassing Sony as a global electronics firm. However, I believe now is the time for the executives’ culture of loyalty to the family to be replaced by a culture of loyalty to the organization. That’s a transformation that will need to be thoughtfully designed and carried out.

Samsung has a long history of turning crises into opportunities. Without learning from the Asian financial crisis of the late 1990s, Samsung wouldn’t be the global powerhouse it is now. Its stock hit an all-time high during the Galaxy Note 7 recall. If the company takes the right steps to repair its reputation, employees and South Korean citizens alike can again fully respect the “three-star” brand that started in 1938 with an investment of just two dollars.

There’s plenty of blame to go around when it comes to Samsung’s situation and the wider reputation of the chaebol. Certainly, South Korean politicians and news outlets deserve criticism for their role in hyping scandals. Even so, the decisive election of Moon Jae-in and the ongoing investigation of Samsung’s heir show that political leaders and prosecutors are determined to correct the country’s reputation for being too lenient on business executives. Unlike past attempts to reform the chaebol, this new government effort should start by focusing on policies that reduce corruption and cronyism, rather than finding a scapegoat to appease public anger.

And, importantly, this is an opportunity for Samsung and the other chaebol to redeem themselves in the eyes of the South Korean public and the world.

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