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Misplaced generosity

A corporation is not entirely owned by shareholders. Society overall has a stake too.
Nov 04,2017
Samsung Electronics has decided be more generous to its shareholders to share the riches it has earned from the ongoing extraordinary semiconductor boom.

It will double its cash dividend next year from this year’s level and pay out around 10 trillion won ($9 billion) annually over the next three years. The returns could become bigger as it vowed to set aside at least 50 percent of free cash flow to distribute to shareholders and maintain that level for three years. The ever-growing demand for memory chips in the age of full automation and digitalization will continue to fatten the bottom line of the world’s largest chipmaker for some years. Many believe the company can afford to reward shareholders 20 trillion won a year for the next three years.

Samsung Electronics stock became even hotter than before after the news broke. Some overseas banks now expect the stock to reach historic highs and proceed towards the 3 million won milestone — and possibly reach a price as high as 4 million won.

A company has a duty to share its profits with shareholders. Moreover, Korean companies are notorious for being stingy in dividend payments.

But Samsung Electronics’ benevolence mostly benefits foreign investors. Foreigners own 54 percent of its shares. Half of its $9 billion annual payout will go offshore. Samsung Electronics’ cash dividend averaged 2 trillion won to 3 trillion won before. The amount jumped from last year as the conglomerate readied hereditary succession of control from bedridden Lee Kun-hee to his son Lee Jae-yong.

Hedge funds exploited the fundamental weakness of the family-run dynasty and demanded reforms or a share of half its profits for the shareholders. At home, call for reforms among chaebol gained momentum with the triumph of left-leaning Moon Jae-in in May’s snap presidential election. Lee Jae-yong, who was implicated in the bribery scandal that doomed the presidency of Park Geun-hye and placed her behind bars, faces a jail term of up to five years. With such a fragile situation at the top, Samsung Electronics had to give in to foreign shareholders’ demands.

Still, its plans are excessive. With 20 trillion won, it could entice 200,000 elite managers with offers of annual salaries of 100 million won. There are fewer than 100,000 on Samsung Electronics payroll. It would cost 21 trillion won to finance Moon’s pledge to create 810,000 new jobs in the public sector over the next five years.

Is this the reform outline the liberal government wanted to see from chaebol? Fair Trade Commission chief Kim Sang-jo, an activist for minority shareholders’ rights, shook his head and said he could not understand why Samsung came up with such program.

It would have been different if Samsung had laid out 10 trillion won for shareholders and another 10 trillion won to help create jobs for young people. It could promote the creation of 10 basic science institutes and donate 1 trillion won each. About 10 trillion won could be used to create thousands of decent-paying jobs. If good jobs are secured, many young people could get married, have children, and spend to help the economy.

The research centers could be sponsored for five years to work on projects without financial worries. Their research could sustain Samsung’s future growth. After five years, the startups should be left alone to survive. Samsung need not worry about their employment and viability from then on.

If not for public support and sacrifices, Korean family-run chaebol could not have achieved today’s successes. A corporation is not entirely owned by shareholders. Creditors, employees, consumers, and the society overall have as much at stake in a corporation as shareholders.

Sweden and other northern European countries made their economies fair and prosperous through capitalism based on a social consensus. Because large conglomerates contributed in creating jobs and social development, they happily endorsed and supported hereditary successions in corporate dynasties over five or six generations. They allow issues of preferred stock with voting rights to allow protective means for the management to defend its ownership.

In times of trouble, it was not foreign shareholders but the Korean people who supported Korea Inc. Samsung should give this deep thought. The government also should retire its rhetorical obsessions about reforming the chaebol and come to a practical solution to lay the grounds for social agreement. Jobs cannot be bred on a habitat full of distrust and conflict.

JoongAng Ilbo, Nov. 3, Page 36

*The author is the head of the Economic Research Institute of the JoongAng Ilbo.

Kim Kwang-ki