Can Samsung become Swedish?

By John Burton

As a foreign correspondent for the Financial Times who covered both Korea and Sweden, I wrote a lot about the biggest business group in each country. That was because both groups were controlled by a single family who dominated their national economies on a scale unmatched anywhere else in the advanced world.

I'm referring to Samsung's Lee family and Sweden's Wallenbergs. The Samsung Group is said to account for a fifth of Korea's gross domestic product. The Wallenberg companies, which include Ericsson (telecoms equipment), ABB (energy generation), SKF (ball bearings), Electrolux (home appliances) and Atlas Copco (mining equipment), are estimated to account for a third of the market capitalization of listed companies in Sweden.

But public perceptions about the role these families play in their respective countries are quite different. The economic power wielded by Lees is often blamed for stunting the growth of the small business sector and causing growing income inequality, which has led to calls for "economic democratization," or curbs on the expansion of the chaebol. The Wallenbergs, on the other hand, are largely embraced by the public despite the Sweden's strong equalitarian values and tradition of progressive social democracy.

The contrasting perceptions of the Lees and Wallenbergs reveal that concentrated ownership power need not result in a populist backlash. So why do the Wallenberg companies generally enjoy popularity in Sweden while the Lee family is often reviled in Korea?

The simple answer is that the Wallenbergs have established a reputation for socially responsible corporate citizenship since establishing a bank 160 years ago that served as the foundation for the subsequent rise of their business empire.

The Wallenberg family has successfully promoted an image of noblesse oblige. The most famous example is the case of Raoul Wallenberg, the Swedish diplomat who rescued thousands of Hungarian Jews from the Holocaust during World War II before being captured and allegedly executed by occupying Soviet forces at the end of war.

The Wallenberg family is careful not to give an appearance of entitlement when it comes to their power. Family members overseeing the Wallenberg sphere of companies are chosen on merit after working their way up the corporate ladder of affiliated companies. The family's entire personal wealth can be regarded as modest at an estimated $1 billion in relation to the much bigger market value of the companies they run. In contrast, Forbes has estimated the personal wealth alone of Lee Kun-hee, the Samsung chairman, at $12.6 billion.

The Wallenbergs have also focused on owning mainly engineering-related companies, while avoiding expanding into other business sectors and leaving room for the growth of small businesses in Sweden.

The business approach of Wallenbergs reflects events going back to the early 1930s when Sweden's first Socialist government was elected. At the time, the Wallenbergs feared that their companies would be nationalized in line with socialist doctrine then. But the government and the Wallenbergs came to a pragmatic agreement. The Wallenbergs agreed that trade union representatives would have a say in how the companies would be managed and that a sizeable share of profits would be reinvested in R&D and industrial investments to provide jobs for workers and keep the companies competitive in global markets. In return, the Wallenberg companies would not be nationalized and be lightly taxed if their main operations stayed in the country.

Another reason why the Wallenberg empire enjoys public support is that its management and shareholder structure is relatively transparent and efficient.

The Wallenbergs established a holding company, Investor, in 1916 that controlled the family's shares. Investor, in turn, is owned by several Wallenberg family foundations, which lavishly finance scientific research, universities and the arts. The Wallenbergs have also benefited from what is known as a dual-class share system, where one class of share carries greater voting power than other shares held by outside investors.

Samsung presents a quite different picture. The group has the reputation of spending relatively little as a percentage of profits on social-related programs and has become mired in scandal, including the conviction of Lee Kun-hee of financial wrongdoing and tax evasion in 2008. These acts appeared related to arranging the succession of his son to take over the group. In this respect, the government should share some of the blame.

The combination of punishing inheritance taxes, legal barriers to creating holding companies and a ban on dual-class shares has led to the adoption of the circular shareholding structure that characterizes Samsung and other chaebol.

A change in laws governing corporate structures and taxation would help promote the more efficient management and transparency of the chaebol, although the concessions could prove controversial since many would consider them favorable to chaebol owners.

The lessons offered by the Wallenbergs have not been lost on Samsung heir Lee Jae-yong, who has maintained close contacts with the Swedish family.

His assumption of power could usher in a new age for Samsung as he adopts the practices pioneered by the Wallenbergs.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at johnburtonft@yahoo.com.