From founders toprofessional managersCreated by Binh TruongStudy on Corporate Governance Structureof SONY and SAMSUNG
Agenda• Case studies• Sonys CEO and Governing Structure• Problems with Sonys Governing Structure• Samsungs Powerful Owner-CenteredStructure• The Problems with Samsungs GoverningStructure• Conclusion
Current case studies• Samsung: Chairman Lee > Office of Secretaries> Affiliates leaders• Sony: CEO for each its individual businessunits (companies). But not from inside out.
Sonys CEO and Governing Structure (1)• Founders and the Inner Circle– 1st generation, Founders era: Ibuka, Morita are God-like figures (and no one dare to against them).– Ibuka & Moria: formed inner circle (based on theirpersonal relationships).– 2nd generation: Ohga, continued decision-makingpattern of Ibuka, Morita. (Ibuka: Trinitron TV, Morita:Walkman, Ohga: PlayStation).• => Autocratic management style– Loyalty & commitment were expected for inner circlemembers.
Sonys CEO and Governing Structure (2)• Idei and Board Reform (Chairman Idei)– Implemented new form:• Individuals business units had more autonomy.• Manage with new structure: executive power, andsupervisory rights.– Sony Groups board divided: 10 executive officers, 3outside directors.– In 2003, Sony implemented: outside directorsystem, and committees(Nomination, Audit, Compensation committee...).– By 2003 time, Sony has > 50% outside directors
Problems with Sonys Governing Structure (1)• Succession and Leadership– Former executives were angry, unfriendly with newgoverning structure (because LOST POWER).– Lacked supports from analog eras engineers (fromelectronics sector).– Previous analog technologies engineers PASSIVELYRESISTED digital technologies.– Easily FALL into chaos IF LEADERSHIP NOT STRONGENOUGH.– Inconsistency between leadership and corporate culture.– Professional manager were taking reins from founders,owners.
Problems with Sonys Governing Structure (2)• Internal Politics– "Creative destruction": The appear of Kutaragi, closethe PTC, NACS => Destroyed Ideis network strategies.– Kutaragi, Ohga criticized both Idei, Ando for missingtransition time.– March 7, 2005: Idei, Ando resigned (6 internal boardmembers followed). => pulled down Kutaragi.– New leaders: Howard Stringer (chairman), Chubachi(president), Ihara (vice-president, CFO). (3 guys wereappointed by Idei).– Chubachi form Sony the way systematic, NOTCHARISMATIC.
Problems with Sonys Governing Structure (3)• Applicability of a Western-Style GovernanceStructure– Using outside directors can prevent CEO from makingwrong decision. BUT may effect to corporation byshort-term profitability.– Difficult to share interdivisional issue with otherdivisional heads.– Make confusion when add CEO, COO title (Westernstyle).– Middle managers confused whether to listen to.(CEO/COO/President?? Mostly they listen to CEO).
Problems with Sonys Governing Structure (4)• Conclusion: Sonys adoption of a Westerngovernance structure:– Take more costs than benefits.– Cant globalize Sonys system as it was supposedto.– Sonys management and EMPLOYEES were STILLFUNDAMENTALLY JAPANESE.
Samsungs Powerful Owner-Centered Structure• Emperor Management– Power authority held by chairman.– Benefits / Advantages:• Make decision quickly.• Take full responsibilities for its strategies.• Making a turning point to become the market leader.• Fit with High-risk and High-return industry .– Examples of benefits• Invested in 8-inch wafer.• Decided to develop LCD technology, PlayStation.
The Problems with Samsungs Governing Structure (1)• One-Man Decision-Making Structure– Powerful owner-centered system: Chairman Lee >Groups Office of Secretaries > Inner Circle => itmakes "wise emperor", and problems such as:• Uncertainty of leadership (no guarantee that suchleadership will be sustained).• Wise emperor PERSONALLY makes MISTAKEs.• Fired some executives who has concern about emperordecision.• Under "emperor management" system, the leadermakes both inspired & disastrous decisions.
The Problems with Samsungs Governing Structure (2)• One-Man Decision-Making Structure (cont.)– the URGENT TASKS for Samsung Electronic (orSamsung Groups) are HOW TO:• Assist the leaders decision making.• Present diverse opinions.• Reduce the risk of wrong decisions.
The Problems with Samsungs Governing Structure (3)• Sustainability of Family Control– Kun-hee Lee• Byung-chull Lee > Kun-hee Lee > Jae-yong Lee (Lees family own <=4% all Samsung Groups shares).• Kun-hee Lee (and his family members) hold ~22% shares ofSamsung affiliates.• Lee’s family use CROSS-SHAREHOLDING method to control, inheritbetween father-and-son, to hold largest shares of Samsung.• Chairman Lees family major shareholder: Samsung Everland(private owned firm) > owns Samsung Life (unlisted firm) > ownslarge shares Samsung Electronics.– Taking owner of private firms, unlisted firms... will keepLees family maintain power and control at SamsungGroups.
The Problems with Samsungs Governing Structure (4)• Sustainability of Family Control (cont.)– Jea-yong Lee• Inherited 6 billion won (cash) from Kun-hee Lee => 4.4 billionwon after tax.• Purchase stocks of UNLISTED AFFILIATES in Samsung Groups(ex: S-one).• Purchase CONVERTIBLE BONDS to take controls affiliates ofSamsung groups (continue CROSS-SHAREHOLDING method)• Samsung Electronic also support other affiliates (SamsungCard) under investment (no matter what objection fromforeign share-holders).– This kind of activities make CROSS-SHAREHOLDING ofSamsung Groups more complicated.
The Inner Circle within Samsung• OFFICE OF SECRETARIES:– TRAIN talent people, then send them to affiliates, in KEYPOSITIONs.– Quality for selection: LOYALTY with Group Chairman.(trust-base relation).– They have INFORMATION (promotion, leadership training,KPI...) among themselves.• GROUP OF ENGINEERS– They maintain Samsung Electronics technical expertise.• Mostly, employees from the 2 groups above arePROMTED to be a MANAGER (NOT ProfessionalManager)
Leadership of Professional Managers Issues• Lack of leadership by professional managers.• Chairman Lee makes ALL importantDECISIONs.• CEOs of Samsung affiliates OPERATINGdecisions UNDER parameters set by "Office ofSecretaries".• => All executives compete against ONEanother rather than CORPORATE.
Conclusion• Solution for Samsung? LOOK at Sonyexperiences, lessons learnt, they DID THETRANSITION from "Founder Generation -> toProfessional Managers".• BUT Samsung needs to prepare to avoidconfusions, interest conflict, culturedifferences.