From founders to professional managers

Created by Binh Truong

Study on Corporate Governance Structure of SONY and SAMSUNG

Agenda

• Case studies• Sony's CEO and Governing Structure• Problems with Sony's Governing Structure• Samsung's Powerful Owner-Centered

Structure• The Problems with Samsung's Governing

Structure• Conclusion

Current case studies

• Samsung: Chairman Lee > Office of Secretaries > Affiliates leaders

• Sony: CEO for each its individual business units (companies). But not from inside out.

Sony's 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 their

personal relationships).– 2nd generation: Ohga, continued decision-making

pattern of Ibuka, Morita. (Ibuka: Trinitron TV, Morita: Walkman, Ohga: PlayStation).

• => Autocratic management style– Loyalty & commitment were expected for inner circle

members.

Sony's 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, and

supervisory rights.

– Sony Group's board divided: 10 executive officers, 3 outside directors.

– In 2003, Sony implemented: outside director system, and committees (Nomination, Audit, Compensation committee...).

– By 2003 time, Sony has > 50% outside directors

Problems with Sony's Governing Structure (1)

• Succession and Leadership– Former executives were angry, unfriendly with new

governing structure (because LOST POWER).– Lacked supports from analog era's engineers (from

electronics sector). – Previous analog technologies engineers PASSIVELY RESISTED

digital technologies. – Easily FALL into chaos IF LEADERSHIP NOT STRONG ENOUGH.– Inconsistency between leadership and corporate culture.– Professional manager were taking reins from founders,

owners.

Problems with Sony's Governing Structure (2)

• Internal Politics– "Creative destruction": The appear of Kutaragi, close the

PTC, NACS => Destroyed Idei's network strategies.– Kutaragi, Ohga criticized both Idei, Ando for missing

transition time.– March 7, 2005: Idei, Ando resigned (6 internal board

members followed). => pulled down Kutaragi.– New leaders: Howard Stringer (chairman), Chubachi

(president), Ihara (vice-president, CFO). (3 guys were appointed by Idei).

– Chubachi form Sony the way systematic, NOT CHARISMATIC.

Problems with Sony's Governing Structure (3)

• Applicability of a Western-Style Governance Structure– Using outside directors can prevent CEO from making

wrong decision. BUT may effect to corporation by short-term profitability.

– Difficult to share interdivisional issue with other divisional heads.

– Make confusion when add CEO, COO title (Western style).

– Middle managers confused whether to listen to. (CEO/COO/President?? Mostly they listen to CEO).

Problems with Sony's Governing Structure (4)

• Conclusion: Sony's adoption of a Western governance structure:– Take more costs than benefits.– Can't globalize Sony's system as it was supposed

to.– Sony's management and EMPLOYEES were STILL

FUNDAMENTALLY JAPANESE.

Samsung's 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 Samsung's Governing Structure (1)

• One-Man Decision-Making Structure– Powerful owner-centered system: Chairman Lee >

Group's Office of Secretaries > Inner Circle => it makes "wise emperor", and problems such as:• Uncertainty of leadership (no guarantee that such

leadership will be sustained).• Wise emperor PERSONALLY makes MISTAKEs.• Fired some executives who has concern about emperor

decision.• Under "emperor management" system, the leader

makes both inspired & disastrous decisions.

The Problems with Samsung's Governing Structure (2)

• One-Man Decision-Making Structure (cont.)– the URGENT TASKS for Samsung Electronic (or

Samsung Groups) are HOW TO:• Assist the leader's decision making.• Present diverse opinions.• Reduce the risk of wrong decisions.

The Problems with Samsung's Governing Structure (3)

• Sustainability of Family Control– Kun-hee Lee

• Byung-chull Lee > Kun-hee Lee > Jae-yong Lee (Lee's family own <= 4% all Samsung Group's shares).

• Kun-hee Lee (and his family members) hold ~22% shares of Samsung affiliates.

• Lee’s family use CROSS-SHAREHOLDING method to control, inherit between father-and-son, to hold largest shares of Samsung.

• Chairman Lee's family major shareholder: Samsung Everland (private owned firm) > owns Samsung Life (unlisted firm) > owns large shares Samsung Electronics.

– Taking owner of private firms, unlisted firms... will keep Lee's family maintain power and control at Samsung Groups.

The Problems with Samsung's Governing Structure (4)

• Sustainability of Family Control (cont.)– Jea-yong Lee

• Inherited 6 billion won (cash) from Kun-hee Lee => 4.4 billion won after tax.

• Purchase stocks of UNLISTED AFFILIATES in Samsung Groups (ex: S-one).

• Purchase CONVERTIBLE BONDS to take controls affiliates of Samsung groups (continue CROSS-SHAREHOLDING method)

• Samsung Electronic also support other affiliates (Samsung Card) under investment (no matter what objection from foreign share-holders).

– This kind of activities make CROSS-SHAREHOLDING of Samsung Groups more complicated.

The Inner Circle within Samsung

• OFFICE OF SECRETARIES: – TRAIN talent people, then send them to affiliates, in KEY

POSITIONs.– 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 are

PROMTED to be a MANAGER (NOT Professional Manager)

Leadership of Professional Managers Issues

• Lack of leadership by professional managers.• Chairman Lee makes ALL important

DECISIONs.• CEOs of Samsung affiliates OPERATING

decisions UNDER parameters set by "Office of Secretaries".

• => All executives compete against ONE another rather than CORPORATE.

Conclusion

• Solution for Samsung? LOOK at Sony experiences, lessons learnt, they DID THE TRANSITION from "Founder Generation -> to Professional Managers".

• BUT Samsung needs to prepare to avoid confusions, interest conflict, culture differences.

FAQ ?

Thanh you!