Samsung and HP Case Ian McCarty Justin Jenter Yama Najib

1. Samsung A. What did the Lee Family do that was illegal and/or unethical and why this a breach of their obligations to shareholders? The Lees have been seen as being unethical as they had conducted tax evasion sand by how their actions have not been in the best interests of shareholders (breach of fiduciary trust). Chairman Lee reportedly owned $4.6 billion worth in Samsungs insurance. He also allegedly had cash and bonds hidden in at least 1,200 brokerages and bank accounts that were registered to other former and current Samsung executives. Lees son, Lee Jae Young, was not innocent either as he had back in 1995 bought $4.6 billion worth of Samsung stock and within the following two years of purchase sold the shares earning him a hefty profit of $62 million. B. How did the Lee family retain control over Samsung despite not having majority ownership of the company? The Lee familys interest in the Samsung group has created an Agency problem between shareholders and the way in which the company is being managed. According to the Samsung Under Siege article, Chairman Lee Kung and family only owns 3% of all Samsung shares but they still have substantial control over the companys management and actions. This fact, in itself, creates problems within the agency over the Lee family has faced much tension by shareholders wishing to reform the company and remove some of the Lees power of Samsung.

To assure that the Lee family would still be the dominate power in Samsung, in 1995 Lee Jae Young and his sisters exercised their stock options equating to $9.9 million that gave the family rights to Everland, a Samsung affiliate amusement park. As a result of this transaction, the Lee children now owned 64% of Everland and the Korean government found that the price per share came out to be $8 a share when market value was about 11

times that amount. This also led to the Lees able to own 18.4% of Samsung Life, an insurance affiliate of Samsung and it was found that the Lees purchased shares of Samsung Life at 2% below that of estimated fair market value. As a result of all these transactions it was then found that the Lee family now owns 7.3% of Samsung Electronics and this further enraged the agency problem because they purchased shares at below fair market value.

C. Why havent other Samsung shareholders exerted their influence and prevented these abuses? As stated previously, the Lees have substantial control of Samsung and have membership at almost every level of management of the company including the Board of Directors. They have carefully crafted the board and have selected friends and other key collaborators to be sure that they have control of Samsung. Everland shareholders did not complain about the change in control as the majority of remaining shareholders were a part of the Lee Family. It can be said that no matter which part of the Samsung business you encounter it is inevitable that it will be in some form controlled by the Lee family.

D. Why hasnt the South Korean government stepped in and stopped the Lee family? Every time that the South Korean government has tried to stop and prevent the Lees from controlling power, the Lee family gives a generous charitable donation made on the familys behalf and the government abandons its accusation. An example of this occurred back in 2005 when Chairman Lee left the country for 5 months because of an investigation that the government was making about alleged illegal donations to presidential candidates. Upon Lees return, he simply donated $825 million to charity and the government suspended its investigation about the illegal donations. Samsung is

being reported as testing the limits of the South Koreans government authority over large conglomerates headquartered within its borders.

2. Hewlett-Packard A. Why has HP seemingly lost its way? HPs recent history is the start of HP losing its way beginning with the resignation of CEO Carleton Fiorina and replacing her with Mark Hurd. At the start of CEOs Hurd reign as CEO things were looking very positive for HP. Revenues were up in his first five years and the stock price was increased by 130%. The trouble for Hurd began when he was accused of having a sex scandal and the board fired him and cited this as a violation of a HPs standards of business conduct. It was later determined that the Boards decision to fire Hurd was not because of sex scandal but because the Board and Hurd had different goals and objectives for HP. Hurds success was in short term financial metrics and he did this through cutting research and development expenses. This was a problem because research and development is one of HPs core competencies and it was brought down from the original 9% of sales to being 2% of sales. With the lower research and development expenses, HP was unable to keep up with the competition. Yet problems still continued as HP replaced Hurd with Apotheker and this was most attributed to the board hiring the man before meeting him and researching his qualifications. With the selection of Apotheker as CEO, HP became the laughing stock of its industry as Apotheker not very reputable in the United States.

There are two very probable causes to HPs recent demise and that is for the lack of synergies within the companys business units and its poor corporate governance

system. It seems that the common morale of HP employee ranging from the technical core up to management as well as the Board of Directors is very low and this seems reflective of little to no synergies. It also seems that no HP employee is in it for the long run, especially when the Board was looking to hire a new CEO following the firing of its former CEO Mark Hurd. This was because everyone of the board seemed pretty content in hiring Mr. Apotheker as new CEO without even interviewing him. When a member of the board was question about it this was the response I admit it was highly unusualBut we were just too exhausted from all the infighting (Stewart, Pg 1). This also explains the lack of synergy as according to the board member that there has been a lot of tension especially when the board has had to fire two CEOs in a very short time. In summary HP losing its way can be said as that it is unable to combine its organizational abilities with effective corporate governance measures put into action.

B. Why is the board of directors apparently unable to function in a manner that helps HPs stockholders? The purpose of the Board of Directors towards a company is to help bring remedy to the agency problem between shareholders and management. HPs Board of Directors only makes the agency problem worse as it seems theres an agency problem within itself. It seems that most HP board members think that other board members are thinking only for their own personal benefit and not for the benefit of shareholder. There is also a lack of synergy on the board as board members argue about every decision that is made and do not look for ways to bring remedy to the issue. This also leads on the next point how none of the Board members care enough to interview Mr. Apotheker to be sure that he is the best fit for HP. As stated in the previous question, one board member said that they were all too tired to interview the potential CEO

candidates and that they were sick of all the disagreement between members of the board.

C. What flaws do you see in the current corporate governance system and how would you fix it based on the case? This case brings to point that a qualified team of board members is not necessarily a successful team, especially is there is a lack of synergy between its members. It also shows that board members and CEOs need to be working together because the board is not there simply to hire and fire the CEO but there to offer advice as well. They also need to be sure that there is adequate compensation system put into place to be sure CEO interest align with shareholder interest. HP in this case does not have an adequate compensation system as when fired Mr. Hurd he received a severance package that was valued to be worth between $40 to $50 million. HP also needs to be sure that it bases CEO pay not only on short term finance performance but long term financial performance as well and that financial incentives should be based on more than just short-term goals.