– Published in The Wall Street Journal
Combustible smartphones are a symptom of deeper management problems at the Korean company.
The Galaxy Note 7 recall and cancellation isn’t the first time Samsung has suffered a quality crisis. But the scale and nature of this fiasco shows that the company can no longer rely on its traditional approach to setbacks. Instead, it must look for new ways to drive the company’s development.
Samsung has long used crises to motivate employees. In 1995, the new mobile phones that Chairman Lee Kun-hee sent out as gifts proved to be faulty. He had workers don headbands that read “quality first” and smash $150 million worth of phones and fax machines. Then they lighted a bonfire. Then a bulldozer razed whatever remained.
It may have been overkill, but Chairman Lee wanted to send a clear message: If we keep making bad products, we’ll come back and do this again. It’s a story that is repeated constantly within the company.
This time, there were no mass incinerations, no tears shed, no Samsung Men standing in formation. That’s partly because Chairman Lee has been hospitalized ever since his heart attack in May 2014. His son, Jay Y. Lee, Samsung’s vice chairman, is effectively running the company.
More importantly, Samsung, having reached the top of the global industry, can no longer rely on the culture of crisis that once kept it moving. The Galaxy Note 7 blunders far outstrip what happened in 1995—and are unthinkable for a world-class corporation. Samsung now needs to prevent crises so it can stay on top, not use them to catch up.
Today the company is staffed by some of the world’s finest engineers and designers whose careers don’t depend on an emperor. The workforce is more professionalized but less enthusiastic. Employees say the company is beset by bureaucracy, complacency and petty internal politics—similar to the problems that undid erstwhile rival Sony .
Under Vice Chairman Lee, Samsung has made some progress at reform, selling off noncore assets and affiliates to trim down this sprawling empire. But the pace of change has been modest.
Now an unusual trifecta of problems is suddenly converging, offering Vice Chairman Lee an opportunity to prove himself. In the short term, he will have to reboot the Galaxy phone brand. In the long term, he’ll need to define a clearer direction into new growth areas and against Chinese handset makers.
Finally, and the most sensitive of all, he’ll need to simplify Samsung’s complicated ownership structure and smooth relations with shareholders such as Elliott Management.
The solutions for the first two depend on fixing the company’s hierarchical culture. The rush to beat Apple’s iPhone—and the reluctance of its authoritarian bosses to have an open dialogue about Samsung’s problems—probably contributed to the Galaxy Note 7 fiasco.
Vice Chairman Lee will need to dismiss aging managers who are too enamored with Samsung’s old engineer-focused culture. He’ll need to make room for a new generation of thinkers in marketing, design, software and other creative fields who can be entrusted to manage their own affairs. Lay-offs will invoke a different kind of crisis, but one that Samsung needs to have to open space for a younger and less authoritarian generation.
Addressing this dynastic culture will require uncomfortable steps. That includes weakening the founding Lee family’s hold on Samsung Group. This is the vast web of companies that own pieces of each other through cross-shareholding.
For decades, activist shareholders have challenged this notoriously unaccountable governance structure. The Lee family effectively controls the group—including its crown jewel, Samsung Electronics—with a relatively small number of shares. Passing control across generations has created governance problems, including criminal convictions and presidential pardons of Chairman Lee, and the convictions of a handful of other executives.
Weaning Samsung off a culture of reverence for its founding family will require untangling its cross-shareholding structure and forming a holding company. On Oct. 5, Elliott Management proposed just this sort of consolidation. Samsung hasn’t publicly responded. But it’s in the long-term interests of both the Lee family and minority shareholders to streamline Samsung’s ownership structure. This will free up its people and resources to make good products rather than play family politics, and raise its undervalued share price on stronger investor confidence in its governance.
Mr. Cain, a Seoul-based journalist, is writing a book about Samsung due from Crown.