South Korean Democracy’s New Challenge Is Its Own Corporate Giant

South Korea is the greatest success story of the coronavirus pandemic. Countless lives have been saved, the world has been given a model for success, and a nation’s faith in its leadership has been restored after years of obscene corruption. President Moon Jae-in’s approval rating reached a historic high of 71 percent this month, after a sweeping victory for his left-wing Democratic Party in the April 15 general elections.

South Korea’s coronavirus success has permanently reshaped its politics, seemingly shutting the book on its legacy of authoritarian rule. But that same success has also strengthened the most authoritarian power left in the country—Samsung.

Thanks to a health care system that ranks second to none, mass testing, and a vast surveillance system that made precise contact tracing possible, as of May 12 South Korea had only 258 coronavirus deaths in a country of more than 51 million people. Even though the country never went on a full lockdown, two weeks ago it reported no new domestic cases thanks to a combination of these measures and voluntary social distancing. To be sure, this victory would not have been possible without Samsung. But the company’s role should also urge caution.

South Korea’s chaebol, literally “wealth clans,” are family-owned conglomerates that came to power in the 1960s thanks to the protectionist policies of dictator Park Chung-hee. This kick-started South Korea’s economy. But it also transferred enormous economic and political power—often at the expense of the public—into the hands of these business empires, whose internal operations sometimes resemble Apple and Amazon less than they do North Korea. These conglomerates now account for 77 percent of the market value of Korean companies on the Asia300 Index.

Samsung is one of the biggest chaebols, and its fingers are in many pies. To begin with, it operates world-class medical research centers and hospitals nationwide, including the nation’s top hospital, Samsung Medical Center. South Korea has universal health care, but high out-of-pocket payments means 87 percent of Korean households also use private health insurance, and Samsung is the top provider. Samsung also makes coronavirus testing kits and donates them abroad. South Korea’s contact tracing program involves tracking Apple and Samsung mobile phones and pulling footage from CCTV cameras, which are mostly made by a former Samsung subsidiary, Hanwha Techwin.

Then there’s Samsung’s biopharmaceutical arm, Samsung Biologics. In the first quarter of this year, ending in March, sales for Samsung Electronics rose 5.6 percent year over year, while sales for Samsung Biologics jumped 65.3 percent. The company also ranked first in March for brand reputation among Korean pharmaceuticals. Last month, it clinched a $362 million deal to make coronavirus antibodies for a U.S. start-up and signed a collaboration deal with Asia’s largest pharmaceutical company, Takeda. Also last month, a U.S. biotech firm reported promising results in treating coronavirus patients with its HIV drug leronlimab, which Samsung Biologics will supply for up to $1 billion over the next few years.

But Samsung Biologics is also at the heart of the most controversial business deal in South Korean history. On May 26, 2015, Samsung’s de facto holding company, Cheil Industries, announced plans to acquire Samsung’s construction and trading arm, Samsung C&T. The all-stock deal offered Samsung C&T shareholders 0.35 Cheil shares for each of their C&T shares, effectively valuing Samsung C&T’s operating business at less than nothing. But that was beside the point. South Korea has the second-highest inheritance tax in the world after Japan. For the Samsung family, that comes to $7 billion, which is exactly how much C&T investors stood to lose in the deal. More importantly, Samsung Chairman Lee Kun-hee suffered a heart attack 12 months earlier and has remained hospitalized in a coma ever since. His son, Vice Chairman Lee Jae-yong, was eager to inherit the throne.

The younger Lee had been plotting his rise for years, snapping up stakes in Samsung affiliates, slowly tightening his hold on the entire organization. The merger was the royal intermarriage he needed, as it would further simplify Samsung’s convoluted ownership structure. Samsung C&T investors knew they were being fleeced. The proxy advisory firm Glass Lewis called the deal “profoundly unattractive,” while the hedge fund Elliott Associates sued to block the merger in a South Korean court but predictably lost. Still, Lee needed shareholder approval to move forward, and because he held 23.3 percent of Cheil but had no shares in C&T, as Choi Hyun-june of Hankyoreh later wrote, “it was in his interest to inflate the value of the former and deflate the value of the latter.”

A plan was devised to deflate Samsung C&T’s value by claiming that, despite a housing boom, it had supplied only 300 apartments. Once the merger was complete, the company announced plans to supply 10,994 apartments that month alone. At the same time, Cheil’s value was inflated by having its subsidiary Samsung Biologics report net profits over $1.5 billion for its subsidiary Samsung Bioepis despite continued losses.

The company also floated the possibility of listing Samsung Bioepis on the Nasdaq index, which it never actually did. This inflated the value of Samsung Biologics by $3.78 billion, which in turn boosted Cheil’s value and convinced shareholders that the absurd swap ratio made sense. The deal went through, Cheil ate Samsung C&T alive, and Lee became the de facto ruler of the Samsung empire.

Then in May 2017, Moon was elected president. Moon had promised corporate reform during his campaign, and in November 2018, South Korea’s financial regulator suspended trade of Samsung Biologics’ stock after ruling that the company “had violated accounting standards” during the merger. Samsung Biologics sued the regulator. To this day, the company is dealing with the blowback from the merger.

In April of last year, 355 plaintiffs sued in the Seoul Central District Court over the company’s accounting practices, seeking some $7 million. In December, three executives at Samsung Electronics were each sentenced to up to two years in prison for destroying evidence tied to Samsung Biologics’ accounting fraud. Last month, police summoned Samsung Bioepis CEO Christopher Hansung Ko for questioning over the matter, and Samsung C&T CEO Lee Young-ho was called in yet again to answer questions about the merger as part of a related probe. Last week, a former Samsung Bioepis executive testified that Samsung told the company in 2015 to float the idea of a Nasdaq listing to secure the merger. And this week, police summoned the vice chairman of a securities firm to ask him about his time at Samsung Biologics and the alleged accounting fraud.

Corporate power is the great counterforce to democracy in Korean society. Bribery scandals have tainted the nation’s last four presidents. The wives of senior members of Kim Dae-jung’s party spent $165 million in bribes on fur and jewelry. Roh Moo-hyun jumped off a cliff himself while being investigated for bribery involving Daewoo E&C. Lee Myung-bak was detained in 2018 on charges of bribery, which included allegedly taking $6 million from Samsung in 2009 in exchange for pardoning Lee Kun-hee, who at the time was in prison for tax evasion and fraud. And Park Geun-hye now sits in jail for charges including bribery, which included $7.1 million from Samsung. The country has yet to figure out how to handle the problem. In the meantime, many Koreans admire Samsung simply out of nationalistic pride, as a globally recognized symbol of Korean success.

The weeks ahead will offer insight into how far South Korea’s liberalization goes. The pandemic proves that the real secret to success for Samsung, as well as the nation, has always been the Korean people. Their health is thriving, as well as their democracy. The famous candlelight protests of 2017, which led to Park’s imprisonment, were the nation’s largest-ever. Last month’s general elections, held in the middle of a pandemic, drew the highest voter turnout in a generation. That might give the government the impetus needed to seriously tackle the chaebols.

Despite all the corruption, Samsung Biologics is now one of South Korea’s most successful businesses. Last month, Samsung as a whole surpassed Hyundai Motor to become the third-most valuable company in the nation, worth roughly 20 percent of the country’s GDP. Reform may yet come, but if the pandemic further cements Samsung’s power, it won’t come easy.

Correction, May 18, 2020: The biotech firm developing coronavirus treatments with HIV drugs, CytoDyn, is based in the United States. A previous version of this story mistakenly said the firm was Canadian.