How is Lee Kun-hee able to retain absolute control over the Samsung Group when he owns only 1.07% of the company?

Answer by Wonwhee Kim:

The answer is: a) the holding company structure is how the Lees currently maintain control over the Samsung Group, b) BUT their control is definitely not absolute.
a) Analyzing company ownership structures in Asia is actually one of the ways equity analysts incur the most brain damage.
One time I asked a Korean equity analyst at Morgan Stanley about the ownership structure of Hyundai and she literally facepalmed herself and shut down in the middle of a meeting.
The reason is that Samsung, like most Korean conglomerates, is held by the founding family through two types of ownership: direct stakes by individual family members, as mentioned in the question/article, and indirect stakes through companies that they control.
Here’s the latest clear chart (as of Feb 2016) I could find below with some annotations, which includes the cats cradle-type ownership origami activities the group has done over the last two years.  Since the last chart was made in Anonymous’ answer, the Group has done a conversion of its circularity into a holding company structure, and also merged a few entities.
If you see below, note that the Lee family directly owns 31% of Samsung C&T.  This is essentially the holding vehicle through which control over all the other companies is kept.  Now it is probably more clear if you look at a specific example. Take the Group’s (rapidly diminishing) flagship Samsung Electronics.
Note here that Samsung C&T, which is controlled by the Lees, owns 4% of SS Electronics.  SS Life owns 7%, and SS Fire & Marine (grey untranslated box) owns 1.3%, for a total of about 12-13% owned by other SS Group companies.
So how does the family actually control it?
First, as of yesterday (Feb 15), Lee Kun-Hee owned 3.44% of SS Electronics directly, which is not shown here as the diagram is only B2B relationships.  That means about 18% of the outstanding shares were controlled by the family + family-controlled companies.
Next, this 18% of the outstanding shares actually represents more than 22% of  voting shares.  This is because SS Electronics holds treasury shares that it hasn’t retired (which have no voting rights), and the company also has another class of common shares that have no voting rights.  Eliminate these and the family’s stake is 20%+ in voting.
Your first question is, back up, how, then, does the family control SS Life, SS Fire, and SS C&T?
Assume for now that the family controls C&T.  C&T owns 19% of SS Life.  Lee Kun-Hee separately owns more than 20% of SS Life, and other family-controlled entities such as the Samsung Cultural Institute (not pictured here) combine stakes for more than 47% by the family.
SS Fire is similarly controlled about 18% by the family, 15% of it through C&T, and another 3% through the cultural institute.
Now your next question is how the family maintains control over these companies with such low stakes?  Take SS Electronics again – even if the company is 22% controlled by the family, 78% of the shares are owned by others!
First, Korea’s National Pension Service, a long-term investor if there ever was one, owns a 8% block of the company and cannot be counted on to vote or move against company management (more on this later), leaving only 70% that is effectively distributed over thousands of individual investors.
Now, in the case of Samsung Electronics, even if someone wanted to, it would be almost impossible to amass a large enough position to match the 20%+ control that the family holds to oppose or overrule their vote – this is because it is prohibitively expensive (20% of the $160b USD market cap is more than $30b) and would be even more expensive as you started buying; you cannot buy a stock in such vast quantities without alerting everyone on the street and you would start getting matched by the Lee family or others would pile on as well, driving up the $30b price tag to…however high it can go.
So – although it is not immediately obvious, that 22% voting share control is a de facto control over the company and its decisions.  And this -> is the case for virtually every company in that chart you see above.  In one way or another, the family exercises control over the decision-making through indirect control via C&T, direct ownership stakes (as in Lee Kun Hee’s 20% ownership of SS Insurance), indirect ownership through secondary/tertiary controlled companies like the cultural institute, embedded managers loyal to the family, hidden treasury shares that actually help inflate the voting stake, and large passive investor blocks like the NPS or big mutual funds and/or sovereign wealth funds.
And back to the first assumption about C&T; the family owns a 30% stake in it directly and other Group companies own 9% (look at the arrows pointing in).  Yes, there is still some circularity.  But the total stake that the family + Group companies have in C&T is 40%.  Which is much larger than that 22% above and is basically firm control.
This is not absolute control.  But it is control.
Because the shrewder minds among you might think, ok, there are plenty of other companies within the Group that are less expensive that might be worth targeting, if you wanted to wrestle control away from the Lee family right?
b) That is exactly what Elliott Associates (a US-based HF) tried to do last year.  It held about 7% of Samsung C&T, which up to then was just another group company.  So to go back to that chart above, Cheil Industries was the entity at the top, and Samsung C&T was elsewhere in the constellation and actually owned by SS SDI and SS Fire & Marine.
Before the merger, Elliott’s 7% stake was even more than Lee Kun-Hee’s individual 1.4% stake.  However, note that if you added up the stakes of SS SDI and SS Fire & Marine, the family effectively controlled 14% a la the above.  In May, Cheil Industries, the family holding vehicle, announced a takeover offer for C&T at a bargain basement price that did not sit well with many investors, Elliott among them.
Elliott tried to block the bid and force C&T to hold out for a higher price, but because the whole reason for this merger was to consolidate/solidify family control over the Group, the family fought only as those who are desperate could, using such tactics as calling individual shareholders (housewives) at home, while branding Elliott as just another one of those ‘foreign hedge fund vultures’.  The vote barely passed with 69.5% in favor.  They needed 66.7%.  During the battle, people wondered which way the NPS would vote with their 11% stake; ultimately it was in favor as well.
So – their control is not absolute.  But it is difficult to unseat them.  If even a company that was only about 14% controlled by the Lee family & Group companies was ultimately revealed to be ‘controlled’ by the family, imagine what would happen if someone tried to take control of some of the other companies, crown jewels like SS Electronics or Life among them, controlled in much larger amounts by the family.  Probably nothing.
I was rooting for Elliott.  This is why Korean conglomerates are in trouble; they seem to be spending more time trying to figure out dynastic succession issues and how to avoid inheritance taxes than how to innovate and create value.  It’s why ROEs and ROIs are so low and shareholders demand discounts to own them.

How is Lee Kun-hee able to retain absolute control over the Samsung Group when he owns only 1.07% of the company?

Leave a comment

Filed under Essays

Some thoughts as I attend a design meeting with county-level officials in Jiangsu, China


These are some thoughts I took down while attending a design charette.  Jiangsu is one of the wealthiest provinces in China, but as in most areas of China, there is great variability in…just about everything.  Standards of living, degree of globalization, urbanization, levels of sophistication.  As you travel from Nanjing to the countryside, you can feel an exponential drop-off in the degree of development, the pace of life, the number of cars and road maintenance, with corresponding surges in the craziness of the drivers, the number of rice fields, the difficulty of understanding the local dialect-inflected speech.

We are gathered here, this week, with the mayor of the village whose land will be redeveloped, the minister of tourism, the minister of the waterways and agriculture, various other officials, and a cultural authority who we are to consult.  The cultural authority plays the part with a long wiry beard, straw hat, and billowing, linen clothing.

On Saturday, as soon as we land, the minister of tourism takes us on a bike ride around a 100-hectare nature preserve, with pine trees planted at almost scientifically exact intervals that create an almost fractal effect as you ride through them.  It is hot, but the pine trees create shade, and are embedded in some sort of green, neon muck that looks like ectoplasm.  Cranes roost and preen, and the air is crisp and quiet.

1. On Sunday we begin.  We are almost all wearing polo shirts with khakis and jeans, although the Westerners are dressed more formally than their counterparts at the other side of the table.  They are diligent and polite, and I note that weekends are not observed here, and note with respect that even these government officials are working seven days a week.  The designers lead the session, taking us through the steps that need to be taken, the importance of preserving the cultural authenticity while enlivening its most salient aspects.

Over the next few days, I notice that as is characteristic when too many people are in one room, that there has now been a dissipation, and abdication, of responsibility.  Minor secretaries and other associated people whose identities I do not know, file in and out of the room, attending but not participating in the meetings.  They sit in the back row of seats arrayed behind the main table, and along the walls.  During the charette there is much speaking into ears among the officials, in voices that are still loud enough for everyone to hear.

The officials enter and exit at will, announcing that they have some important business and will be back later.  When the designers begin asking questions, many of the officials exit with panicked looks on their faces, excusing themselves during convenient points during interpretation and translation.

There are those who still participate, however.  The cultural authority has a long gray, wiry beard, looking like one of those Chinese wise men of old, and with the loudest voice and most obnoxious ringtone, which summons him out of the room about three times a day.  The minister of tourism has a higher voice and thin hair, and is wearing a lavender shirt with two buttons unbuttoned at the top.  He is proud of his English, and practices it at every occasion, stubbornly refusing to switch to English even when no one, including the interpreter, understands his Mandarin.  During the proceedings in English, he exclaims, repeating words that he has just recognized, loudly, and tries his hand at being the interpreter to the confusion of all those involved.  He is quite active, peering at our computer screens while the meeting is in session, and is the most significant devourer of the m&m’s placed on the table.  When he answers his phone, he always begins speaking in a loud voice first, and only after several seconds does he leave the room.  The assistant minister is a tawny, thin man with jet black hair.  He sits closest to the whiteboard, and gets up every fifteen minutes to answer his phone.  An assistant sitting next to him does the same.

2.  It is a different story when a person of some authority enters the room.  Although I do not know the identities of these people, I know exactly when they enter, because as if in anticipation, all these minor level officials scurrying about to set up the appropriate number of chairs, and everyone arranges themselves in an invisible, deliberate way, so that the seats closest to the figure of authority have been duly arranged in a way of decreasing authority.  No one sits, until the person of authority sits.

Now, for the first time, none of the officials leave the room.  They shut off their phones when they ring.  And finally, to the delight of the designers, they actually answer the questions when called upon.  They excitedly call out their thoughts, like eager schoolboys announcing an answer to a question they know the answer to.  All of a sudden, they are eager to volunteer.  I realize, as I look up from taking notes on my computer that there are no less than 30 officials sitting in the room.

3.  It is important to note that these officials are in charge of spending the tens of millions of dollars that will bring in a sizable development to their village.  These same officials, who for three days straight, did almost nothing but tap their feet impatiently, leave the room to talk about more important matters, while return only on the last day to demonstrate to the Province-level official that they have been fully engaged and involved.

Every day for lunch, there is a banquet around a large round table serving no less than fifteen courses of local delicacies.  The last night’s banquet takes place in an indoor bamboo pavilion that looks like a treehouse.  There is baijiu and wine and beer and merriment, and enough food to feed twice as many participants.  I like them all.  They are full of boyish energy, and the freewheeling energy that comes with the belief that it will be someone else, whether it is the Western designers or consultants, whether it is the higher-level officials, will come in and make all the right decisions for them.

Leave a comment

Filed under People, Places

January Notes

1.  Everyone should read this post and map out their own lives on Excel or whatever tool suits you best.  Breaking it down one week at a time, is a meaningful unit to visualize your life and manage the time you have left.

Assuming I may live to 90, here’s mine below.  This exercise can be depressing or inspiring, but this is essentially a wealth visualizer.  Each block below is how many weekly units of time you have left to spend, so spend wisely.I’ve found that this helps encourage long-term thinking.


2.  I’ve been reflecting on a conversation I had with a hedge fund PM last year.  Interpret it how you will.

Me: “I really recommend reading this book, 4 Hour Workweek, by Tim Ferriss.”

Him: “What’s it about?”

Me: “Just about productive living, just like the title says, techniques that will help you reduce your workweek by hours at a time.”

Him: “I see.  But if you only work 4 hours a week, what are you supposed to do in the rest of the time?”

3.  Endurance by Alfred Lansing is about the Shackleton expedition to Antarctica in 1914.  The expedition failed and their ship was lost, but all the men made it back alive.  Read this, and forever have the following things to write in your gratitude journal: dry clothes, shelter, a diet other than just seal blubber, warmth, stable land under your feet and while you sleep.

I can’t imagine what, after going through a two year journey in the Antarctic stuck on various patches of ice and navigating hundreds of miles of ice water in open water boats, you would do as your second act.  What next?  Did everything feel anticlimactic afterwards?  Did they feel grateful, every day for the rest of their lives?

4.  The American by Henry James.  This is a story of a wealthy American who goes to Paris and ends up looking for a wife.  Written in the 1870s.

I’m struck by: the custom of salons and people seeming to ‘pay a visit’ on each other and sitting around in groups in these rooms.  How did you choose which drawing rooms to go to?  Also struck by how James spends paragraphs, if not pages concentrating on how a character thinks, looks, and acts in a particular instant.  Very nuanced character pieces.

5.  Conor McGregor.  No better showman in the fight business today and perhaps no one more articulate, either.  Fight scholar, best dressed, versatile, confuses opponents with varied styles, and an heir to Bruce Lee.  And I hope he doesn’t get distracted and forget what got him there, i.e. Ronda Rousey.

He and Floyd Mayweather understand that the fight business is a business, and not just some kind of system that pays you concomitant to your abilities.  His answer here to Mayweather’s comments about race, more than anything McGregor has actually explicitly said, show that he understands what it means to be an underdog and be oppressed.  You can be classy and empathetic, and it’s possible to be the first without the second, but he was both here, and that more than anything – to me – shows that he is more like Floyd than Floyd thinks.

6.  Lately I find myself asking others what I used to be like 5, 10, 15 years ago, because I don’t really remember..


Leave a comment

Filed under Essays

A Year at a Hedge Fund

…Is probably still fresh enough to notice how different this business is from any other, while having been here long enough to add substance to my observations.  And that is the starting point of this piece.

First, this is my first job in proper finance.  The first thing I noticed, and was pleasantly surprised by, is the fact that I could not imagine ex ante the level of service and responsiveness you get when you’re in finance, especially when you’re the client.  Where else can you get multiple Ivy League-degreed people as basically your customer service reps, answering your questions with a phone call or dispatching someone to your office to fix the issue, five minutes after you send an email, all day, every day?

I can see why people in finance are impatient with almost everything else in life, because the speed at which the world moves and communicates is blinding.

Before I entered this business, what I thought was that there was simply a way to just figure things out – through dogged research and analysis, to discover an insight that no one else in the world knew, as a scientist would, like you were solving a puzzle.  In fact, if you read about some of the greatest trades ever made by fund managers over the years, this is the impression you get.

I always thought that the greatest hedge fund managers were the world’s best systems thinkers, in that they knew how the world fit together and how it worked.  As an MBA I used work with a fund manager based in San Francisco.  I remember every afternoon I came home from a discussion with him, I had to just lay down, to decompress from what I can only term an extreme cognitive load of trying to understand what he was talking about, as he started discussions on a random topic, like say the Chinese energy market, and draw a series of successive related links that had him discussing the caloric intake needs of sub-Saharan Africans five minutes later.

I admired this level of intelligence, one that rivaled the highest level of thinking on the planet, and one that was so eminently practical.

And as it turns out, that impression is correct.  That is a skill you need, the ability to think well.  But it’s not all.  Making money as a fund manager is not just about being among the world’s greatest systems thinkers.  It is also about being a supreme risk manager (i.e. good gambling instincts), having the temperament of a Stoic, and the clarity of a monk.  It helps to enjoy it, too.

One, even if you are right on your grand idea, you can still be wrong in so many ways.  If you didn’t size your winning position correctly, if you didn’t get in at the right time or got out at the wrong time, if you got the macro wrong, if you missed the central bank policy, if the rest of your positions don’t go the right way, you can win but still lose overall.  Getting the research right is difficult, then sizing everything so that your portfolio actually beats the market is like an exponential compounding of that difficulty.

*Of course, a lot of this stuff goes away if you’re not an active manager; i.e. you buy and hold forever, or at least have very patient investors (e.g. yourself only) who won’t react to swings.

Two, then you also need the capacity to absorb pain.  It’s physically wrenching, as I discovered in August, when the markets head south and all your well-reasoned theses are dragged down with it.  Can you withstand that pain, of watching as every day your positions are dragged down and then not doubt yourself?  Some investors ask for updates every week or every month.  Humans are wired for pain avoidance, and looking at the positions themselves cause you pain.  Thinking about how much money you’re losing causes you pain.  Having to write it in an update or newsletter causes even more.  You can avoid the pain by denying it.  You can avoid it also by excising it, like dumping your positions.  If you know you’re right, though, you should actually be buying more.  Do you have the temperament to do that?  Using an athletic analogy, this is like championship athletes having to watch tape of their mistakes – and instead of being able to go out and practice and ‘get ’em next time’, having to sit still instead.

Like I said, extraordinarily difficult, and yet another exponential compounding of the skill required.

Third, here comes the most wrenching part, which is that you have to constantly be reassessing your own mental process.  This has been the most difficult for me, because it’s the most profound.  Your mind, the very tool which you use to think, has to use its own abilities, to judge its own quality of thinking.  It seems self-referential, reflexive, paradoxical.  Even in the physical world, hasn’t it been proven that the very act of observing an electron change its characteristics?  How do you do this?

Are you being compelled to act…out of fear?  Are you following the herd?  Are you being stubbornly contrarian (in which case it’s as bad as following the herd)?  Are you acting out of…a bias towards action?  Are you recommending this name…out of recency or availability bias?  How much are you relying on the chatter of the Street that envelops and bombards you in 4D, through your email and chat and Bloomberg, through every luncheon or meeting?  Why do I think what I think, and how much conviction do I have in this position?  Is it real?  Do I know it will make money?  Or am I hoping?  And if I made money, was it luck?

At times it can seem in this business, that you’re drowning in a sea of possibilities, where it’s unclear what’s real and what’s not.

My conclusion, which is wholly unoriginal by the way and merely an echo of every other investor’s advice, is that the only way to succeed in this business, as in all games of extreme uncertainty, is to construct a process.  Because this is like building a physical thing, a crutch outside of your own mind, so its biases don’t get in the way.  Then you follow that process, letting it guide you out of the darkness, fumbling here and there, and using that feedback when you hit a wall or fall off a cliff to revise or add on to your process, your construct.  This takes decades.

So, paradoxically, you can’t want to do it just for the money.  You might get lucky for a market cycle then blow up in the next one.  You have to just love this stuff and think about it all the time.  The competition is just too great, the stakes are just too high.

Leave a comment

Filed under Essays, Uncategorized

The Marks Left on Us

I once read a beautiful passage about death, to the effect that it impacts the living by anchoring us to a place.  For years I carried that quote with me, not understanding what it meant.

One of my best friends, Daniel, died when we were 19.  Now, half that span of a life later, I can begin to understand what the author was trying to say.  As I’ve grown older, Daniel has stayed the same age.  Yet he doesn’t seem any younger than me.  In a sense, my frame of reference when I think of him is those days of ambition and excitement, of encouraging each other as we wondered who we would become and what the world held in store for us.

As I’ve grown older, whenever I do anything, I always wonder how Daniel would react, what he would say, what insults he would heave upon me when he detected falsity, what truth he would bring out in me.  He was training to join the LAPD when he died, and he always told me to come back home.  I rarely have.  The way his death anchored me was not in any physical manner.  It was from the fact that unconsciously, I’ve lived to make sure I didn’t become someone he didn’t recognize.

My friend Yaleny succumbed last year to a cancer that started in her ovaries and metastasized crazily fast.  It was less than a year from her diagnosis to her death, and only about a year after she got married.  She was the woman who cut my hair.  But she was more than that.  In 2008 I went through a terrible time after the financial crisis, and the warmth and kindness she showed me when we first met helped me out of a cold depression, the kind that distorts your everyday interactions and destroys your self-confidence.  Sometimes we did not talk much at all, because she sensed I was in no mood to do so.  When I think of her, I think of the imprint of her warmth helping me pick up the pieces of my self.

There are things that are both unquantifiable and ineffable, and love is one of them.  This year my daughter was born, a month before Yaleny died.  And when I pick her up, embrace her, or smile at her, my deepest wish is to impart to her that she is surrounded by love.

Leave a comment

Filed under Essays

HK Taxi Drivers

Two days ago on a ride from the airport into Central Hong Kong, I had another gangster taxi driver.  

I use the word gangster in a colloquial sense, implying someone who is ruthless and capable at the same time.  It reminded me of a ride I had two years ago to the airport, when I got into the cab with a man dressed in a white polo with a popped collar, aviator sunglasses, and perfectly coiffed hair.  After asking me when my flight was, he peeled off and practically drifted around corners as we flew down the hill.  It took me 3 minutes exactly to get to the Hong Kong Express, even though we passed major thoroughfares like Queen’s Road with Shibuya-like, human-tsunami intersections.  

My taxi driver this time was a guy who had on driving gloves and compression shorts, presumably to help the calf strain in pressing the pedals.  He also even had modifications to his car like wide angle rearview mirrors to help in his performance.  

The point of this post – long live people who are serious about their jobs.  

Leave a comment

Filed under People, Uncategorized

Money Thoughts

What do I think about it?  Some related and non-related thoughts that have been brewing in my mind the past few months:

  • Occasionally over the past two years, when I have too long of stretches of working from home, I’m clawed with anxiety.  Not because I’m not getting paid, but because I don’t feel connected.  When everything is communicated over email and Dropbox, it’s too easy to feel like you have no impact on the world.  Client receives report.  Emails questions.  Wires money.  The end.

    I visited a few clients last year, three real estate moguls in their 60s and 70s.  One owned a portfolio of buildings in West LA.  Another was a developer in the Valley.  Another owned a chain of movie theaters.  All of them had enough money to retire and more.  All of them showed up to work at 7 am, and two of them worked out of small drab manager’s offices carved out of leftover space in the buildings they had developed/owned.  I’m talking about a desk topped with overflowing papers in a 300 square foot room.But I think I recognized something in that.  They feared being irrelevant.  I do too.  And that may drive me more than the prospect of retirement.

  • My most spendthriftiest years were when I was drawing a steady paycheck.  Since I knew exactly how much I was going to make, I would justify all impulse purchases by doing a quick ratio of [spending]/[next bi-weekly paycheck].  If it was less than 1, I would feel fine.  If it was over 1, then I would substitute [next bi-weekly paycheck] with [next month’s total paycheck].  I think this is because there was a disconnect between my efforts and pay.  Maybe over the average of a year, it would probably be equal.  But sometimes I worked double overtime and the pay would be the same as when I snuck out of the office for three hours to go read a book at a the bookstore.

    I noticed this too when I was working with real estate brokers ten years ago in 2004-2005.  When money is falling out of the sky, it doesn’t feel like that money is even yours.  These guys would change their cars every week and spend it every night at clubs of the gentlemanly persuasion.

  • A few times I was on summer junk trips in Hong Kong.  These are chartered boats you can rent, call up 50 of your closest friends, fill the holds with a few hundred pounds of food and booze, and anchor on some outlying island as everyone enters a state of drunken debauchery.Of course, not all junk trips involve alcohol, but because of the cost of chartering the boat, you need a lot of people to pitch in.  And it’s always been a surprise to me, the technology of boats; how a two story structure could remain upright as 50 humans writhe with the music all over it, do flips off the balcony, slip and slide and cry and kiss and fight each other on it.Anyway, the point is that these junk trips are for people of a certain income class.

    Because if you’re really rich, you’ll take your own yacht out.  Likely when you take a yacht out, you don’t need to assume the role of a club promoter and tap your second and third degree contacts in order to fill the boat.Because I don’t like drunken debauchery I used to float out in a foam noodle far away from the boats.  It would be peaceful, with the water a balmy temperature, and me and the noodle undulating.  Sometimes the current would make me drift towards the sleek yachts.  And when I would look at the yachts, there would be maybe 2-3 people on the deck, obviously not enough to replicate nightclub-like conditions, and their gaze would be…on my boat.

    Money can buy you isolation from the mundane and trivial, but I hope I always remain connected.

Leave a comment

Filed under Essays, Uncategorized