When the Korean national football team set out to reach the quarter finals of the 2002 World Cup, it succeeded through a combination of sheer hard work and a disregard for old status-oriented power structures – not to mention world-class leadership by the team’s Dutch coach.
The sea of red shirts that spread jubilantly over Seoul heartened Woosik Chu, vice president of the investor relations team at Samsung Electronics. For him it was a celebration not just of sport, but of the Korean market in general. ‘The World Cup team is a reflection of the vibrant nature of the economy, a reflection of companies like Samsung Electronics,’ he says. ‘You don’t see this anywhere else in Asia, never mind elsewhere in the world.’
Since the 1997 Asian crisis, Samsung Electronics has transformed itself in no less a spectacular fashion than Korea’s Red Devil football heroes. By late 1997, the company’s debt totaled 13 tn won, or about $9 bn – more than 70 percent of it in foreign-currency loans. Under the leadership of CEO Yun Jong Yong, Samsung slashed its debt, cut costs and sold or spun off dozens of businesses. In 2002, even in the midst of the high-tech doldrums, Samsung posted profits of $3bn in the first half. It has about as much cash – nearly $5 bn at the end of the first half – as its Korean competitor Hynix has debt (all figures are on a parent company basis).
This drastic restructuring has not gone unnoticed by investors. Indeed, Samsung decided that shareholder value means not simply the performance of the company, but informing the market about that performance. At the beginning of 2001 it launched another transformation, this time of investor relations, and with the same tools employed by Korea’s football team: hard work by a new team of up to 20 full-time staff; and a world-class coach in the form of Woosik Chu, a US-educated former Korean treasury official.
While other Korean companies relegate the IR task to the general manager level, Chu has vice president status, works closely with Samsung’s CFO and CEO, and attends all major management meetings. He ranks highly enough to represent the company anywhere, and he regularly speaks on the same platform as other IT companies’ CEOs at investment conferences. ‘The momentum of IR can rise above a critical level only when it is high up in the management hierarchy,’ Chu remarks. ‘Compared to other companies, our management gives a lot of weight to IR.’
That IR clout makes Samsung a pioneer in Korea and indeed in Asia. As a result, Chu recognizes the responsibility Samsung has to take the lead in helping other Korean companies raise the quality of investor relations, and he and his team are active in the local IR community. ‘Someone has got to take care of these issues; they don’t take care of themselves,’ he says.
Relaying the essence
Chu is a firm believer in IR as a two-way street, with input from shareholders and analysts feeding management decisions. At the same time, the IR team can be objective in a way no individual operations manager can be – ‘relaying the essence of the company to the market.’
Samsung has built a ‘backbone’ of IR activity around quarterly earnings releases. It webcasts its teleconferences and updates its web site constantly. At least twice a year, after earnings announcements, two teams, led by the CEO and CFO, visit major investors around Asia and elsewhere, including London, Edinburgh, Frankfurt, Amsterdam and Milan in Europe, and in the US, New York, Boston and San Francisco. Even Washington, Miami, Denver and Los Angeles get visits.
Chu himself travels about twice a month to ensure Samsung is represented at all major sell-side conferences. And twice a year, he invites sell-side tech analysts to meet with him in Seoul. As the world’s number one IT company (according to Business Week in June), Chu expects nothing less than ‘universal’ analyst coverage.
All that on top of around 250 one-on-one meetings a year in Seoul, many of them with foreign investors. No wonder, considering that foreign ownership on the Korean Stock Exchange is as high as 40 percent, and Samsung comprises 18-20 percent of the KSE’s capitalization. ‘If they invest in Korea, they invest in Samsung, and they all want to meet with us,’ as one of the IR managers notes.
The investor relations team conducts its own biannual investor surveys to identify Samsung’s strengths and weaknesses, including investor relations performance. They also conducted a peer company study to identify investors not currently on the shareholder rolls who should be. An active targeting program is currently underway to meet with these prospects.
Following the signs
‘The market is fast-moving. If there’s something you’re doing right, signs pop up to affirm it. On the other hand, if you mess up, signs pop up even faster,’ Chu laughs, continuing, ‘We just have to put up our antennae and see what the market is saying.’
Those signs are quickly fed back to top management, with a daily market report delivered to the CFO and CEO. For a company with a workforce of nearly 50,000, there’s surprisingly little bureaucracy, and when the need arises, Chu can get the ear of the CEO or CFO in under ten minutes.
These days the signs point to the fact that while Samsung’s share price performance has been stellar, it is still undervalued. For example, its PE ratio of 6.6 in the first half of 2002 was a fraction of the PE of comparable companies.
One problem is the difficulty investors have comparing Samsung against a diverse range of competitors. About 30 percent of sales come from semiconductors, with Samsung the world’s top memory chip maker ahead of Micron in the US, Germany’s Infineon and Japan’s Elpida. In telecoms it’s up against the likes of Nokia, Ericsson and Siemens; while it has less than 10 percent market share compared to over 35 percent for Nokia, Samsung’s margins have recently surpassed those of the Finnish company, making it one of the most profitable telecoms companies anywhere. In telecoms systems Samsung competes against giants including Motorola, Cisco, Alcatel, Lucent and Nortel, and in consumer electronics it’s usually matched with Japanese brands like Sony, Toshiba and Panasonic.
As might be expected for such a high-profile company, Samsung investors are concerned about executive compensation, but not in the way you might think. Korea’s executive pay is far below that of other countries, even in Asia, partly because of the traditional lack of incentive compensation. But Samsung has been at the forefront of change, judging business division heads according to performance and widening the gap between the lowest and highest paid at the same managerial level. Even the CEO’s remuneration is based on performance measures like EVA.
‘We are at the point where we need to make such performance measures apply throughout the company, to the majority of our workers,’ Chu says. ‘In a way, over-compensation is not a problem in Korea, but rather the lack of it.’
As a company still in transition, today’s main IR challenge is to convey how much Samsung has changed since the 1997 Asian crisis. In the first two years after the crisis it went from just $131 mn profit in 1997 to record earnings of around $5.3 bn in 2000. And according to some analysts, 2002 could top that record.
‘We’re a totally new animal,’ Chu comments, adding that while differentiating itself from a diverse range of competitors, Samsung always has to tell its story in a Korean context in a way that makes it stand out from the unwieldy chaebols most investors remember of old: ‘We are truly a global company operating on global standards.’
Rebuilding governance
Samsung Electronics was by far the best Korean company in the first annual Investor Relations Magazine Asia Awards, and it came a close second to Sony in the category of best Asia-Pacific IR in the US market at the Investor Relations Magazine US Awards 2002.
As one investment pro in the US survey commented, ‘Samsung has improved its disclosure in the past year and taken small steps towards a better corporate governance structure.’ It is praise, but it is faint praise. IR chief Woosik Chu agrees that instantaneous change is impossible. ‘However, things are moving in the right direction, with the philosophy of corporate management now changed from scale-oriented to profit-oriented. We have zero tolerance for corporate governance lapses.’
The 1997 Asian crisis highlighted a weakness in Korea’s chaebol structure. The practice of debt guarantees for sister companies – or ‘cross-guarantees’ – meant that when one company in the group failed, a contagion effect took down others. These cross-guarantees, Chu says, have been eliminated, while cross-shareholdings are now limited.
Samsung still gets criticized for its governance, though the transgressions are largely in the past. The company has been a major target of Hasung Jang, a professor of finance at Korea University, who has long fought for better governance in Korea along with a group of minority shareholders led by the People’s Solidarity for Participatory Democracy (PSPD). In an ongoing legal battle, last December the trial court ordered some of the former and current officers of Samsung Electronics to pay a $69 mn fine.
The Korean shareholder activists saw it as a landmark victory though the trial isn’t over yet.
Chu insists that Korea has made huge advances in corporate governance compared to Asian neighbors like Japan, and Samsung has gone even further towards improvement. Half of Samsung’s board of directors is made up of non-executive directors including three foreigners, some of them recommended by foreign shareholders. There is also an audit committee made up of non-executive directors.
Still, perceptions are slow to change, and many investors are unaware of Korea’s new outlook. In the words of Chu: ‘In today’s competitive environment, where scale is more a liability than an asset, competitive strength is the determining factor.’
US bound
Considering Samsung Electronics’ global footprint and the fact that it has foreign ownership of 55-60 percent, it’s surprising that the company is not listed in the US… yet. Investors and analysts have long seen a NYSE or Nasdaq listing as a strong prospect.
Samsung launched a London-listed GDR in the early 1990s when the domestic market was difficult to enter for foreign investors. Indeed, the GDR used to trade at a premium to the Korean-listed shares, though the trail to the Korean Stock Exchange is now well-traveled and the premium has vanished.
Chu adds that the gap in investment expertise between domestic and foreign institutions has also narrowed and indeed disappeared. ‘The capital market is truly borderless,’ he states. ‘Regardless of whether they’re Korean, American or European, investors are only interested in the return on their investment dollar. Especially in the past few years, Korean analysts and investors have improved on their analytical ability. Today they’re as acute as their counterparts anywhere in the world.’
Despite this cross-border market, a US listing still holds an attraction for Samsung. One reason is that many institutional investors, particularly US pension funds, are blocked from buying Samsung because it lacks an ADR. The company recognizes that a US listing would generate additional demand, and indeed it meets all the listing criteria.
Samsung Electronics is making preparations for an eventual US listing including a gradual transition from Korean accounting to US Gaap, but Chu says it’s difficult to say when the listing will take place.
