South Korea’s Corporate Value-Enhancement Plan Falls Short

South Korea revealed a reform plan for listed firms on Monday (Feb 26) to enhance shareholder returns in a bid to decrease the so-called “Korea discount” on stock prices. However, the much-anticipated plans failed to meet market expectations.

According to analysts, South Korea is copying Japan’s playbook to improve the value of its companies’ value. This comes as Japan’s stock market reached a new high last week due to years of corporate governance changes and initiatives such as encouraging share buybacks, reducing cross-holdings, and increasing dividends.

South Korea Corporate Value-up Program

Companies that prioritize shareholder returns will receive “bold incentives” and tax breaks under the Financial Services Commission’s “Corporate Value-up Programme,” according to a statement released on Monday. The financial regulator said the program’s criteria would be finalized in June.

In the third quarter, South Korea will also launch the “Korea Value-up Index,”. Like Japan’s JPX Prime 150 Index, it comprises best-practicing companies and will serve as a benchmark for pension funds and other institutional investors. The FSC announced that new exchange-traded funds would be able to monitor the index.

Most investors welcomed the initiatives as a step in the right direction. However, they wanted more aggressive steps to address business practices favoring controlling stakeholders. The benchmark Kospi Index fell 0.8% as the government encouraged “self-driven efforts” by businesses rather than mandating any changes.

“The disappointment comes from the fact that companies are not required to take any actions in the short term,” said Seol Yongjin, an analyst at SK Securities Co. “Investors expected specific incentives to be announced today, but now the government said those details will be disclosed later this year.”

Korean equities had risen over the previous month amid a constant drumbeat of government commentary on the reform initiatives. Firms with low valuations, as measured by the price-to-book ratio, had seen solid gains.

President Yoon Suk Yeol has committed to ending the so-called “Korea Discount” phenomenon of local shares. The Korean discount refers to a tendency for South Korean companies to have lower valuations than global peers. This is due to factors such as low dividend payouts and the dominance of opaque conglomerates known as chaebols.

Investor Discontent Calls for Stronger Measures

While some foreign investors initially offloaded Kospi shares, they later reversed their positions. They became net buyers, reflecting continued interest in South Korean equities. However, concerns persist regarding the absence of concrete measures to enforce the proposed initiatives.

Market watchers, including Ahn Youngjun from Hana Securities, observed that the market sell-off occurred due to disappointment over the lack of clarity on enforcement mechanisms.

The thorny issue remains to be the improvement of corporate governance at chaebols or family-controlled conglomerates. FSC Vice Chairman Kim So-young indicated ongoing discussions on this matter, but specific measures have not been outlined.