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The head of South Korea’s stock exchange, Jeong Eun-bo, has defended his country’s stalling corporate reform drive amid disappointment among local and foreign investors that Seoul is failing to replicate Tokyo’s success in boosting historically low valuations.
South Korean regulators and political leaders have spent much of this year promoting their “Corporate Value-up” initiative, which includes a new index highlighting companies that have improved capital efficiency, as well as tax incentives for businesses that prioritise shareholder returns.
But just 1 per cent of South Korea’s 2,600 listed companies have signed up or committed to signing up to the programme since it was announced in February, with leading industrial groups including Samsung and chips-to-batteries conglomerate SK Group yet to announce plans to participate.
“The Corporate Value-up programme was a politically designed stop-gap measure designed to appease local retail investors ahead of parliamentary elections earlier this year, but it ended up as a total failure,” said Park Ju-geun, head of Seoul-based corporate research group Leaders Index.
But Jeong, chief executive of Korea Exchange, which operates the Kospi and Kosdaq indices, told the Financial Times that momentum would build behind the initiative as the country’s biggest conglomerates joined.
Carmaker Hyundai Motor said last month it would set new total shareholder return and share buyback targets as it announced its participation, while electronics group LG and steel-to-battery materials conglomerate Posco are also expected to announce plans to join.
“Korea has a strong naming and shaming culture,” said Jeong. “If leading companies join the Corporate Value-up programme, others are bound to follow suit.” He added that Samsung, South Korea’s largest industrial group, had privately communicated to him their intention to sign up for the voluntary programme by the end of this year.
But he also argued that the role Tokyo’s corporate governance drive played in powering the Nikkei 225 index to historic highs this year had been “exaggerated”. The revival of the Tokyo bourse was attributable principally to a recovery in Japan’s underlying industrial competitiveness, he said.
Blaming a lack of innovation at South Korea’s main industrial groups for their low valuations, he said companies such as Samsung needed to address what he described as “rational” investor concerns about their intrinsic value. Shares in Samsung Electronics hit a 52-week low on Wednesday.
“Our stock prices have not risen enough compared with other major countries, but this is a matter of our industries’ growth potential,” said Jeong. “The key is how each company invests and innovates, and there is not much the Korean authorities can do about this.”
Defying expectations that South Korea would benefit from western money flowing out of China and the diminishing opportunities to invest in undervalued companies in Japan, there was a net outflow of $5.5bn from the South Korean stock market in the first half of 2024, with South Korean holdings in US stocks increasing 26.2 per cent over the same period.
About two-thirds of companies listed on the Kospi benchmark trade at a price-to-book ratio of less than one, meaning the market values them below the stated worth of their net assets. Many analysts blame a legal and regulatory framework designed to protect the founding families of industrial groups at the expense of minority shareholders.
With more South Korean retail investors getting involved in the stock market since the coronavirus pandemic, the “Korea discount” of chronic undervaluations has become more of a political issue. The national pension fund — the largest buyer of South Korean stocks — is also being hit, at a time when it is projected to run out of money in the 2050s because of a shrinking population.
Jeong said Corporate Value-up would help improve valuations by helping investors access better information about company plans to improve capital efficiency and shareholder returns. He added that South Korean authorities were providing stronger tax incentives than those on offer in Japan.
But Park of Leaders Index said for serious progress to be made, South Korea needed to impose on board members a legal duty to uphold the interests of shareholders.
“South Korean corporate governance is still not transparent, and minority shareholders are still routinely mistreated,” he said. “Without a fiduciary duty to shareholders, the authorities cannot credibly argue they have done everything they can.”
