South Korea’s much-hyped plan to push companies to improve management and corporate governance disappointed investors with a lack of enforcement and concrete details.
Companies with management practices that prioritize shareholder returns will be given "bold incentives” and tax benefits under the the "Corporate Value-up Program,” the Financial Services Commission said in a statement Monday. The guidelines for the program will be finalized in June, the financial regulator said.
The nation will also introduce the "Korea Value-up Index” in the third quarter — similar to Japan’s JPX Prime 150 Index and composed of best-practicing companies — that will be used by pension funds and other institutional investors as a benchmark. New exchange-traded funds will be able to track the index, the FSC said.
While welcoming the initiatives as a step in the right direction, most investors said they would have liked to see forceful steps to address corporate practices that favor controlling stakeholders — often the founding families — over smaller shareholders. The benchmark Kospi Index slipped as the unveiled measures largely relied on voluntary efforts by companies rather than mandating any change.
"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. "Investors expected specific incentives to be announced today but now the government said those details will be disclosed later this year.”
South Korean stocks had rallied over the past month amid a drumbeat of government commentary on the reform measures, with President Yoon Suk-yeol determined to end the so-called Korea Discount phenomenon of local shares. Firms with low valuation as measured by the price-to-book ratio had seen particularly strong gains.
Global investors had been keenly awaiting the valuation-boosting initiatives on bets that they will lead to better corporate governance practices in Asia’s fourth-largest economy. The hoped-for outcome was for a sustained market rally that’s similar to the one in Japan after Korea’s neighbor ushered in changes to improve management practices.
The Tokyo Stock Exchange’s decision to name companies with poor shareholder returns was a key factor in spurring structural changes in the market and the Nikkei 225’s rally that surpassed its 1989 peak.
Foreigners turned sellers of Kospi shares on a net basis on Monday after having added 10.5 trillion won ($7.9 billion) in the year through last week — more than any other Asian emerging countries. Financial and auto stocks were the biggest losers during morning trading.
"There are no specific ways on how the government would make companies follow the measures to improve their corporate value so there is a selloff on disappointment,” says Ahn Youngjun, an analyst at Hana Securities.
Some market watchers, including Wongmo Kang at Exome Asset Management LLC in New York, were hoping the government would push companies to actively cancel treasury shares — whose outstanding volume tends to weigh on valuation.
Yet some money managers remained optimistic that with the government taking the initiative, positive changes in corporate behavior will ensue and support the stock market over the long term.
"If Japan is any guide, let’s bear in mind that the governance reform started in the initial stage of the Abenomics with the Governance Code, and the revision of the Company Act,” said Frank Benzimra, head of Asia equity strategy at Societe Generale SA. "We cannot assume that meaningful changes would happen in days, weeks or months.”
Companies’ boards of directors should play a key role in preparing and implementing mid— to long-term improvement plans every year, the FSC said. They will be encouraged to voluntarily disclose their plans on their websites and on the Korea Exchange.
Korea Exchange also will publish major financial indicators of listed firms by sectors, including price-to-book ratio and return on equity. The exchange operator will establish a department and an advisory board to support the program.
The financial regulator also said it will revise the stewardship code to ensure that pension funds and others consider companies’ value-up efforts when making investment decisions.
"There is no compulsoriness in the measures,” said James Lim, senior research analyst at Dalton Investments. "There isn’t much discussion about revising the commercial laws to prevent controlling shareholders from hurting minority shareholders.”
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