[In-Depth Review] Post-Corona, a Momentum for Policy Rationalization in Listed Companies

Jung Woo-yong, Vice Chairman of Policy, Korea Listed Companies Association

The unprecedented novel coronavirus disease (COVID-19) pandemic is demanding a transformation of our capital market and the form of capitalism. First, it has created a significant turning point in domestic and international stock markets. The seats left by rapidly departing foreign investors are being filled by so-called 'Donghak Ants' (individual investors). Even Warren Buffett, known as an investment genius, reportedly recorded a loss of 60 trillion won in the first quarter.

Until now, the basic principle of corporate management?'maximizing profits and distributing them to shareholders'?was considered common sense. However, it has become increasingly difficult to insist on 'shareholder-first capitalism.' The British multinational bank HSBC suspended dividends for the first time in 74 years since 1946, and General Motors (GM) in the U.S. and Renault in France also canceled their dividend plans citing decreased sales.

Institutional investors have also changed compared to the 2008 financial crisis. The International Corporate Governance Network (ICGN), a global institutional investor group including the National Pension Service and Korea Investment Corporation (KIC), whose members manage assets totaling $54 trillion (approximately 6,652.8 trillion won), released a corporate letter last month urging companies to 'prioritize employee employment over dividends.' The U.S. government, while providing $500 billion in support to companies affected by COVID-19, imposed conditions banning share buybacks and dividends.

Our government is also accelerating the 'Korean New Deal' policy. It announced the establishment of a 40 trillion won Industrial Stabilization Fund to support industries such as automotive, aviation, shipping, and shipbuilding. However, conditions such as maintaining employment and restrictions on dividends and share repurchases were attached. This is because if companies reduce costs by laying off workers to increase dividends, it is unlikely to overcome the economic crisis or expect sustainable management. The National Pension Service also announced that it would inject additional funds if the domestic stock market sharply declines in the second quarter. This reflects the policy consideration that market stability is as important as profitability.

What is important is that measures for companies, market participants, and stakeholders such as employees should not be one-time policies aimed only at overcoming the crisis. The National Pension Service’s market intervention, given its high investment proportion in domestic stocks, must also dispel concerns that it could lead to pension socialism and managerial rigidity in listed companies. Internal reserves for liquidity should not be pressured under the pretext of 'stingy dividends.'

Dividends of listed companies have steadily increased over the past five years. Last year, among 761 companies listed on the KOSPI market, 530 companies (70%) paid dividends. Among them, 414 companies (54.4%) paid cash dividends for five consecutive years. The total cash dividends amounted to 29.3 trillion won, and the dividend yield was 2.4%, significantly exceeding the one-year maturity government bond yield (1.516%). This is the result of the activities of institutional investors, including the National Pension Service emphasizing 'shareholder return policies' after the introduction of the Stewardship Code, and shareholder activism directly or indirectly influencing listed companies’ dividend policies.

However, the economic crisis caused by COVID-19 is affecting both financial markets and the real economy. Private consumption has sharply declined, and exports are delayed in recovery due to the slowdown in global trade, so the performance of listed companies is expected to worsen. The first quarter GDP recorded -1.4% quarter-on-quarter, and the first quarter results of airlines and others already reflect the COVID shock.

In such times, government support measures should focus on effectively helping companies survive and grow while maintaining and expanding employment. First, reflecting the reality of companies affected by COVID-19, accounting policies such as auditor designation based on financial criteria and internal accounting control systems should be flexibly operated to reduce burdens. Additionally, institutional measures should be prepared to prevent government or pension funds’ acquisition of listed company shares for relief from leading to future management intervention. In the long term, measures such as corporate tax cuts to the level of advanced countries and tax benefits for investments should also be actively introduced.

The crisis caused by COVID-19 can be a momentum for the growth and structural improvement of the domestic capital market. Policies that aim to help companies by releasing emergency funds while maintaining anti-corporate sentiments that strangle businesses are not the right solution to overcome the economic crisis. Companies are the foundation where managers, investors, employees, and their families live together, and it should not be forgotten that they are the premise of national development and citizens’ happiness.

This content was produced with the assistance of AI translation services.