[Initial Perspective] The 'Fairness' Frame in the Capital Market

As the presidential election approaches, "fairness" has emerged as the hottest topic in the capital market. Most of the capital market pledges announced by major party candidates focus on making the rules of the game, which are unfair or appear unfair, fair. Candidates have been competing to declare that they will eliminate discriminatory factors between major shareholders vs. individuals and professional (foreign, institutional) vs. individual investors as much as possible, leveling the playing field. With 10 million individual stock investors and nearly 60 million stock accounts, measures to ensure fairness have become policies that must be presented to secure the votes of retail investors.

The candidates proposed solutions to issues pointed out in the stock market, such as unequal opportunities in short selling and damages to retail investors caused by corporate splits. Although the measures differ among candidates, the policy goal of securing fairness on these issues is the same. Additionally, to reduce the transaction cost burden on individual investors, one side advocates for transaction tax, while the other calls for the cancellation of the introduction of capital gains tax on stocks. No one disputes that a market with fair rules can grow healthily in the long term. However, as fairness is excessively emphasized as an election strategy to gain votes, there are growing concerns that the core aspects of the capital market?efficiency and excellence?are being overlooked.

Competition among countries and industries is fierce over technological superiority and industrial development in the Fourth Industrial Revolution sectors such as big data, artificial intelligence (AI), fintech, autonomous driving, quantum computing, and renewable energy. At this critical time, the role of the capital market in supplying vital funds to innovative companies is more important than ever. However, voices of candidates emphasizing the excellence of the capital market’s funding function as a core policy goal are absent. Rather than strategic approaches, it seems they are only offering patchwork solutions to recent unfair issues in the capital market. No one is talking about industrial development of the capital market, such as financial hubs or global investment banks (IB), which have appeared in every election.

There are concerns that the excessive emphasis on fairness may damage the efficiency, a core competitiveness of the capital market. An executive from a major securities firm shared a baffling case experienced during the process of promoting an initial public offering (IPO) of a company. A university professor who is a member of the Korea Exchange (KRX) listing review committee raised issues with the shareholder agreement (SPA) between the company and its second-largest shareholder. Although the SPA’s contents were typical and did not cause harm to individuals, it was pointed out as an unfair element from the perspective of retail investors.

Most innovative companies in the Fourth Industrial Revolution have private equity (PE) or venture capital (VC) as their second or third largest shareholders. It is common for them to enter into SPAs with institutional investors during pre-IPO investment rounds. If the SPA itself becomes problematic, these companies will face continuous fairness disputes while trying to go public. Excessive fairness disputes could make it difficult for innovative companies to raise funds and attract investment, which would be a foolish mistake. If these companies give up on going public, retail investors lose investment opportunities in innovative companies.

The value of fairness in the capital market is very important. However, it should not be overlooked that some systems and institutions necessary for market efficiency are mistakenly perceived as unfair and in need of correction. Regardless of the outcome of the presidential election, it is hoped that the new government will not erode the efficiency of the capital market under the fairness framework.

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