"Corporate Profits Concentrated Among Major Shareholders, a Key Cause of Korea Discount"

Exchange and Capital Market Research Institute Hold 'Policy Seminar to Resolve Korea Discount'
"Need to Strengthen Internal Transaction Disclosure and Grant Shareholders of Acquired Companies Stock Purchase Rights"
"Foreigners' Domestic Stock Holding Ratio in July 26.4%... Lowest Since 1999"

Panelists attending the "Policy Seminar to Resolve Korea Discount" held at the Korea Exchange building in Yeouido, Seoul on the 15th are engaged in discussion. Photo by Lee Myunghwan lifehwan@

[Asia Economy Reporter Myunghwan Lee] It has been pointed out that the phenomenon where most corporate profits are concentrated with controlling shareholders is one of the main causes of the 'Korea Discount.' The Korea Discount refers to the undervaluation of companies listed on the domestic stock market compared to overseas listed companies.

Professor Woojin Kim of Seoul National University Business School made this announcement on the 15th at the Korea Exchange Conference Hall in Yeouido, Seoul, at a policy seminar hosted by the Korea Exchange and the Korea Capital Market Institute titled 'Policy Seminar for Resolving the Korea Discount.'

Professor Kim stated, "While the private benefit extraction by controlling shareholders is prohibited for affiliates belonging to large business groups with total assets exceeding 5 trillion won, there are no restrictions on preferential transactions with personal companies held by controlling shareholders for other general listed companies," adding, "Domestic mergers and acquisitions (M&A) conducted through the transfer of controlling shareholders' shares are private transactions among shareholders, so there are no procedures to protect the shareholders of the acquired company."

In response, Professor Kim advised, "For general listed companies as well, disclosure of internal transactions with controlling shareholder-related companies should be strengthened, and screening procedures such as verifying internal transactions should be enhanced when affiliates go public." Furthermore, regarding M&A through share transfers, he stated, "Measures should be pursued to grant appraisal rights to remaining shareholders of the acquired company along with mandatory tender offers."

Following Professor Kim's presentation, Senior Research Fellow Gilnam Nam of the Korea Capital Market Institute emphasized the need to establish a regulatory system from the perspective of international consistency. Research Fellow Nam said, "The proportion of foreign ownership in domestic listed stocks has declined to a low level, from 18.9% in 1999 to 40.1% in 2004, and 26.4% as of July 2022," advising, "To improve foreign investors' market accessibility, the appropriateness of existing regulations should be reexamined, and predictability should be enhanced when establishing capital market regulations."

During the discussion following the presentations, Jisan Kim, Head of Kiwoom Securities Research Center, pointed out, "Compared to foreigners and institutional investors, individuals have relatively limited access to information," emphasizing, "Efforts to alleviate the structural information asymmetry for individuals, along with reforms to the block trade system, easing issues related to multiple listings, and efforts by companies to enhance shareholder returns are absolutely necessary."

Changhwan Lee, CEO of Align Partners Asset Management, suggested that rather than increasing regulations, the threshold for lawsuits regarding shareholder value damage should be lowered to enable self-regulation. CEO Lee argued, "The duty of loyalty of directors under the Commercial Act should include 'proportional interests of shareholders,' and the effectiveness of securities class action systems should be enhanced," adding, "By introducing a discovery system, the burden of proof should be placed on the company rather than shareholders, making it easier to file lawsuits for shareholder value damage."

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