[Exclusive] Kim So-Young Holds Private Meeting with Senior Investment Industry Officials... Institutional and Foreign Funds Desperately Needed

[Long Road Ahead for KOSPI]②Expressing Commitment to 'Corporate Value-Up Program' at Seoul Forum
Unprecedented Attendance by Financial Holding Chairmen
Ban on Major Shareholders Favoring Themselves
Amendment of Commercial Act to Protect Minority Shareholders' Rights
Revising Insufficient Shareholder Return Policies

Kim So-young, Vice Chairman of the Financial Services Commission, recently met with senior officials from the financial investment industry to express the government's commitment to implementing the recently announced 'Corporate Value-Up Program.' This is based on the urgent need for large-scale capital inflows not only from individuals but also from institutional and foreign investors to resolve the Korea discount (undervaluation of the Korean stock market).

Kim So-young, Vice Chairman of the Financial Services Commission, is delivering opening remarks at the "Foreign Financial Companies CEO Meeting" held on the 22nd at the Bankers' Hall in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

Request for Cooperation from the Investment Industry... Direct Introduction of the Corporate Value-Up Program

According to financial authorities and the investment banking (IB) industry on the 30th, Vice Chairman Kim So-young appeared as a speaker at the Seoul IB (SIB) Forum, a private breakfast meeting of senior industry officials, on the 25th. The Seoul IB Forum is a gathering established mainly for CEOs of major domestic banks, securities firms, and foreign IB representatives. In addition to CEOs of financial institutions, researchers, academics, and key government officials participate to discuss desirable development strategies and directions for the Korean IB industry, and to contribute to the industry's growth through regulatory improvements and policy proposals. The forum is so prestigious that even Lee Chang-yong, Governor of the Bank of Korea, gave a lecture there last March. Kim’s appearance as a speaker is interpreted as emphasizing the need to resolve the Korea discount and urging cooperation from the industry. It is also reported that some financial holding company chairmen attended unusually because Kim was present as a speaker.

On that day, when asked about specific policy measures by a participant, Vice Chairman Kim said, "We are preparing the Corporate Value-Up Program and will present concrete measures within one to two months." She added that they had extensively benchmarked and studied the Japanese case. The Corporate Value-Up Program is designed to encourage listed companies to voluntarily analyze the reasons for their undervaluation and establish response strategies. It is expected to include provisions for listed companies to disclose and compare key investment indicators such as price-to-book ratio (PBR) and return on equity (ROE) by market capitalization and industry, and to recommend communicating corporate value improvement plans with shareholders. The program benchmarks Japan’s approach, where companies with low PBR were urged to improve, thereby raising corporate value.

The industry believes that to overcome the stock market undervaluation problem in Korea, there must be more institutional and foreign investors who invest with a long-term perspective on corporate performance and future value. This is because the flow of the stock market is determined by the buying and selling movements of institutional and foreign investors, who are the 'big players' in the market. Experts view that improving PBR through efforts such as shareholder returns by companies will help attract funds and resolve the Korea discount.

It is also believed that if domestic institutional investors with large assets purchase top market capitalization stocks and invest long-term, undervaluation can be overcome. There is a strong call for the government to encourage this. A senior official from a major domestic securities firm said, "Corporate governance cannot become transparent in a short period," adding, "If our government, like advanced countries that institutionally nurture institutional investors, encourages entities such as the National Pension Service to purchase high market capitalization stocks and hold them long-term, it will support the index and help individual investors feel less psychologically discouraged in a volatile market."

Neglect of Minority Shareholders and Insufficient Dividends... Amendment of the Commercial Act Should Take Priority

Besides these efforts by the authorities, experts unanimously agree that corporate governance should be improved and shareholder rights protected through amendments to the Commercial Act. Currently, Article 382-3 of the Korean Commercial Act states that "Directors shall faithfully perform their duties for the company in accordance with laws and the articles of incorporation." This only stipulates directors' duties to the company, not to shareholders, leading to criticism that boards of directors neglect minority shareholders and make decisions solely for the benefit of major shareholders.

Professor Seo Joon-sik of Soongsil University’s Department of Economics said, "The board should be prevented from taking actions that benefit major shareholders at the expense of minority shareholders," and added, "The Commercial Act should include provisions on how to appoint directors and auditors, as well as the goals and purposes of the board."

The practice of boards making decisions favoring major shareholders over minority shareholders stems from the owner-centric corporate structure of major listed companies in Korea. This owner-centric corporate culture makes it difficult for the board to establish a system of checks and balances with management. Ultimately, this entrenches backward governance structures and results in investors avoiding investment in the Korean stock market.

Professor Seo pointed out, "In Korea, it is socially accepted that the son of a company chairman inherits management rights and becomes chairman, and his son succeeds him as chairman," adding, "This is a reality not accepted in foreign corporations and is a factor that lowers corporate value."

Insufficient shareholder return policies are also cited as factors lowering stock market competitiveness. Kang So-hyun, a research fellow at the Korea Capital Market Institute, said, "Cash dividends and treasury stock disposals, which are representative means of shareholder returns, are not being carried out smoothly," and added, "To resolve the Korea discount, institutional improvements are needed to concretely enhance the rights of individual investors."

In fact, an analysis by the Korea Capital Market Institute of the ratio of cash dividends and treasury stock purchases to net income showed that Korea ranked between 27th and 45th out of 45 countries, indicating relatively low shareholder return rates. Especially from 2010 to 2018, Korea remained near the bottom, ranking below 40th.

Some perspectives attribute the causes of the Korea discount to geopolitical risks and the structure of the Korean economy. Korea has a high proportion of manufacturing-based companies that conduct large-scale facility investments and operates a small, open economy dependent on exports, making the stock market highly sensitive to external variables.

Yoo Jung-joo, head of the Corporate Innovation Team at the Korea Economic Research Institute, argued, "The causes of the Korea discount should be sought in geopolitical risks and the inherent limitations of Korea’s economic structure rather than corporate governance," adding, "Since these factors are difficult to fundamentally resolve, it is more appropriate to aim for mitigation rather than complete elimination of the Korea discount."

Yoo further explained, "Major Korean industries such as petrochemicals, semiconductors, and automobiles generate large operating profits structurally, but companies cannot fully retain these profits," and added, "Large manufacturing-based companies make trillion-won scale investments and incur fixed costs such as factory operations, making it difficult to be proactive in dividends."

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