Unveiled Value-Up... Experts Say "Effective Measures Like Tax Benefits Must Be Established"

Financial authorities have unveiled a draft of the 'Corporate Value-Up Program,' which requires all listed companies on the KOSPI and KOSDAQ?over 2,400 firms?to voluntarily disclose their corporate value enhancement plans annually. To encourage voluntary participation, the government plans to develop the 'Korea Value-Up Index,' composed of companies with outstanding corporate value, and also create related exchange-traded funds (ETFs). Participants at the Value-Up themed seminar held on the 26th agreed on the purpose and necessity of the plan but emphasized that more effective measures, such as tax incentives, must be established to encourage company participation.

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The Financial Services Commission and the Korea Exchange, along with related organizations, held the '1st Seminar on Corporate Value-Up Support Measures for the Leap of the Korean Stock Market' at the Korea Exchange in Yeouido, Seoul, on the morning of the same day, announcing policies to resolve the Korea Discount (undervaluation of the Korean stock market). Financial Services Commission Chairman Kim Joo-hyun stated during the Financial Services Commission’s work report meeting chaired by President Yoon Suk-yeol on the 17th of last month, "We will create an investor-friendly stock market environment through programs such as the Corporate Value-Up Program."

The Corporate Value-Up Program targets all companies listed on the domestic stock market, with 809 companies on the KOSPI and 1,584 on the KOSDAQ as of the end of 2023. Companies will use the most appropriate indicators among cost of capital, return on capital, and market evaluation to conduct self-assessments, then establish medium- to long-term goals and plans spanning three years or more. These plans must be published once a year on their own websites and voluntarily disclosed to the exchange.

To encourage voluntary participation, authorities will provide five types of tax-related support: preferential treatment for exemplary taxpayers, preferential pre-review for research and development (R&D) tax credits, consulting for corporate tax credits and exemptions, preferential treatment for value-added and corporate tax reassessments, and consulting for business succession. However, anticipated tax benefits such as corporate tax reductions, dividend income tax rate cuts, or separate taxation were excluded.

The Korea Exchange will develop the 'Korea Value-Up Index' by September, focusing on 'companies with outstanding corporate value,' enabling institutional investors such as pension funds to use it as a benchmark (BM) index. An ETF based on this index will also be launched by the end of the year. The exchange will revise guidelines in the first half of this year to incorporate related efforts into the Stewardship Code (active exercise of voting rights by institutional investors), which guides institutional investors’ behavior. Key investment indicators such as price-to-book ratio (PBR), price-to-earnings ratio (PER), and return on equity (ROE) will be compiled and compared by market and industry by aggregating information scattered across the existing exchange information data system.

The Financial Services Commission will collect corporate feedback on the first draft guidelines in May and finalize the plan by June. From the second half of this year, a support system will be established to enable companies ready to comply with the program to do so, along with incentives. To continuously promote corporate value-up support measures as a mid- to long-term task, a dedicated department will be established and a website created concurrently.

The Financial Services Commission held a discussion session on the 'Corporate Value-Up Support Measures' together with related organizations including the Korea Exchange on the same day. Participants emphasized that active implementation efforts and support from companies, government, and institutions are necessary for the Corporate Value-Up Program to take root.

Kim Doo-nam, Executive Director at Samsung Asset Management, who attended the discussion, said, "It is important for listed companies to establish, disclose, and implement plans tailored to their corporate characteristics themselves. The development of the Korea Value-Up Index, the listing of ETFs based on it, and the utilization by institutional investors such as pension funds will serve as good incentives for companies in terms of securing stable investment demand."

Lee Hyo-seop, Senior Researcher at the Korea Capital Market Institute, who presented on overseas cases and implications, urged that the corporate value-up support measures should go beyond benchmarking Japan’s case, including bold incentives such as tax benefits and incorporation of the Stewardship Code, to become more effective. Lee emphasized, "The core of this program is the medium- to long-term enhancement of corporate value. Based on empirical analysis from Japan, investment decisions should be made comprehensively considering medium- to long-term profitability and growth rather than blindly investing in companies with PBR below 1."

Kim Dong-yang, Researcher at NH Investment & Securities, noted, "Unlike Japan, the Value-Up Index may include currently low PBR stocks, which will be a good incentive for companies. Since participation by undervalued small companies is also important, active incentives such as tax support and continuous support from the exchange are necessary."

There was also an opinion that executive compensation should be linked to corporate value enhancement performance to encourage companies to actively implement corporate value-up programs. Lee Dong-seop, Head of the Stewardship Responsibility Office at the National Pension Service, stressed, "Along with a board of directors with authority and responsibility, the management and compensation committees under the board should directly create and actively engage in the Value-Up Program. Linking executive compensation to corporate value enhancement performance will enable continuous implementation."

He added, "When preparing corporate value improvement plans, outside directors should actively participate to represent the interests of all shareholders, not specific shareholders. For continuous implementation, not only institutional investors such as pension funds but also individual investors should monitor companies and demand compliance."

Professor Lee Jun-seo of Dongguk University proposed a system improvement to calculate market capitalization based on the number of shares outstanding rather than the number of issued shares when companies repurchase their own shares, as a more effective shareholder return measure. Professor Lee said, "Policies such as inheritance and gift tax reductions based on PBR, long-term investment incentives for institutional investors, and minimizing corporate idle funds will also be important."

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