[Insight & Opinion] Questioning the Rationale for the Existence of the Preferred Stock System

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The Korean stock market has made history. On April 27, the KOSPI index surpassed the 6,600 mark during intraday trading, riding the explosive boom in semiconductors. This is the first time in history that the KOSPI has crossed the 6,600 threshold.

The market remains heated with high expectations for continued growth. However, it is difficult to attribute this upward rally solely to improved performance in a specific sector. The unprecedented tightening of regulations in the real estate market has driven a massive influx of idle capital into the stock market. Additionally, the government's amendments to the Commercial Act and proactive shareholder return policies, such as major companies' buyback and cancellation of treasury shares, have fundamentally altered the market's foundation.

In this environment, there is a crucial issue that must be addressed: the preferred stock system. As the market matures and corporate governance reform becomes a central topic, it is time to reconsider whether we should leave preferred stocks, a relic of the past, as they are. Preferred stocks are distinctly different from common stocks. While common stocks grant shareholders the right to participate in management via voting rights at general meetings, preferred stocks do not provide voting rights but instead offer higher or priority dividends. As transparency in corporate governance is increasingly emphasized, the need to improve the preferred stock system has become even more pronounced. The specific reasons can be summarized in four main points.

First, it undermines the democratic capitalist principle of "one share, one vote." The owners of corporations are the shareholders, and shareholders' rights should be proportional to the number of shares they hold. However, preferred stocks without voting rights deprive shareholders of their right to oversee management for the sake of capital-raising convenience, which is a distorted practice. At a time when shareholder democracy is being highlighted, the existence of non-voting shares has lost its legitimacy. Second, it exacerbates the opacity of corporate governance. In the past, preferred stocks were often abused as a means for majority shareholders to expand capital while reducing the cost of defending their management rights. This is a product of the practice of controlling companies with a small equity stake. As a result, it gives foreign investors the impression that Korean corporate governance is complex and nontransparent.

Third, the complexity of capital structure makes it inefficient. As in the case of Hyundai Motor, when a single company has multiple types of preferred shares, it complicates the valuation of corporate value. This leads to information asymmetry, increases management costs, and ultimately undermines the efficiency of the capital market. Fourth, preferred stocks are weak in protecting minority shareholders. Although preferred shareholders are guaranteed priority in dividends, if a company decides not to pay dividends, preferred shareholders have no recourse. Without voting rights, they cannot hold management accountable or demand increased dividends, running the risk of becoming "half-shareholders" with limited influence.

When preferred stocks were introduced during the period of rapid growth, companies needed massive capital for facility investments but were extremely wary of diluting the majority shareholders' management control. At the time, capital raising was the top priority, making preferred stocks a useful, albeit makeshift, solution. Today, however, the situation is different. Major domestic companies already possess vast cash reserves, and now capital efficiency and transparency in corporate governance have become more important than simply raising capital. Even from a global standards perspective, the price gap between common and preferred stocks-known as the spread-varies widely in the domestic market, and even market participants cannot clearly explain the causes of these discrepancies.

This uncertainty indicates that there is still significant room for improvement in the governance structure of our stock market. The current global financial market standard is moving toward a single-class share structure. The more advanced a market is, the less likely it is to have shares with separate voting rights. The new milestone in the KOSPI symbolizes the quantitative growth of our capital market. Now, it is time to pursue qualitative growth as well. From the perspective of corporate governance reform, there is an urgent need for policy initiatives to overhaul the opaque and complex preferred stock system or to encourage conversion into common shares. This is a critical task for Korea to become a truly advanced financial market that meets global standards.

Wonkyung Cho, Professor of Economics at Sejong University

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