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South Korea’s financial regulators have shared more details about the in February proposed “Value-Up” reform. The guidelines published on Thursday shall help companies boost shareholder returns and enhance corporate governance.
Under the “Corporate Value-up Program“, publicly traded companies are encouraged to establish medium-to-long-term goals for return on equity and other non-financial metrics, according to a statement from the Financial Services Commission (FSC).
This voluntary initiative is central to South Korea’s strategy to address the phenomenon where local firms are valued lower than their international counterparts, known as “Korea Discount”. It is attributed to the dominance of family-run conglomerates, or chaebols. These chaebols can significantly influence the market through complex cross-shareholding structures that often marginalise minority shareholders.
According to the handbook published by the FSC, companies can select key indicators that are important for enhancing corporate value, set mid- to long-term objectives, and devise various plans regarding investment and shareholder return. Investors can view companies’ plans via the local stock exchange’s corporate disclosure system.
“The guidelines are not the end but the beginning of the Corporate Value-up,” said Kim Soyoung, vice chairman of South Korea’s Financial Services Commission (FSC). He called on listed companies to “actively participate” in the programme’s development and implementation.
To encourage broader participation in the initiative, the government has announced that it will provide tax incentives to companies that take measures to improve shareholder returns.
South Korea’s “Value-up” following in Japan’s footsteps
The reform follows in the footsteps of similar measures taken by Japan. However, the question remains whether they can be equally successful.
South Korea already had two previous attempts at corporate governance reforms with limited success: the “Choinomics” between 2014 and 2016, which ended with President Park Geun-hye’s impeachment, and President Moon Jae-in’s reforms between 2018 and 2020, which were strongly opposed by the chaebols.
“These failed attempts at corporate governance reform highlighted that to be successful, reforms needed to be long-term oriented, especially given the deeply entrenched nature of the ‘Korea discount’, and have the widespread support of market participants, says Soo Ho Jung, ESG Analyst at Wellington Management. The current push for reform differs from previous attempts, he says, citing increased retail investing and political incentives, lessons learned from Japan and growing investor activism as reasons.
Abrdn advises investors to monitor Korea’s value-up program closely. “This is a program that could potentially increase the appeal of Korean companies and boost stock valuations in Asia’s fourth-largest economy,” the Asian Equities team says.
“We think the drive for improved corporate governance has the potential to create a number of investment opportunities in South Korea, particularly in autos and holding companies and, to a lesser extent, the financials and telecom sectors,” Soo adds.
However, there are also critical voices. According to Amay Hattangadi, Portfolio Manager, Emerging Markets Equity Team at Morgan Stanley Investment Management, some critics argue that there is “too much ‘carrot’ and not enough ‘stick’ in the current proposals to encourage the chaebols to take transformative actions”.
“While Korea’s initiative may result in little change in the short-term, due to its unspecified and voluntary nature, it should not be deemed insignificant,” thinks Mobius Capital Partners. “Given that Japan’s reforms took over a decade to take effect, Korea’s equivalent reforms should not be expected to happen overnight but should be considered an important starting point for long-term improvements.”
