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After the end of the Korean War, South Korea was one of the poorest countries in the world until the 1960s, when the period of high economic growth began. Since then, South Korea has established itself as a significant player in the global manufacturing sector, resulting in an annual real GDP growth average of 7.3% between 1960 and 2019.
“The government’s role in facilitating this growth, through loans from foreign financial institutions and protective measures, laid the foundation for the rise of conglomerates such as Samsung, LG, and Hyundai. These conglomerates, also referred to as “chaebols”, have now become the backbone of the South Korean economy, contributing to nearly 60% of the nation’s GDP as of 2023,” says Mathieu Bortot, Portfolio Manager at Canadian asset manager Fiera Capital.
However, as per Bortot, the conglomerates had given precedence to safeguarding their wealth rather than considering the interests of minority shareholders. This approach, he explained, significantly affected the local equity market, leading to the emergence of the “Korean Discount” phenomenon. This phenomenon is characterised by the lower valuation of Korean companies, attributed to issues related to corporate governance.
“This concentration of economic power within a few chaebols has exacerbated income inequality, leading to significant social and economic challenges with investors frustrated with corruption, tax evasion and questionable capital allocation,” explains Bortot.
In response to the “Korea Discount” problem, South Korea announced a reform plan for listed companies in February to boost shareholder returns, enhance governance, and increase valuations. The proposed changes also include adjustments to dividend and inheritance taxes, which are expected to benefit the general public and influential chaebol families.
The changes follow Japan’s reforms to improve corporate governance for a more investor-friendly dialogue. “The positive outcomes of these reforms in Japan, including improved stock valuations and a lower cost of capital, underscore the potential benefits of similar ‘Value-Up’ reforms in Korea, as we see the Japanese equity market at current all-time highs,” opines Bortot.
Some analysts have commented that the proposals put forth by the Korean government do not go far enough.
Jae-hwan Huh, an analyst at Eugene Investment Securities, expressed that the market had anticipated a ‘sell-on-the-news’ reaction, yet the pressure to take profits intensified because the proposal announced was significantly more disappointing than expected. “It was just too plain, with few measures seen as incentives. Neither compulsory requirements nor tax benefits were in there, which were steps the market had been anticipating,” he said.
The reforms are voluntary; however, the proposal “includes more and much stronger incentives than those rolled out in Japan”, the Financial Services Commission (FSC) said.
The FSC further plans to introduce the “Korea Value-up Index” for institutional investors, including pension funds, and to list ETFs that track the index to facilitate retail investors’ access to these companies.
