South Korea’s stock exchange chief defends slow start to corporate reform

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South Korea’s stock exchange chief Jeong Eun-bo defended his country’s corporate reform drive amid disappointment among local and foreign investors that Seoul is failing to replicate Tokyo’s success in raising historically low valuations.

South Korean regulators and political leaders have spent much of this year promoting their “Corporate Value-up” initiative, which includes a new index highlighting companies that have improved capital efficiency, as well as tax incentives for businesses that prioritize shareholder returns.

But only 1% of South Korea’s 2,600 listed companies have signed up or committed to join the program since it was announced in February, leading industry groups including Samsung and battery chip conglomerate SK Group, has not yet announced plans to participate. .

“The corporate value enhancement program was a politically engineered stop-gap measure to appease local investors ahead of the parliamentary elections earlier this year, but it ended up being a total failure,” said Park Ju- geun, the head of the company in Seoul. Corporate Research Group Leaders Index.

But Jeong, chief executive of the Korea Exchange, which operates the Kospi and Kosdaq indices, told the Financial Times that momentum would build behind the initiative as the country’s biggest conglomerates joined.

Carmaker Hyundai Motor last month said it would set new total shareholder return and share buyback targets as it announced its stake, while electronics group LG and battery steel materials conglomerate Posco will also announce plans to join.

“Korea has a strong culture of naming and shaming,” Jeong said. “If leading companies join the Corporate Value-up program, others are bound to follow suit.” He added that Samsung, South Korea’s largest industrial group, had privately communicated to him their intention to join the voluntary program by the end of this year.

But he also argued that the role Tokyo’s corporate governance played in propelling the Nikkei 225 to record highs this year had been “overstated”. The revival in the Tokyo stock market was mainly attributed to a recovery in Japan’s underlying industrial competitiveness, he said.

Blaming a lack of innovation by South Korea’s main industrial groups for their low valuations, he said companies like Samsung needed to address what he described as investors’ “rational” concerns about their intrinsic value. Shares of Samsung Electronics hit a 52-week low on Wednesday.

“Our share prices have not risen enough compared to other major countries, but that is a matter of the growth potential of our industries,” Jeong said. “The key is how each company invests and innovates, and the Korean authorities can’t do much about that.”

Defying expectations that South Korea would benefit from the flow of Western money from China and diminishing opportunities to invest in undervalued companies in Japan, there was a net outflow of $5.5 billion from the Korean stock market of the South in the first half of 2024, with South Korea’s holdings in US stocks rising 26.2% over the same period.

About two-thirds of companies listed on the Kospi benchmark trade at a price-to-book ratio of less than one, meaning the market values ​​them below their stated net asset value. Many analysts blame a legal and regulatory framework designed to protect conglomerate founding families at the expense of minority shareholders.

As more South Korean retail investors have gotten involved in the stock market since the coronavirus pandemic, the “Korea reduction” of chronic undervaluations has become more of a political issue. The national pension fund – South Korea’s biggest stock buyer – is also being hit, at a time when it is expected to run out of money in the 2050s due to a shrinking population.

Jeong said the Corporate Value-up would help improve valuations by helping investors access better information about the company’s plans to improve capital efficiency and shareholder returns. He added that South Korean authorities offer stronger tax incentives than those offered in Japan.

But the Park of Leaders Index said, for serious progress to be made, South Korea must impose a legal obligation on board members to uphold the interests of shareholders.

“Corporate governance in South Korea is still not transparent and minority shareholders are still routinely mistreated,” he said. “Without a fiduciary duty to shareholders, authorities cannot credibly argue that they did everything they could.”