Peter S. Kim
The Financial Supervisory Service (FSS), South Korea's key financial regulator, held an event in New York City recently that was attended by more than 200 global investors.
The event’s main purpose was to promote the Corporate Value-Up Program (CVP), an ambitious initiative to revitalize Korea's capital market. Since the launch of the CVP at the beginning of this year, the Korean stock market has risen in anticipation of a market boom similar to the one seen in Japan.
However, while the Japanese stock market has risen by 40 percent over the past 18 months, Korea's main bourse KOSPI has risen by a modest 17 percent during the same period. One of the main reasons cited for the underwhelming market reaction is the outcome of April’s general election in which the left-wing opposition party retained majority of the parliament, raising concerns from global investors that the ruling party will have limited legislative power to support the capital market revitalization plans. However, there are reasons to remain optimistic in the coming months.
In 2016, Korea introduced the stewardship code as a framework for constructive dialogue about better shareholder returns and transparency. Since then, there has been gradual progress in understanding the need for constructive discussion between investors and corporate management.
The stewardship code is aimed at building consensus-driven dialogue rather than the hostile one that is often associated with activist investors. Amid the rising trend of activism and the CVP, the role of the stewardship code is of critical importance.
The FSS has proposed to introduce a benchmark index comprised of companies that comply with CVP guidelines by the end of the year. And most encouragingly, the stewardship code has been mentioned as the key framework for constructing this index. That means that the CVP-related ETF will have the implicit backing of the National Pension Service (NPS) since it has endorsed Korea's stewardship code since inception. As the largest owner of Korean equities, in addition to its dominant influence over the domestic asset management industry with its outsourced funds, the NPS could be the silver bullet for the FSS should CVP momentum falter at any point.
The second important event for investors is the Commercial Act Article 382, which stipulates shifting the board of directors' fiduciary duty from company to shareholders. To me, this is the fundamental game changer and the most vital message yet that Korean management will have to cater to the collective group of minority shareholders as well as majority shareholders going forward. The Article 382 revision was proposed initially last year by the left-wing opposition with support from the ruling right wing, making it a rare bipartisan bill. The leader of the opposition party Lee Jae-myung was quoted as supporting the bill, which means the general election win by the left makes the bill’s prospects bright for the upcoming legislative session.
Any opposition to the bill, including the Ministry of Justice that cited concerns about opening a Pandora's box of frivolous litigations from shareholders of all sizes and potentially paralyzing companies from conducting their normal course of business, has largely been resolved in the face of public support from President Yoon and key political figures. As the National Assembly prepares to open in June, the passage of Article 382 will be critical in convincing investors that the direction of corporate governance reform is on track.
In addition to the aforementioned two catalysts, evolving public sentiment towards the CVP will be equally, if not more, important. Korea's general population is getting a much-needed education on the need to improve capital market efficiency for an economy that is fast running out of traditional sources of growth. For decades, Koreans have had an insatiable appetite for residential property as an unchallenged investment asset.
However, with a rapidly declining population and intensifying concerns about the household debt used to speculate on apartments, the need to shift investment focus to financial products away from property is urgently needed. The opposition party is pushing for capital gains taxes on all financial products, including stocks and dividends, starting from next year. The need to postpone or cancel this tax levy should be a priority for an economy seeking to generate growth through prudent financial management rather than traditional speculative herd investing.
Korea's general public, including the working class, needs to understand the urgency of the CVP as an engine to drive long-term growth for an economy running out of traditional avenues of growth like exports and residential property. The empowerment of minority shareholders' rights is one of the important landmarks for Korea to achieve status as a developed economy. Therefore, increasing support for the CVP from the voting public will be critical in laying the foundation for Korea’s economy, which is already an advanced economy by most measures. Hopefully, it will not take three decades of painful education, like we have seen in Japan, before the general public demands real action.
Peter S. Kim is managing director at the KB Financial Group.
Shareholder rights at crossroads
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05.06.2024
Peter S. Kim
The Financial Supervisory Service (FSS), South Korea's key financial regulator, held an event in New York City recently that was attended by more than 200 global investors.
The event’s main purpose was to promote the Corporate Value-Up Program (CVP), an ambitious initiative to revitalize Korea's capital market. Since the launch of the CVP at the beginning of this year, the Korean stock market has risen in anticipation of a market boom similar to the one seen in Japan.
However, while the Japanese stock market has risen by 40 percent over the past 18 months, Korea's main bourse KOSPI has risen by a modest 17 percent during the same period. One of the main reasons cited for the underwhelming market reaction is the outcome of April’s general election in which the left-wing opposition party retained majority of the parliament, raising concerns from global investors that the ruling party will have limited legislative power to support the capital market revitalization plans. However, there are reasons to remain optimistic in the coming months.
In 2016, Korea introduced the stewardship code as a framework for constructive dialogue about better shareholder returns and transparency. Since then, there has been gradual progress in understanding the need for constructive discussion between investors........
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