Recently, however, Government initiatives in South Korea have kick-started the road to reform. Inspired by Japan, South Korea has introduced its own “Corporate Value Up program” - an injection of measures designed to bring about improved capital management by listed South Korean companies, seeking to embed constructive guidelines that empower minority shareholders.
The program began with a raft of capital market advancement initiatives introduced at the start of President Yoon’s term in 2022 and was recently augmented with new guidelines aimed at further enhancing shareholder disclosure, increasing shareholder returns through dividends, encouraging share buybacks and improving operating performance, all with a view to boosting valuations.
On the back of the announcements earlier this year, prices for low P/B stocks rose steadily, in anticipation of real change. April’s general election results, which handed greater parliamentary control to the opposition DP party, dampened investor interest and led to some pullback of stocks previously seen as “value up” beneficiaries.
The “value up” program does of course face challenges, for example that it is currently set up on a voluntary basis with no legal obligation for compliance, and the South Korean market has punitive inheritance tax laws which are unlikely to change given the current division of power in South Korean politics.
However, with the number of South Korean retail investors having increased from six million in 2019 to 14 million today, 40% of voters are now shareholders. This rise in public interest creates a more bipartisan platform for change. It’s in everyone’s interest for the share market to perform well. And in our recent interactions with South Korean companies, including the management of a number of the large chaebol members, we are hearing that the reforms are indeed being taken seriously, with many companies not wanting to be seen to be dragging their feet while their competitors push ahead. There has also been a noticeable rise in shareholder dissention, opinion letters to Boards and proposals at AGMs – signaling a rise of activism which was also a feature of the successful governance improvement seen in Japan.
We recognize that these reforms will take time to realize, and that for the P/B of South Korean companies to see lasting improvement, a concerted and combined joint effort across Government, regulators, agencies and the investment community will be needed. However, we believe that the early signs remain promising.
Because much of the governance improvement is targeted at lower-valued companies, the impact is likely to be more of a tailwind for value-oriented investment strategies. In Japan, MSCI’s value index has outperformed its growth counterpart by 76% since the end of 2020. In South Korea, although we are at a much earlier stage of the governance improvement program, MSCI’s value index has outperformed the growth index by 39%, and we believe there is significantly more potential still to be realized (Display).
