Earlier this year, Korea’s Financial Services Commission (FSC) launched the Corporate Value-Up Program to address the so-called “Korea Discount”, which has led Korean companies to be valued lower than their global peers. Inspired by a successful recent campaign to improve the valuation of Japanese companies, this initiative aims to enhance the capital efficiency of Korean companies.
In this post, we provide background on the Korea Discount, an overview of the Corporate Value-Up Program, and a look at the potential repercussions on stewardship and shareholder activism.
Efforts to Overcome Korea Discount
The discounting of Korean valuations is largely due to low capital efficiency and insufficient corporate governance structure, often stemming from the dominance of opaque conglomerates known as chaebols. The phenomenon has persisted despite a strong economy – as have its root causes. According to the Financial Services Commission (FSC), as of 2023, the Korean stock market capitalization was at KRW 2,558 trillion, ranking 13th among major global markets, with 2,558 listed companies, the 7th largest number globally. However, while the country’s stock market ranks within the top 10-15 globally in quantitative growth, qualitative growth metrics, such as PER, governance, and returns, tend to lag behind global standards.
The FSC’s “Support for Corporate Value-UP” report indicates that over the past decade, the average price-to-book ratio (PBR), price-to-earnings ratio (PER), and return on equity (ROE) for Korean listed companies has lagged that of the U.S., Japanese, and British markets. These key performance indicators suggest that Korean companies are undervalued relative to their net assets and earnings. Over the past decade, while the S&P500 and Nikkei 225 indices have grown by 179.4% and 155.5% respectively, the KOSPI has grown by only 35.0%. This growth rate is also lower than that of emerging markets such as India (255.4%), Brazil (167.3%), Taiwan (117.7%) and China (36.4%).
In response to persistent demands from both foreign and domestic investors to address the issue, the Korean government has initiated actions to improve capital efficiency and align the market more closely with global corporate governance best practices. Recent discussions have focused on regulatory changes, such as mandatory non-financial disclosures, improvement of dividend processes, and adoption of the virtual-only meeting format. While some of these measures have faced delays due to political wrangling, the governmental effort to address the Korea Discount has continued into 2024, with President YOON Suk Yul’s cabinet prioritizing the issue, and the Financial Services Commission (FSC) announced the Corporate Value-Up Program in February.
What is the Corporate Value-up Program?
The Corporate Value-up Program (Program) was inspired by Corporate Governance Code (Japan CG Code) adopted by the Tokyo Stock Exchange (TSE) in Japan, where issues of capital efficiency are similar to that in Korea. This initiative provides companies with guidance on analyzing their financial positions, developing strategies to enhance corporate value, and engaging with investors to communicate these plans effectively. Unlike most Korean rules and regulations, which are typically based on “hard law” compliance, the Program emphasizes voluntary disclosure. This may create barriers for Korean companies who are unfamiliar with individualized and open-ended disclosure requirements, having traditionally adhered to disclosures mandated by specific laws and regulations.
To facilitate a smooth transition, The Korea Exchange (KRX) implemented the finalized guidelines starting May 27 to support the active participation of listed companies in programs.
These guidelines recommend that companies:
- Present key investment indicators, such as PBR, PER, ROE, and dividend payout ratio, along with governance structures that include plans for board independence, gender diversity, and the separation of CEO and board chair roles.
- Analyze these disclosed indicators as part of a three-year Corporate Value-up Plan, which should include specific targets for increasing capital efficiency through business investments, the disposal of treasury stocks, and other measures. Companies are expected to disclose this plan at least annually and update progress starting from the second year.
- Actively engage with investors and disclose the outcomes of these engagements. For companies with total assets exceeding KRW 500 billion, who are subject to mandatory corporate governance report disclosures starting in 2024, the corporate governance report must confirm whether a Corporate Value-up Plan has been presented.
Financial authorities have clarified that the Program is not intended as a short-term measure that could lead to superficial compliance. Instead, it aims to encourage companies to voluntarily participate, fostering a long-term view of corporate growth and value enhancement.
Derivatives from the Corporate Value-up Program
As part of the Program, “Korea value-up index” was launched in September. This index applies five selection criteria: market capitalization within the top 400, profitability with no losses over the past two years, shareholder return through consistent dividends or share buybacks, a price-to-book ratio (PBR) in the top 50%, and high return on equity (ROE). Based on these criteria, 67 KOSPI and 33 KOSDAQ companies were included in the index. It is designed to create both peer pressure among competitors and market pressure from investors, depending on a company’s inclusion of the index. The Korea Value-up Index will serve as a benchmark for developing various financial products and will be a key indicator for the Korea National Pension Service and other institutional investors.
Additionally, the Korean Stewardship Code (Code) has been amended to recommend that institutional investors monitor the mid- to long-term corporate values of their investee companies. This includes observing the implementation and engagement of the Corporate Value-up Plans, although the Code did not specify detailed evaluation criteria.
To further incentivize participation in the Program, the government offers various rewards, such as certified corporate value-up awards, exemptions from annual fees on the Exchange, priority participation in KRX’s joint IR events, and more. While tax benefits were initially rumored to be available to participate companies, these have not been included in the guideline released in May.
Impact on Shareholder Activism
Many observers have argued that the Program cannot be effective without fundamental reforms to the current “Chaebol” system. The priorities of these conglomerates often do not align with those of minority shareholders, hindering the implementation of shareholder return policies and the establishment of independent boards that could enhance corporate value. In this context, activist funds, particularly local ones, have been increasingly engaged in pushing for improvements in corporate governance among Korean companies. While the Program does not explicitly address Chaebol reforms, its emphasis on enhancing corporate values may act as a catalyst for greater shareholder activism in the Korean market.
Recent trends suggest that activist campaigns advocating for better shareholder returns, including specific improvement measures, are likely to increase. Data from the 2024 proxy season shows that although most activists did not win proxy battles against Chaebol-controlled companies at annual general meetings, their efforts influenced corporate behavior — for example, the pressure from these campaigns led to a 33% increase in the cancellation of treasury stocks among Korean listed companies from 2022 to 2023, signaling a response to market demands and government signals.
The Program mandates that boards of directors take a leading role in monitoring the preparation and implementation of value-up plans, a process that will require independent oversight. In 2024, over 74% of large companies meet the Glass Lewis benchmark policy’s majority board independence criteria, yet concerns remain about the true independence and professional input of purportedly independent directors. More than 50% of companies still combine the roles of board chair and CEO, and major firms like Samsung, Hyundai, and LG have recorded zero dissenting votes from independent directors in the past five years. Furthermore, 70% of outside directors come from academia, government, or legal backgrounds, rather than corporate management.
Consequently, to reinforce independent and professional oversight, we expect an uptick in activist campaigns pushing for the appointment of additional independent directors at future shareholder meetings.
Notably, the 2024 proxy season saw significant achievements in this area, with the domestic activist investor Align Partners successfully placing two directors at JB Financial Group, marking a first in Korean financial history. Additionally, Flashlight Capital, a Singapore-based fund, secured a director position at KT&G Corporation after cooperating with the tobacco company’s largest shareholder, the Industrial Bank of Korea.
As the Program begins to reshape the landscape, it is likely to stoke additional activism. Whether that takes the form of contentious proxy battles, or increased engagement, pre-communication and collaboration remains to be seen – and is largely in the hands of Korean public companies and their shareholders.