Korean government knows what needs to be done, but June deadline is too late. Market is running out of patience
The 1st policy seminar on Corporate Value-up program support measuresannounced on February 26th was broadly in line with our expectation. The government's efforts to strike a balance and encourage voluntary participation from corporates, with tax incentives, are commendable. However, for the support measures to be successful, we need to approach our corporate governance reform with the notion that it will be dozens of times more difficult than Japan's. Just two years ago, LG Chemical rushed the listing of LG Energy Solution after a split-off, shamelessly exposing Korea discount to the world. Market participants seem to have low trust in controlling shareholders who infringe on the interests of minority shareholders and the financial authorities who turn a blind eye.
While the financial chief's plea for patience from the public is understandable, the market inherently lacks patience. The financial authorities' claim that four months are needed from the second seminar in May to finalizing the Guideline in June raises questions. Both the government and the market are aware of the ideal solution for the guidelines. We believe the government has several scenarios. Further delaying the process will only increase market uncertainty. The sudden short selling ban in last November failed to boost stock prices and instead heightened market uncertainty, especially damaging global financial markets' confidence in the Korean stock market. Let's learn from our mistakes and avoid repeating them after three months. We urge the authorities to expedite the finalization of the Guidelineby 1-2 months. It is concerning that the press release issued by the Korea Exchange today did not have an English version. Considering the significant proportion of foreign holdings in listed companies requiring value-up and the international financial market's strong interest in the corporate governance reform, publishing a Korean-only press release without an English version reflects a narrow perspective. The global financial market is urging Korean financial authorities to embrace global standards by drawing comparisons to the Tokyo Stock Exchange in Japan.
We assign a B- letter grade on the Corporate Value-up supportmeasures after the first seminar, which is considered as a practice test. Hopefully, the authorities are diligently preparing for the midterm exam (Guideline announcement) to achieve an A grade. If the government's target goals are met in the second half of this year and 2025, with listed companies' PBR multiples rising and shareholder returns expanding, leading to the elimination of Korea discount, the Value-up measures deserve an A+ as a final grade. The global financial market is particularly interested in the tax incentives for voluntary treasury share buybacks and cancellations. While tax benefits for dividends may be meaningful, it is also worth considering a policy that imposes taxes on companies that retain excessive profit, similar to the approach taken in Taiwan. Actually, after the introduction of an additional tax on retained earnings led to an increase in dividend payout.
It is surprising see push backs from corporates despite the government's genuine efforts to build public consensus. In today’s editorial of one of local economic papers titled “Reducing Korea discount; problem lies in the government, not corporates” criticized the Value-up support measures as a temporary solution aimed at appeasing retail investors ahead of the general election. The editorial also argued to implement a "poison pill", which an outdated instrument that has already been phased out in the United States. It is time for Korean listed companies to embrace fair competition. If management wants to maintain control of the company, they should focus on delivering strong performance, high shareholder returns, and maintaining excellent stock price and valuation as outlined in business textbooks. Notably, with high equity valuation, Apple, Microsoft, NVIDIA, Alphabet/Google, and Meta do not invite activists’ engagement.
In order to maximize the effectiveness of the Value-up support measures and transform it into a sophisticated policy instrument, we request the following five principles be followed:
1. The core of the Value-up measures is not tax breaks, but the template itself. This well-designed template, which corporates should regard as a bible, is all about details. This process aims to maximize corporate value by enabling the boards of listed companies to analyze the reasons for low valuation indicators such as PBR and PER. It also involves BoDsanalyzing the relationship between the cost of capital and ROE/ROA, setting goals and improvement plans, and implementing them. Communication with major shareholders is a crucial component of the Value-up support measures, particularly in receiving and incorporating their feedback. English reporting is recommended as a basic practice.
2. Learn from Meritz Financial Group as a best practice case. Meritz Financial Group has unanimously earned its reputation as the exemplary value-up program practitioner in Korea. It is regrettable that we were unable to invite the leadership of Meritzto the first seminar presentation or panel discussion. Unlike the recent trend of split-offs exemplified by LG and Kakao, Meritz Financial Group has taken the approach to separating ownership and management by maintaining 100% stake in its subsidiaries, Meritz Fire & Marine Insurance and Meritz Securities, and keeping them as wholly owned subsidiaries. The Group has emerged as a leading financial institution in Korea, with a market cap of W17 trillion (on par with Hana Financial Group) and PBR of 1.7 times, by upholding its commitment to returning 50% or more of its net income to shareholders.
3. Heads of financialauthorities should assume the role of project managers rather than delegate to their direct reports. In early 2024, President Yoon Seok-Yeol emphasized the importance of the capital market as a platform for mutual growth between the Korean people and businesses. He also urged the financial authorities to address the issue of Korea discount. While the establishment of a dedicated department within the Korea Exchange is a welcome step, the direct involvement of the Exchange Chairman and other financial leaders such as FSC Chairman is key to success. It is essential that they demonstrate authenticity and sincerity in their efforts.
4. FSC, KRX, and other relevant agencies must build partnerships with key long-term investors ? both local and foreign like TSE, to continuously receive feedback and refine support measures. It is crucial for the Deputy Minister of Economy and Finance, the head of FSC, and the Chairman of KRX to personally visit the offices of key investors in March for 1-2 weeks. It is important that the feedback received from investors is carefully considered and incorporated into the Value-up support guidelines. While group meetings and Zoom calls can be useful, it is essential to directly listen to the opinions of CEOs, executives, and portfolio managers of global mega funds SWFs. As NPS plays a critical role in the success of the Value-up program, gather the opinions of the NPS CIO and executives of the investment management division.
5. Pay close attention to communication with the market. Until recently, most market participants, especially global investors, were under the wrong impression that the finalized Value-up measures would be announced on February 26. KRX and FSC should upgrade their own English websites (using Japan Stock Exchange as a reference) and provide English reporting with Korean listed companies. Live broadcasting of the first seminar held today via YouTube would have attracted more participants if real-time English interpretation was provided.
While corporate governance initiative like Value-up support measuresis important in addressing Korea Discount, it is also crucial to focus on fundamental shareholder protection through regulatory reforms, especially the revision of director’ fiduciary duty to shareholders, Article 382-3 of the Commercial Code.As a final point, the implementation of a long-term dividend separation tax is a?necessary policy?that?should be enacted without further delay.
February 26, 2024
Korean Corporate Governance Forum
Chairman
Namuh Rhee
Korean government knows what needs to be done, but June deadline is too late. Market is running out of patience
The 1st policy seminar on Corporate Value-up program support measuresannounced on February 26th was broadly in line with our expectation. The government's efforts to strike a balance and encourage voluntary participation from corporates, with tax incentives, are commendable. However, for the support measures to be successful, we need to approach our corporate governance reform with the notion that it will be dozens of times more difficult than Japan's. Just two years ago, LG Chemical rushed the listing of LG Energy Solution after a split-off, shamelessly exposing Korea discount to the world. Market participants seem to have low trust in controlling shareholders who infringe on the interests of minority shareholders and the financial authorities who turn a blind eye.
While the financial chief's plea for patience from the public is understandable, the market inherently lacks patience. The financial authorities' claim that four months are needed from the second seminar in May to finalizing the Guideline in June raises questions. Both the government and the market are aware of the ideal solution for the guidelines. We believe the government has several scenarios. Further delaying the process will only increase market uncertainty. The sudden short selling ban in last November failed to boost stock prices and instead heightened market uncertainty, especially damaging global financial markets' confidence in the Korean stock market. Let's learn from our mistakes and avoid repeating them after three months. We urge the authorities to expedite the finalization of the Guidelineby 1-2 months. It is concerning that the press release issued by the Korea Exchange today did not have an English version. Considering the significant proportion of foreign holdings in listed companies requiring value-up and the international financial market's strong interest in the corporate governance reform, publishing a Korean-only press release without an English version reflects a narrow perspective. The global financial market is urging Korean financial authorities to embrace global standards by drawing comparisons to the Tokyo Stock Exchange in Japan.
We assign a B- letter grade on the Corporate Value-up supportmeasures after the first seminar, which is considered as a practice test. Hopefully, the authorities are diligently preparing for the midterm exam (Guideline announcement) to achieve an A grade. If the government's target goals are met in the second half of this year and 2025, with listed companies' PBR multiples rising and shareholder returns expanding, leading to the elimination of Korea discount, the Value-up measures deserve an A+ as a final grade. The global financial market is particularly interested in the tax incentives for voluntary treasury share buybacks and cancellations. While tax benefits for dividends may be meaningful, it is also worth considering a policy that imposes taxes on companies that retain excessive profit, similar to the approach taken in Taiwan. Actually, after the introduction of an additional tax on retained earnings led to an increase in dividend payout.
It is surprising see push backs from corporates despite the government's genuine efforts to build public consensus. In today’s editorial of one of local economic papers titled “Reducing Korea discount; problem lies in the government, not corporates” criticized the Value-up support measures as a temporary solution aimed at appeasing retail investors ahead of the general election. The editorial also argued to implement a "poison pill", which an outdated instrument that has already been phased out in the United States. It is time for Korean listed companies to embrace fair competition. If management wants to maintain control of the company, they should focus on delivering strong performance, high shareholder returns, and maintaining excellent stock price and valuation as outlined in business textbooks. Notably, with high equity valuation, Apple, Microsoft, NVIDIA, Alphabet/Google, and Meta do not invite activists’ engagement.
In order to maximize the effectiveness of the Value-up support measures and transform it into a sophisticated policy instrument, we request the following five principles be followed:
1. The core of the Value-up measures is not tax breaks, but the template itself. This well-designed template, which corporates should regard as a bible, is all about details. This process aims to maximize corporate value by enabling the boards of listed companies to analyze the reasons for low valuation indicators such as PBR and PER. It also involves BoDsanalyzing the relationship between the cost of capital and ROE/ROA, setting goals and improvement plans, and implementing them. Communication with major shareholders is a crucial component of the Value-up support measures, particularly in receiving and incorporating their feedback. English reporting is recommended as a basic practice.
2. Learn from Meritz Financial Group as a best practice case. Meritz Financial Group has unanimously earned its reputation as the exemplary value-up program practitioner in Korea. It is regrettable that we were unable to invite the leadership of Meritzto the first seminar presentation or panel discussion. Unlike the recent trend of split-offs exemplified by LG and Kakao, Meritz Financial Group has taken the approach to separating ownership and management by maintaining 100% stake in its subsidiaries, Meritz Fire & Marine Insurance and Meritz Securities, and keeping them as wholly owned subsidiaries. The Group has emerged as a leading financial institution in Korea, with a market cap of W17 trillion (on par with Hana Financial Group) and PBR of 1.7 times, by upholding its commitment to returning 50% or more of its net income to shareholders.
3. Heads of financialauthorities should assume the role of project managers rather than delegate to their direct reports. In early 2024, President Yoon Seok-Yeol emphasized the importance of the capital market as a platform for mutual growth between the Korean people and businesses. He also urged the financial authorities to address the issue of Korea discount. While the establishment of a dedicated department within the Korea Exchange is a welcome step, the direct involvement of the Exchange Chairman and other financial leaders such as FSC Chairman is key to success. It is essential that they demonstrate authenticity and sincerity in their efforts.
4. FSC, KRX, and other relevant agencies must build partnerships with key long-term investors ? both local and foreign like TSE, to continuously receive feedback and refine support measures. It is crucial for the Deputy Minister of Economy and Finance, the head of FSC, and the Chairman of KRX to personally visit the offices of key investors in March for 1-2 weeks. It is important that the feedback received from investors is carefully considered and incorporated into the Value-up support guidelines. While group meetings and Zoom calls can be useful, it is essential to directly listen to the opinions of CEOs, executives, and portfolio managers of global mega funds SWFs. As NPS plays a critical role in the success of the Value-up program, gather the opinions of the NPS CIO and executives of the investment management division.
5. Pay close attention to communication with the market. Until recently, most market participants, especially global investors, were under the wrong impression that the finalized Value-up measures would be announced on February 26. KRX and FSC should upgrade their own English websites (using Japan Stock Exchange as a reference) and provide English reporting with Korean listed companies. Live broadcasting of the first seminar held today via YouTube would have attracted more participants if real-time English interpretation was provided.
While corporate governance initiative like Value-up support measuresis important in addressing Korea Discount, it is also crucial to focus on fundamental shareholder protection through regulatory reforms, especially the revision of director’ fiduciary duty to shareholders, Article 382-3 of the Commercial Code.As a final point, the implementation of a long-term dividend separation tax is a?necessary policy?that?should be enacted without further delay.
February 26, 2024
Korean Corporate Governance Forum
Chairman
Namuh Rhee