KB Financial’s value-up deserves A+, JB earns A-
Chaebol should learn from KB’s top-notch value-up program
KB Financial Group and JB Financial Group have unveiled comprehensive and detailed value-up plans on October 24th and September 24th, respectively. While both have been recognized for their efforts, KB Financial Group has been awarded an A+ grade and JB Financial Group with A-, as the latter has two areas for improvement. Given the ambitious nature of KB's newly announced plan, it is ironic that the Korea Exchange excluded KB from the Korea Value Up Index on September 24th. Perhaps the Exchange could benefit from studying KB's approach to value creation.
KB was awarded the highest score due to three key factors:
- Development of a robust value-up framework, facilitated by a board-centric approval process;
- Demonstrated commitment and effective governance in place; and
- Strategic focus on long-term sustainability and predictability of value creation.
The substantial 78% foreign equity ownership in KB demonstrates the financial group's leadership in building shareholder communication and trust with global investors. Based on this, the company has indicated its intention to continuously elevate its equity valuation through enhanced shareholder returns, emphasizing sustainability and predictability. It clearly stated that shareholder returns are a means to an end, not the ultimate goal of value creation. It's unfortunate that many Korean listed company CEOs and CFOs misunderstand this point.
KB initiated a comprehensive review of its ‘2022 Value-up strategy’ long before the Korea Exchange's guideline was published past May. KB has engaged in at least five in-depth board discussions to refine its value-up framework. This collaborative process culminated in the board's final approval on October 24th, underscoring the board's central role in shaping the company's value creation direction. By inviting value-up and governance experts to educate the board and management, KB has incorporated a solid understanding of capital costs and rational capital allocation principles. This demonstrates KB's commitment to best practices, and it would be advantageous for other local listed companies to adopt this approach.
Although still in its early stages, KB has initiated efforts to align the interests of its employees with shareholders by implementing executive stock-based compensation and encouraging employee share ownership (ESOP). It is reported that the employee stock ownership association holds approximately 2% of the company's issued shares, valued at around 740 billion won. CEO Yang Jong Hee and other executives are pursuing shareholder alignment through long-term performance-based cash rewards linked to stock prices (“phantom stock”). To further solidify this alignment, we recommend that KB significantly increases the proportion of stock- based awards, such as RSUs, in the long-term compensation of management. Additionally, to better compensate outside directors (or independent directors) for their substantial contributions, their total compensation should be adjusted, and a large portion should be tied to the company's performance through RSUs.
Consistent with its commitment to "Responsible growth," JB Financial Group has unveiled a detailed value-up plan last month. CEO Kim Ki Hong was previously hesitant about the benefits of share buyback and cancellation. In the value-up plan, however, JB recognized the significant value creation potential, as evidenced by the projected internal rate of return of 23% of share buyback/cancellation, which is higher than its ROE of 13%. JB’s decision to maintain a consistent dividend payout ratio of 28% while allocating excess cash to share buyback program is a positive step, in our view. Its ambitious long-term goals, including a target ROE of 15%, a shareholder return ratio of 45% by 2026, and a commitment to returning over 50% of capital to shareholders when the CET1 ratio surpasses 13%, are indeed impressive. The effectiveness of this well-crafted capital allocation policy is evident in the 13% increase in share price following the announcement on September 24th.
Despite its strengths, JB was rated A- (two notches below KB) for two main reasons:
- Absence of a plan to manage the growth of risk-weighted assets (RWA); and
- Lack of a detailed succession planning for CEO Kim Ki Hong, whose six years of tenure ends in March 2025.
JB's board of directors appears to have room for improvement in terms of independence compared to larger financial holding companies such as KB. According to JB's value-up plan, the CEO succession planning process should begin at least four months before the end of the current term, which is scheduled for March 2025. The board should select the most suitable CEO from a pool of highly qualified candidates through a transparent process to meet the heightened expectations of shareholders.
October 28, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
KB Financial’s value-up deserves A+, JB earns A-
Chaebol should learn from KB’s top-notch value-up program
KB Financial Group and JB Financial Group have unveiled comprehensive and detailed value-up plans on October 24th and September 24th, respectively. While both have been recognized for their efforts, KB Financial Group has been awarded an A+ grade and JB Financial Group with A-, as the latter has two areas for improvement. Given the ambitious nature of KB's newly announced plan, it is ironic that the Korea Exchange excluded KB from the Korea Value Up Index on September 24th. Perhaps the Exchange could benefit from studying KB's approach to value creation.
KB was awarded the highest score due to three key factors:
- Development of a robust value-up framework, facilitated by a board-centric approval process;
- Demonstrated commitment and effective governance in place; and
- Strategic focus on long-term sustainability and predictability of value creation.
The substantial 78% foreign equity ownership in KB demonstrates the financial group's leadership in building shareholder communication and trust with global investors. Based on this, the company has indicated its intention to continuously elevate its equity valuation through enhanced shareholder returns, emphasizing sustainability and predictability. It clearly stated that shareholder returns are a means to an end, not the ultimate goal of value creation. It's unfortunate that many Korean listed company CEOs and CFOs misunderstand this point.
KB initiated a comprehensive review of its ‘2022 Value-up strategy’ long before the Korea Exchange's guideline was published past May. KB has engaged in at least five in-depth board discussions to refine its value-up framework. This collaborative process culminated in the board's final approval on October 24th, underscoring the board's central role in shaping the company's value creation direction. By inviting value-up and governance experts to educate the board and management, KB has incorporated a solid understanding of capital costs and rational capital allocation principles. This demonstrates KB's commitment to best practices, and it would be advantageous for other local listed companies to adopt this approach.
Although still in its early stages, KB has initiated efforts to align the interests of its employees with shareholders by implementing executive stock-based compensation and encouraging employee share ownership (ESOP). It is reported that the employee stock ownership association holds approximately 2% of the company's issued shares, valued at around 740 billion won. CEO Yang Jong Hee and other executives are pursuing shareholder alignment through long-term performance-based cash rewards linked to stock prices (“phantom stock”). To further solidify this alignment, we recommend that KB significantly increases the proportion of stock- based awards, such as RSUs, in the long-term compensation of management. Additionally, to better compensate outside directors (or independent directors) for their substantial contributions, their total compensation should be adjusted, and a large portion should be tied to the company's performance through RSUs.
Consistent with its commitment to "Responsible growth," JB Financial Group has unveiled a detailed value-up plan last month. CEO Kim Ki Hong was previously hesitant about the benefits of share buyback and cancellation. In the value-up plan, however, JB recognized the significant value creation potential, as evidenced by the projected internal rate of return of 23% of share buyback/cancellation, which is higher than its ROE of 13%. JB’s decision to maintain a consistent dividend payout ratio of 28% while allocating excess cash to share buyback program is a positive step, in our view. Its ambitious long-term goals, including a target ROE of 15%, a shareholder return ratio of 45% by 2026, and a commitment to returning over 50% of capital to shareholders when the CET1 ratio surpasses 13%, are indeed impressive. The effectiveness of this well-crafted capital allocation policy is evident in the 13% increase in share price following the announcement on September 24th.
Despite its strengths, JB was rated A- (two notches below KB) for two main reasons:
- Absence of a plan to manage the growth of risk-weighted assets (RWA); and
- Lack of a detailed succession planning for CEO Kim Ki Hong, whose six years of tenure ends in March 2025.
JB's board of directors appears to have room for improvement in terms of independence compared to larger financial holding companies such as KB. According to JB's value-up plan, the CEO succession planning process should begin at least four months before the end of the current term, which is scheduled for March 2025. The board should select the most suitable CEO from a pool of highly qualified candidates through a transparent process to meet the heightened expectations of shareholders.
October 28, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee