Korean Corporate Governance Forum Opinion
Latest Government and Ruling Party’s ‘Value-up’ Initiatives
Receive Disappointing C grade
“Without amendments to Commercial Code for investor protection,
tax reform will merely result in tax cuts for wealthy.”
The government’s “2024 Tax Reform Proposal” announced on July 25 was very disappointing assuming that there will be no further addition to the ‘Value-up’ program. Value-up is Yoon Suk-Yeol’s signature economic policy. In early May, our forum awarded A for Corporate value-up Guidelines and B- for overall plan, but it is inevitable to revise down to C rating today. Had the Financial Investment Income Tax proposal been omitted, we would have considered even a D grade. It appears to be a mere tax cut policy for the wealthy, giving carrots but no sticks to those who are responsible for the “Korea discount”. Under the present conditions, the prospects of the government's tax reform bill receiving the opposition party's endorsement at the National Assebley appear dim. The root of the Korea discount is weak corporate governance. Value-up policies should prioritize issues beyond inheritance and gift tax cuts. The government and ruling party's uncoordinated approach to Value-up policies, unfortunately, reveals a lack of comprehension of the capital market and a disregard for the interests of the 14 million individual investors.
The main reason for the disappointment with the latest Value-up plan is the decision to postpone amendments to the Commercial Code, which would expand the duty of loyalty of directors from the company to shareholders. We believe strong opposition from the business community resulted in the postponement. Shareholders of listed companies in Doosan, Hanwha, and SK groups have suffered significant financial losses in July due to a series of capital transactions primarily benefiting the controlling shareholders. The series of highly complex capital transactions disclosed by Doosan Corporation and its three listed affiliates on July 11 was shocking. On July 25, shares of Doosan Corp was down -12%, Doosan Enerbility -4%, Doosan Robotics -8%, and Doosan Bobcat -6%; mass selling resulted. The decline in the stock market and the erosion of trust in the capital market have adversely affected not only 14 million individual investors but also the National Pension Service (NPS). If the directors of the four Doosan listed firms above had been independent and considered for the best interest of shareholders, the board would not have approved the series of capital transactions, and minority shareholders would not have suffered from the sell-off.
While establishing a 'Tax incentive for shareholder returns' is welcomed, significant shortcomings exist. The three-year limitation will likely restrict its effectiveness, in our view, as shares represent perpetual capital and share prices reflect long-term future value. It is very concerning that companies may develop the bad habit of only taking actions when given incentives. While the government is concerned about a shortfall in overall tax revenue, the 'Corporate tax credit' scheme offers a mere 5% deduction only on the incremental amount, raising questions about its effectiveness. While ‘Separate taxation on dividend income’ may be effective for listed financial holding companies that are expected to see robust dividend growth in the future, it too only provides benefits on the incremental amounts. Our forum suggests the following: remove the three-year limit and, over time, promote separate, lower taxation on full dividend amount (as opposed to incremental increases), aligning our practices with those of developed countries. To ensure that the expansion of ‘ISA tax support’ leads to sustained inflows of capital into the stock market, the corporate governance of the listed companies must ultimately improve. This would enable Korean stocks to achieve a long-term total shareholder return of 10-13% per annum, comparable to those of the US, Japan, and Taiwan, instead of the current 5% pa.
The lowering of inheritance tax on listed company shares held by controlling shareholders’ has betrayed 14 million minority investors who had hopes for the Value-up initiatives. There must be genuine efforts by controlling shareholders to improve corporate governance. While we agree that the excessively high inheritance and gift tax rates should be adjusted to a more reasonable level, key Value-up initiatives that investors have long demanded for—such as amendments to the Commercial Code, mandatory share buyback and cancellation, and the proactive activation of stewardship code by the NPS—have all been overlooked. The government's claim that reducing inheritance taxes will boost corporate competitiveness is not supported by global evidence. The concept of 'Management rights' claimed by controlling families is unique to Korea and does not exist in advanced countries.
Foreign investors, who have been the main drivers of Korean stock market this year, will likely feel deceived by the government's latest move regarding the Value-up. To address tax revenue concerns, the government may consider taxing listed companies with chronically low PBRs (below 1x) based on book value instead of market value (ie, share price). By imposing an inheritance tax on the greater of book value or market value while simultaneously lowering the tax rate, the government could increase tax revenue, and investors could anticipate higher share prices. To eliminate the incentive for controlling shareholders to artificially depress share prices, the taxation method should be rationalized based on the higher value between market value and book value.
The “Discussion on proportional benefits for shareholders and Value-up plan” hosted by eight opposition party lawmakers (and sponsored by our Forum) on July 23, was quite impressive. These lawmakers' insights, experiences, concerns, and sincerity appeared to surpass those of any government officials or ruling party members. The market eagerly awaited the opposition party's official response to the government's Value-up policy announced earlier this year. During the discussion, a practical alternative was proposed to amend the Capital Markets Act instead of the Commercial Code to accelerate revision to Director’s duty of loyalty. The 14 million retail investors in Korea would resonate with Deng Xiaoping's pragmatic approach, 'It doesn't matter whether a cat is black or white, as long as it catches mice.'
July 26th, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Korean Corporate Governance Forum Opinion
Latest Government and Ruling Party’s ‘Value-up’ Initiatives
Receive Disappointing C grade
“Without amendments to Commercial Code for investor protection,
tax reform will merely result in tax cuts for wealthy.”
The government’s “2024 Tax Reform Proposal” announced on July 25 was very disappointing assuming that there will be no further addition to the ‘Value-up’ program. Value-up is Yoon Suk-Yeol’s signature economic policy. In early May, our forum awarded A for Corporate value-up Guidelines and B- for overall plan, but it is inevitable to revise down to C rating today. Had the Financial Investment Income Tax proposal been omitted, we would have considered even a D grade. It appears to be a mere tax cut policy for the wealthy, giving carrots but no sticks to those who are responsible for the “Korea discount”. Under the present conditions, the prospects of the government's tax reform bill receiving the opposition party's endorsement at the National Assebley appear dim. The root of the Korea discount is weak corporate governance. Value-up policies should prioritize issues beyond inheritance and gift tax cuts. The government and ruling party's uncoordinated approach to Value-up policies, unfortunately, reveals a lack of comprehension of the capital market and a disregard for the interests of the 14 million individual investors.
The main reason for the disappointment with the latest Value-up plan is the decision to postpone amendments to the Commercial Code, which would expand the duty of loyalty of directors from the company to shareholders. We believe strong opposition from the business community resulted in the postponement. Shareholders of listed companies in Doosan, Hanwha, and SK groups have suffered significant financial losses in July due to a series of capital transactions primarily benefiting the controlling shareholders. The series of highly complex capital transactions disclosed by Doosan Corporation and its three listed affiliates on July 11 was shocking. On July 25, shares of Doosan Corp was down -12%, Doosan Enerbility -4%, Doosan Robotics -8%, and Doosan Bobcat -6%; mass selling resulted. The decline in the stock market and the erosion of trust in the capital market have adversely affected not only 14 million individual investors but also the National Pension Service (NPS). If the directors of the four Doosan listed firms above had been independent and considered for the best interest of shareholders, the board would not have approved the series of capital transactions, and minority shareholders would not have suffered from the sell-off.
While establishing a 'Tax incentive for shareholder returns' is welcomed, significant shortcomings exist. The three-year limitation will likely restrict its effectiveness, in our view, as shares represent perpetual capital and share prices reflect long-term future value. It is very concerning that companies may develop the bad habit of only taking actions when given incentives. While the government is concerned about a shortfall in overall tax revenue, the 'Corporate tax credit' scheme offers a mere 5% deduction only on the incremental amount, raising questions about its effectiveness. While ‘Separate taxation on dividend income’ may be effective for listed financial holding companies that are expected to see robust dividend growth in the future, it too only provides benefits on the incremental amounts. Our forum suggests the following: remove the three-year limit and, over time, promote separate, lower taxation on full dividend amount (as opposed to incremental increases), aligning our practices with those of developed countries. To ensure that the expansion of ‘ISA tax support’ leads to sustained inflows of capital into the stock market, the corporate governance of the listed companies must ultimately improve. This would enable Korean stocks to achieve a long-term total shareholder return of 10-13% per annum, comparable to those of the US, Japan, and Taiwan, instead of the current 5% pa.
The lowering of inheritance tax on listed company shares held by controlling shareholders’ has betrayed 14 million minority investors who had hopes for the Value-up initiatives. There must be genuine efforts by controlling shareholders to improve corporate governance. While we agree that the excessively high inheritance and gift tax rates should be adjusted to a more reasonable level, key Value-up initiatives that investors have long demanded for—such as amendments to the Commercial Code, mandatory share buyback and cancellation, and the proactive activation of stewardship code by the NPS—have all been overlooked. The government's claim that reducing inheritance taxes will boost corporate competitiveness is not supported by global evidence. The concept of 'Management rights' claimed by controlling families is unique to Korea and does not exist in advanced countries.
Foreign investors, who have been the main drivers of Korean stock market this year, will likely feel deceived by the government's latest move regarding the Value-up. To address tax revenue concerns, the government may consider taxing listed companies with chronically low PBRs (below 1x) based on book value instead of market value (ie, share price). By imposing an inheritance tax on the greater of book value or market value while simultaneously lowering the tax rate, the government could increase tax revenue, and investors could anticipate higher share prices. To eliminate the incentive for controlling shareholders to artificially depress share prices, the taxation method should be rationalized based on the higher value between market value and book value.
The “Discussion on proportional benefits for shareholders and Value-up plan” hosted by eight opposition party lawmakers (and sponsored by our Forum) on July 23, was quite impressive. These lawmakers' insights, experiences, concerns, and sincerity appeared to surpass those of any government officials or ruling party members. The market eagerly awaited the opposition party's official response to the government's Value-up policy announced earlier this year. During the discussion, a practical alternative was proposed to amend the Capital Markets Act instead of the Commercial Code to accelerate revision to Director’s duty of loyalty. The 14 million retail investors in Korea would resonate with Deng Xiaoping's pragmatic approach, 'It doesn't matter whether a cat is black or white, as long as it catches mice.'
July 26th, 2024
Korean Corporate Governance Forum
Chairman, Namuh Rhee