Seoul unveils corporate value-boosting plan

Bold move: Currency traders watch monitors at a foreign-exchange department of a bank in Seoul. South Korea will also introduce a value-up index in the third quarter, similar to Japan’s JPX Prime 150 Index, composed of the best-practicing companies. — AP

SEOUL: South Korea unveiled further details on its plans to push listed companies to improve management and corporate governance, taking a cue from Japan to address a view that local stocks are undervalued compared to other Asian markets.

In the “Corporate Value-up Programme,” South Korean companies with management practices that prioritise shareholder returns will be given “bold incentives” and tax benefits, the Financial Services Commission (FSC) said in a statement yesterday.

The nation will also introduce the “Korea Value-up Index” in the third quarter – similar to Japan’s JPX Prime 150 Index and composed of best-practising companies – that will be used by pension funds and other institutional investors as a benchmark.

New exchange-traded funds, envisioned to be launched in the fourth quarter, will also be able to track the index, the FSC said.

The announcement provides clearer guidance on South Korean authorities’ valuation-boosting initiatives, which have been keenly anticipated by global investors eager for better corporate governance practices in Asia’s fourth-largest economy.

The hoped-for outcome would be to engender a sustained market rally that’s similar to the one in Japan after South Korea’s neighbour ushered in similar changes to improve management practices.

Foreign funds added 10.5 trillion won to companies in the benchmark Kospi on a net basis this year, more than any other Asian emerging countries, in anticipation of sweeping Japan-style changes. The gauge has risen about 9% since a January low.

“We are pursuing ‘corporate value-up’ measures to spread and establish the corporate culture where companies voluntarily strive to improve value and respect shareholders,” Kim Joo-hyun, chairman of the FSC, said in a statement.

Companies’ boards of directors should play a key role in preparing and implementing mid to long-term improvement plans every year, the FSC said.

They will be encouraged to voluntarily disclose their plans on their websites and on the South Korea Exchange.

Top officials, including President Yoon Suk Yeol, have vowed to end what they perceive to be the “South Korea discount” – the undervaluation of local stocks compared to other Asian peers due to poor corporate governance and meagre shareholder returns.

In aggregate, the return on equity on South Korean stocks and their book value trail those of Taiwan and Japan.

South Korean authorities acknowledged they are studying Japan’s experiment, including a name-and-shame tactic.

The Tokyo Stock Exchange’s decision to name companies with poor shareholder returns was a key factor in spurring structural changes and the Nikkei 225’s rally that surpassed its 1989 peak, investors said.

South Korea has pushed for reforms in the past. But the latest initiative “feels different” given that it has “more economically-oriented goals, rather than a social agenda”, analysts at Morgan Stanley including Joon Seok wrote last week.

If the proposals are successful, they may help the South Korean stock market to be upgraded to the MSCI’s developed market status, they said.

South Korean deep-value sectors’ valuations may rise by at least 25% if they drift towards even half of the valuations of their Taiwanese counterparts, according to a recent report by HSBC Holdings Plc.

The financial regulator also said it will revise the stewardship code to ensure that pension funds and others consider companies’ value-up efforts when making investment decisions.

The South Korea Exchange also will publish major financial indicators of listed firms by sectors, including price-to-book ratio and return on equity. — Bloomberg

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