Korean companies canceling own shares rising on calls to improve returns

Krafton Inc. headquarters [Courtesy of Krafton]

South Korean listed companies cancelling their shares have more than doubled in the last two years as part of their efforts to strengthen shareholders value.

According to the Korea Exchange on Tuesday, the amount of treasury stock cancellation by listed companies increased to 3.14 trillion won ($2.38 billion) last year from 2.54 trillion won in 2021 and 1.16 trillion won in 2020. The amount in the first quarter of this year is estimated to have reached an all-time high on a quarterly basis. If the current trend continues, the amount this year is expected to exceed the size of the previous year.

Krafton Inc., a South Korean game developer, announced late last month that it would cancel 167.9 billion won worth of its own shares, drawing attention from the market, as it is common for game companies that value growth to spend money on investment rather than shareholder return.

Other game companies followed suit disclosing plans to cancel their own shares or expand dividend payouts, in an apparent move to ease shareholder backlash against lower shares.

By company, Korea’s largest automaker Hyundai Motor Co. had the largest amount with 315.4 billion won, followed by KB Financial Group Inc. at 300 billion won, Hana Financial Group Inc. at 150 billion won, Shinhan Financial Group Co. at 150 billion won, SK Inc. at 100.6 billion won, KT Corp. at 100 billion won, and Mirae Asset Securities Co. at 88.6 billion won.

Meritz Financial Group Inc., a financial holding company with major subsidiaries including Meritz Fire & Marine Insurance Co. and Meritz Securities Co., has also announced a plan to buy back and cancel as much as 388.5 billion won worth of its shares.

Hyundai Motor Co. headquarters [Photo by Lee Chung-woo]

This development is attributable to growing demand from individual investors and activist funds. Furthermore, companies became more active in shareholder return as part of their environmental, social, and governance (ESG) management. In particular, there were growing calls for share buybacks and retirement to enhance shareholder value rather than one-time dividend payments.

According to KB Securities Co., the number of activist shareholder proposals in Korea increased nearly fivefold to 47 last year from 10 in 2020. This year, seven major financial holding companies and KT&G Corp., a leading tobacco company in Korea, have become targets of activist funds calling for improved shareholder value.

“It has become more difficult for companies to ignore calls for share buybacks and retirement or expansion of dividend payouts due to intensifying shareholder activism,” said an official from a listed company. There are also mounting calls that shareholder return should be further expanded in order to reduce the Korea discount in the stock market. Korea discount refers to a tendency for Korean companies to have lower valuations than global peers due to factors such as low dividend payouts.

Experts are emphasizing the need to cancel treasury shares as there were many cases in Korea in which treasury stocks were used in the interests of the largest shareholders, such as strengthening their control on management, while overseas share buybacks mean retirement. There were also many cases in which share buybacks were used to hand shares over to friendly forces for the purpose of defending management rights.

In fact, according to an analysis by the Korea Capital Market Institute, 85.6 percent of companies that disclosed their acquisition and disposal of treasury stocks from January 2015 to the first half of last year said that they bought back their own shares to stabilize stock prices, but only 3.6 percent used them for the cited purpose. The companies used 34.5 percent of their own shares acquired for employee performance compensation and 26.9 percent to exercise stock options, according to the analysis.

In this regard, some raised the need to properly regulate the use of treasury stocks by companies, as in the U.S., where treasury stocks are excluded from market capitalization calculations.