[Yoo Choon-sik] South Korea’s value-up program and its true goals

South Korean stock prices have been on an unexpectedly strong rally in the past several weeks, even without any significant changes to the generally bleak macroeconomic and corporate earnings prospects, and despite the global geopolitical situation deteriorating further.

Market players and commentators broadly attribute the rally to growing hopes among investors that the Yoon Suk Yeol administration’s so-called corporate value-up program, centering around possible requirements on companies whose shares are deemed undervalued to take steps to shore up their stocks.

Foreign investors led the rally, snatching up approximately 7.1 trillion won ($5.3 billion) worth of stocks more than they sold on the main board during the 15 sessions since the government unveiled the outline of the program late last month. The main Kospi stock price index rose more than 7 percent over the period.

Even though it appears to have been influenced by similar programs that Japan has had in place for years, the Yoon administration’s move was more than welcome, as it is attempting to tackle the long overdue problems on the local stock markets, which have encouraged retail investors to flock to overseas stocks in search of higher returns.

South Korean stocks have long been notorious for their price performance, far lagging behind those of the world’s major advanced and emerging economies, even when the country’s economic and corporate earnings performance is sound. This phenomenon is widely known as the "Korea discount."

Data released by the Financial Services Commission, the country’s top financial regulator, shows that the South Korean stock market’s average price-to-book ratio stood at 1.1 times as of last year, lower than 4.5 times in the United States, 3.69 times in India, 2.41 times in Taiwan, or 1.4 times in Japan.

The ratio, a firm’s stock price divided by its book value per share, is a useful indicator of how its stocks are trading relative to its book value. A ratio below 1 is widely seen as indicating that the company’s shares are undervalued, although it may not be an adequate measure for some industries.

In fact, South Korea’s stock prices performed the second-worst among the Group of 20 major economies over the past 10 years, posting less than half the gains of the United States and just over one-third of Japan’s, according to data compiled by the Organization for Economic Cooperation and Development.

Leading the recent market rally were shares of companies whose price-to-book ratio stood below 1 despite sound business operations, driven by expectations that the government would impose specific requirements on these companies to introduce plans aimed at improving their share prices.

Despite these initially positive responses, this effort could prove to be only one of many near-term "theme plays" if it is simply aimed at shoring up stock prices over the short run, instead of accompanying a broader, deeper set of measures to address fundamental issues involving South Korea’s corporate governance.

In stark contrast with the buying spree among foreign investors since the government’s intention was announced, millions of South Korean retail investors dumped a net 8.2 trillion won worth of shares over the same period, apparently reflecting their deep doubts about the lasting effects of the campaign.

In Japan, whose drive to boost shareholder value gave a strong hint to South Korea’s value-up program, the government and financial authorities have been implementing a wide range of measures not only aimed at lifting share prices but also designed to reform the broader corporate governance structure.

The South Korean government is set to unveil further details of the value-up program later this month, and Finance Minister Choi Sang-mok also acknowledged during his briefing session for reporters last week that this campaign should not finish with measures aimed solely at boosting share prices.

Nevertheless, the government could face an uphill battle given the fact that South Korea’s economy has been and continues to be heavily dominated by the family-run chaebol, whose unique governance system has been the very source of issues hampering the country’s global competitiveness.

In South Korea, children and grandchildren of the founders in major business conglomerates still wield almost absolute power in all member companies, even those in which they have no controlling stakes, while holding only small stakes in core member companies.

Many investors suspect that controlling families of chaebol companies are obsessed with the mission of safely transferring business ownership to their descendants, even at the expense of shareholder value. Some even joke that chaebol owners can save inheritance tax if share prices in member companies remain low.

It may take a very long time, probably beyond the current administration’s tenure, to fundamentally change South Korea’s chaebol-dominated corporate management culture. However, today marks the earliest opportunity to seriously start making changes, as the cost will just continue to mount as time passes.

After all, it is one thing to help lift stock prices by removing some tentative hurdles; it is quite another to put the very value of companies and their operations on a sustained upward track by fixing fundamental problems.

Yoo Choon-sik

Yoo Choon-sik worked as chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.

By Korea Herald(khnews@heraldcorp.com)