[KH Explains] Missing pieces of 'value-up' program

The Yeouido financial district in Seoul (Newsis)

The government’s measures aimed at increasing shareholder returns to boost Korea's undervalued stock market have sparked much debate on their effectiveness due to the lack of motivational drivers for companies to join the program.

In the Corporate Value-up Program announced by the Financial Services Commission on Feb. 26, the government directed some 1,600 firms listed on the Kospi and Kosdaq markets to disclose their major investment indicators such as price-to-book ratio, and make public announcements of corporate value improvement plans. The introduction of an exchange-traded fund composed of companies making substantial corporate value improvement is also among the gist of the scheme.

Investors' reactions to the measures have been lukewarm. The Kospi index has closed lower on all but three of the past eight trading days.

The feasibility of combating the so-called Korea discount with such directives has been questioned, as they don't address fundamental issues such as how to improve corporate performance and enhance the regulatory environment.

The market is waiting for the second and final set of guidelines for the program, which financial authorities plan to lay out in May and June, to see whether they would blow past expectations.

Neither carrot nor stick

The absence of means to enforce the measures and the ambiguity over the incentives for voluntary participation have been pointed out as major loopholes in the program.

The government emphasized companies’ “voluntary,” “self-initiated” efforts for their value enhancement, but the absence of penalties or incentives tied to the scheme means it is difficult to expect listed companies’ active participation.

While the market expected a substantial tax break for companies with the best practices, the incentive that the Finance Services Commission said it would grant was awards and commendations for exemplary enterprises.

“Contrary to market expectations, there was no clear incentive, such as an inheritance tax reduction. … There was also a lack of coercion for companies to increase the amount of shareholder return,” said Sangsangin Investment & Securities analyst Hwang Joon-ho.

Major chaebol groups -- Samsung, SK, Hyundai Motor and LG account for over 45 percent of the combined market capitalization of the Kospi and Kosdaq markets, according to data from the Korea Exchange on Friday.

One reason Chaebol families, usually the largest shareholders of their business empires, do not wish for a higher valuation is that it would lead to more taxes when transferring stocks to their children, making it harder to keep the business in the family.

Conglomerates have been calling for tax benefits to participate in the program, arguing that inheritance tax and gift tax should be reduced to alleviate the financial burden of business succession and encourage shareholder returns.

Blindly copying Japan’s success

The corporate value-up program promoted by the government benchmarked Japan's success story.

Japan’s corporate governance reforms have been deemed as a key driver of the current Japanese stock market’s record-breaking rally.

Experts say Japan’s stock market boom was not only created by the Tokyo Stock Exchange's 2023 corporate governance code but also a series of governance reform initiatives carried out since former Prime Minister Shinzo Abe’s administration about 10 years ago.

“Japan’s policy to boost corporate valuation brought a positive impact on its stock market. But it is not the only reason for the rebound,” Korea Investment & Securities analyst Choi Bo-won said.

With a start with the Japan Revitalization Strategy announced in 2013, the Stewardship Code and the Corporate Governance Code were introduced in 2014 and 2015, respectively. The country laid the foundation to increase accessibility to Japanese stocks through the reorganization of the Japanese bourse in 2022, according to Choi.

What’s next?

Calling the value-up program “a mere first step” to bring about a substantive change to Korea’s capital market, Finance Minister Choi Sang-mok vowed to develop policies until the term "Korea discount" disappeared.

On Thursday, bourse operator Korea Exchange formed an advisory group and kicked off a discussion on follow-up measures to fill up the void in the first version of the corporate value-up program.

The group is comprised of 12 market experts including investors from the National Pension Service and JP Morgan, officials from financial institutions as well as professors.

The most likely plan to be included in the next guidelines is tax relaxation on dividend income. Currently, companies prefer to buy back stock rather than pay dividends as a way to return money to shareholders due to heavier tax they opt for the former.

As the low dividend payout ratio regarded as one of the key reasons for Korean companies' undervaluation, the tax revision could be one of the next steps that the government may push for.

By Park Han-na(hnpark@heraldcorp.com)