The tendency for South Korean companies to trade at lower valuations than their global peers, in large part because of a poor record in corporate governance, has long been a feature of South Korea’s equity market. However, change may now be afoot with the government’s Corporate Value-up Program, announced in February. Could the proposed reforms help to narrow the so-called “Korea discount” and build on the momentum gathering pace elsewhere across Asia to improve corporate governance and shareholder returns?
The historical context
South Korea’s socioeconomic history has had a pronounced impact on the country’s approach to corporate governance. We believe that its poor track record in protecting minority shareholders’ interests, and its consequently lower equity valuations, can be largely explained by the dominance “chaebols” — opaque family-owned business conglomerates.
In the post-war reconstruction era, South Korean chaebols grew rapidly thanks to government sponsorship and strict limits on foreign ownership. This protectionist set-up indirectly contributed to opaque circular ownership by enabling controlling families to expand their businesses without ceding control to foreign capital. During the 1997 Asian financial crisis (AFC), many chaebols were forced to restructure by foreign creditors, further fuelling concerns about foreign control. A tendency to hoard cash also became prevalent.
Tax legislation has been another important factor in the evolution of corporate governance in South Korea. Dividend taxes approaching 50% act as a powerful brake on the payment of dividends. As a result, dividend yields in South Korea have consistently trailed emerging markets for over 20 years. And punitive inheritance taxes incentivise companies undergoing intergenerational wealth transfer to hoard cash and suppress valuations, to the detriment of minority shareholders.