9 hours Ago By The Straits Times
South Korea’s transformation from economic minnow to industrial giant owes much to its family-run conglomerates known as chaebols. SEOUL – Global investors are watching if South Korea can make company boards more accountable to stockholders. Shares in the country tend to trade at lower valuations than their peers overseas, with analysts saying poor corporate governance is one factor behind what is known as the “Korea Discount.
” President Yoon Suk Yeol has made fixing it a priority as he seeks to win favour with a growing base of retail investors. He is not the first leader to try, and he will need to overcome powerful business interests that have benefited from the status quo. What is the Korea Discount? South Korea is home to major companies such as Samsung Electronics, one of the biggest makers of smartphones on the planet, and the Hyundai Motor Group, the world’s third-largest automaker.
But investors often price them below their book value and lower than overseas rivals, such as Taiwan Semiconductor Manufacturing or Toyota Motor, even when they achieve a comparable level of profitability. One explanation is the risk discount placed on South Korean assets because of the country’s standoff with nuclear-armed North Korea. More credible reasons can be found in the corporate structures that were pillars of the nation’s “miracle economy” but may now be holding it back.
How did we get here? South Korea’s decades-long transformation from economic minnow to industrial giant owes much to its sprawling, family-run conglomerates known as chaebols. These include LG, Hyundai, SK, Lotte and, largest of them all, Samsung. Now run by the second or third-generation descendants of their founders, the chaebols – meaning “wealth clique” in Korean – enjoy oversized influence and have often had cozy relationships with governments.
This has led to a series of influence-peddling scandals. There are now 64 conglomerates that fit the definition of a chaebol, according to South Korea’s Fair Trade Commission. The combined turnover of the five biggest chaebols is equal to about 45 per cent of South Korea’s gross domestic product as of 2022, according to estimates from the Citizens’ Coalition for Economic Justice, a South Korean activist group.
Chaebols exert control over hundreds of listed companies through a complicated web of cross-shareholding. Their founding families often control the boards and management of those listed firms. Critics say chaebol leaders seek to keep share prices artificially low to avoid the country’s inheritance tax, which is among the highest in the world.
Why is the Korea Discount a problem? The Korea Discount dampens economic growth by making it harder for companies to raise affordable capital close to home. Foreign investors are discouraged from holding Korean equities for the longer-term, preferring to flip in and out of stocks for quick gains, in part for fear of being penalised by corporate decisions that go against the interests of minority shareholders. The relative absence of a large pool of long-term investors is often blamed for making Korean stock prices volatile.
The Korea Discount is one reason why many South Koreans have avoided investing in stocks at home, preferring to put their money in real estate or US stocks. This deprives the country’s capital markets of wealth generated by rising disposable incomes. How big is the Korea Discount? Take Samsung Electronics, South Korea’s most valuable company.
The world’s largest maker of memory chips trades at slightly below its book value, whereas Taiwanese rival TSMC is worth more than five times the value of its balance sheet assets. If Samsung Electronics matched the price-to-book ratio of US rival Micron Technology, its valuation would be about double. Overall, companies on the benchmark Korean Kospi share index trade roughly on par with their book value, while Taiwanese stocks change hands for about more than twice their book value.
Korea Capital Market Institute researchers who studied the price-to-book ratio of listed companies in 45 countries found in a 2023 report that South Korea sat in 41st place due to weak shareholder returns, low profitability and poor growth prospects. What is the government doing about it? It has been taking steps to improve access to capital markets for investors and revising systems and rules aimed at better protecting the rights of minority shareholders. One move was a “Corporate Value-Up Program” announced in late February for pushing listed companies to voluntarily improve shareholder returns and reform corporate governance in return for tax benefits.
The plan has had mixed success so far. Investors are hoping the launch of the new Value-Up Index will spur inflows and give companies the incentive to follow the government’s initiative. The South Korean program takes a cue from Japanese corporate reforms that helped to push stocks to multi-decade highs.
South Korea’s financial regulator says the idea is to propel South Korean stocks higher over the coming decades. President Yoon has zeroed in on reducing the high inheritance taxes that give an incentive to controlling shareholders to keep a lid on stock prices. But the president’s plans to cut the tax took a blow when his conservative party suffered a setback in April elections for parliament.
A progressive opposition bloc holds a majority in the body and has no plans reduce the levy. How did Japan do it? The chaebols are widely believed to have been influenced by Japan’s zaibatsu – both share the same Chinese characters and meaning. Like the chaebols, zaibatsu were family-controlled conglomerates that dominated Japan’s economy until they were disbanded by the US after World War II.
While some Japanese companies have founding families in management, the practice is not as widespread as it is in South Korea. Japan’s corporate reforms began almost a decade ago when the government of Shinzo Abe introduced measures to prod managers to boost the valuations of their companies. At first, many did just the bare minimum to comply with the requirements, which included installing more outside directors on boards.
The efforts eventually gained traction, and a tipping point arrived in 2023 when the Tokyo Stock Exchange asked companies to come up with capital efficiency plans, forcing many to turn lip service into action. The growing presence of activist investors in Japan has made chief executive officers more aware that they can lose their jobs if they keep ignoring the demands of investors. What are the next steps for South Korea? The government will seek rule changes to protect the rights of minority shareholders against those of controlling shareholders who use mergers and acquisitions, as well as spinning off units, to advance their own interests.
The main opposition Democratic Party, which controls parliament, vowed to pass the Commercial Act revision during this year’s regular parliamentary session. The measure is aimed at preventing power abuse by controlling shareholders. What is a recent example of volatile shares? Shares in Korea Zinc have been on a roller coaster ride due to a spat between the two wealthy families of the company’s two founders.
They are battling over the future of the US$15 billion (S$20.14 billion) metals empire with the issuance of shares being used as a cudgel. The dispute has implications far beyond South Korea.
Including affiliates, the company accounts for 12 per cent of the world’s zinc produced outside of China, according to Bloomberg analysis using data from consultancy CRU Group. The firm’s chairman in November said he would step down from his role as the head of the board after scrapping a planned US$1.8 billion share sale, a blow to his efforts to fend off a bid for control from the company’s largest shareholder.
The dramatic turnaround came just weeks after Korea Zinc announced its planned share sale, prompting a sell-off in the stock and triggering an investigation by the country’s financial watchdog that put its corporate governance into the spotlight. BLOOMBERG Join ST's Telegram channel and get the latest breaking news delivered to you. Read 3 articles and stand to win rewards Spin the wheel now.
