South Korea Unveils Corporate Value-Boosting Plan to Replicate Japan - Hindustan Times
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South Korea Unveils Corporate Value-Boosting Plan to Replicate Japan

Bloomberg |
Feb 26, 2024 08:08 AM IST

South Korea’s much-hyped plan to push companies to improve management and corporate governance disappointed investors with a lack of enforcement and concrete details, sending local stocks lower.

(Bloomberg) -- South Korea’s much-hyped plan to push companies to improve management and corporate governance disappointed investors with a lack of enforcement and concrete details, sending local stocks lower.  

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In the “Corporate Value-up Program,” companies with management practices that prioritize shareholder returns will be given “bold incentives” and tax benefits, the Financial Services Commission said in a statement Monday. The guidelines for the program will be finalized in June, the financial regulator said. 

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The nation will also introduce the “Korea Value-up Index” in the third quarter — similar to Japan’s JPX Prime 150 Index and composed of best-practicing companies — that will be used by pension funds and other institutional investors as a benchmark. New exchange-traded funds, envisioned to be launched in the fourth quarter, will also be able to track the index, the FSC said.

“The disappointment comes from the fact that companies are not required to take any actions in the short term,” said Seol Yongjin, an analyst at SK Securities Co. “Investors expected specific incentives to be announced today but now the government said those details will be disclosed later this year.”

Read: Kospi Falls as ‘Value Up’ Plan Details Disappoint: Street Wrap

Korean stocks had rallied over the past month amid a drumbeat of government commentary on the reform measures, with President Yoon Suk Yeol determined to end the so called “Korea Discount” phenomenon of local shares. With the unveiled measures largely relying on voluntary efforts, the Kospi fell more than 1% on Monday to underperform most other Asian markets.

Global investors had been keenly awaiting the valuation-boosting initiatives on bets that they will lead to better corporate governance practices in Asia’s fourth-largest economy. The hoped-for outcome was for a sustained market rally that’s similar to the one in Japan after Korea’s neighbor ushered in changes to improve management practices. 

The Tokyo Stock Exchange’s decision to name companies with poor shareholder returns was a key factor in spurring structural changes in the market and the Nikkei 225’s rally that surpassed its 1989 peak.

Foreigners turned sellers of Kospi shares on a net basis on Monday after having added 10.5 trillion won ($7.9 billion) in the year through last week — more than any other Asian emerging countries. Financial and auto stocks were the biggest losers during morning trading.

Read more: Kospi Falls as ‘Value Up’ Plan Details Disappoint: Street Wrap

“There are no specific ways on how the government would make companies follow the measures to improve their corporate value so there is a selloff on disappointment,” says Ahn Youngjun, an analyst at Hana Securities.

Companies’ boards of directors should play a key role in preparing and implementing mid- to long-term improvement plans every year, the FSC said. They will be encouraged to voluntarily disclose their plans on their websites and on the Korea Exchange.   

Korea Exchange also will publish major financial indicators of listed firms by sectors, including price-to-book ratio and return on equity. The exchange operator will establish a department and an advisory board to support the program. 

The financial regulator also said it will revise the stewardship code to ensure that pension funds and others consider companies’ value-up efforts when making investment decisions.    

“There was speculative money buying last week and selling in reaction to today’s regulatory announcements which did not exceed expectations,” said Alan Richardson, a fund manager at Samsung Asset Management. “Nevertheless, the trend is positive and progress on Korea’s corporate value program is a continuing theme after elections.” 

--With assistance from John Cheng.

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©2024 Bloomberg L.P.

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