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South Korean officials unveiled measures on Monday to boost shareholder returns, as Seoul seeks to replicate Japan's success in raising stock valuations through a corporate governance drive.
Last week, the Nikkei 225 soared past its all-time high after a 34-year wait, validating a decade-long reform effort by Japan that included the introduction of a “name and shame” system on the Tokyo Stock Exchange, which encouraged companies to focus . To increase the value of their companies.
In a reflection of reforms in Japan, the Korean proposals include a new “Higher Korea Value Index” to highlight companies that have successfully improved capital efficiency, as well as tax incentives for companies that prioritize shareholder returns.
Kim Soo-young, vice chair of South Korea's Financial Services Commission, said Seoul's initiative would offer more incentives to Korean companies than those offered by the equivalent JPX Prime 150 index in Japan.
“About 20 percent of Japanese companies have joined the government program to boost valuations. We plan to offer stronger incentives than those offered by Japan so that more Korean companies can join our program,” Kim said.
About two-thirds of companies included in South Korea's leading Kospi index are trading at a price-to-book ratio of less than one, meaning the market values them at less than the reported value of their net assets.
Korean investors said the reform measures lack details and means of implementation. “The package announced today falls short of my expectations because it lacks strong measures,” said Albert Young, managing partner at Petra Capital Management in Seoul. “Some unspecified tax benefits and incentives have been announced for those who cooperate, but there are no penalties for those who do not.”
The Kospi index rose about 7 percent during the first three weeks of February amid growing anticipation for bold government reforms. Last month, South Korea's president, Yoon Suk-yeol, expressed support for imposing a fiduciary duty on shareholders, while the country's top financial regulator suggested that Seoul would replicate Tokyo's “name and shame” system.
But the index fell slightly on Monday as investors expressed their disappointment with the reform announcement. “Today’s market decline was a classic example of buying on rumours, selling on news,” said Chaewon Lee, president of Seoul-based Life Asset Management.
Japan's efforts to boost valuations have also gotten off to a slow start, noted Ahn Hyung-jin, chief investment officer at Seoul-based Billionfold Asset Management.
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“This is just the beginning for Korea and should not be a one-time package,” Ahn said. “The government must continue to strive for change, and some type of sanctions are necessary if companies do not change.”
South Korea's business landscape is dominated by the country's largest conglomerates, including Samsung, Hyundai, LG and SK Group, which are controlled by their founding families through a complex series of joint ownerships in the group's subsidiaries. Earlier this month, a group of investors called on Samsung's actual holding company to increase dividends and conduct stock buybacks.
“It took about 10 years for the Japanese measures to take effect,” said Lee, of Life Asset Management. “We are only at the beginning stage.”
Additional reporting by Leo Lewis in Tokyo
