"Advance Dividend Decision, Subsequent Shareholder Confirmation"… Revising Opaque Dividends

[Asia Economy Reporter Ji Yeon-jin] There has been a call for South Korea to reform its domestic dividend system to follow the approach used by advanced countries like the United States, where the dividend amount is determined first and then the shareholders entitled to receive the dividends are confirmed.

Professor Jang Jun-hyuk of Seoul National University stated at the "Policy Seminar to Resolve Korea Discount," hosted by the Financial Services Commission, Korea Exchange, and Korea Capital Market Institute on the morning of the 28th, "In order for dividend information to be properly reflected in the market, it is necessary to first finalize the dividend amount and then set the dividend record date," adding, "Since only the current system of ‘(first) dividend record date (later) dividend amount confirmation’ is allowed for quarterly dividends, amendments to the Capital Market Act and other measures are needed."

Professor Jang pointed out that profit dividends are the most essential shareholder right, but the low dividend payout ratio of Korean companies is one of the causes of the Korea discount. He explained, "Shareholder rights include decision-making rights and profit realization rights, but unlike controlling shareholders, ordinary investors find it difficult to influence major company decisions, so the profit realization right among shareholder rights is important," and "investors can realize profits through dividends or stock sales, but if the company does not pay dividends or pays very little, they tend to focus on short-term capital gains."

In South Korea, the dividend payout ratio last year was 19.14%, which is lower than that of the United States (37.27%), the United Kingdom (48.23%), Germany (41.14%), France (39.17%), and Japan (27.73%). Due to this low dividend payout ratio, domestic corporate investors tend to choose short-term capital gains over long-term dividend investment, according to Professor Jang.

He emphasized, "While respecting corporate autonomy, it is necessary to establish institutional improvements that increase investors' dividend predictability and activate dividend payments," adding, "the system should be improved so that the dividend amount is confirmed first and then the shareholders entitled to receive dividends are determined."

Regarding this, Professor Kwon Jae-yeol of Kyung Hee University evaluated, "If the dividend amount is confirmed before the dividend record date, dividend information will be provided in advance, reducing uncertainty related to dividends and contributing to fair price formation," and Professor Lee Ki-hwan of Inha University also emphasized, "It is necessary to amend related laws to advance dividend culture through improvements in board dividend decisions and dividend record date procedures, as well as to improve interim dividends and par value systems."

Lee Yoon-soo, Director of the Capital Market Division at the Financial Services Commission, said, "We will promptly prepare and announce specific measures to enhance the global consistency of the capital market, reflecting the discussions held today."