[Salty Dividends]③ Financial Authorities to Revise 'Blind' Dividends

Financial Services Commission to Decide Dividends First, Confirm Shareholders Later
"Governance Issues Also a Factor in Korea Discount"

Editor's NoteOne of the factors causing the 'Korea Discount,' which refers to the undervaluation of the Korean stock market, is the so-called 'stingy dividends.' Although domestic listed companies are increasing dividends, Korea still carries the label of the 'lowest dividend country' among major nations. Financial authorities are attempting to reform the dividend system by deciding dividends first and confirming shareholders later, but these efforts are insufficient. The fundamental issue lies in companies' passive attitude toward shareholder returns. The dividend payout ratio remains low. We analyzed the total cash dividends and dividend payout ratios of the top 100 companies by market capitalization over the past three years to examine the current state of corporate dividends in Korea.

[Asia Economy Reporter Lee Jung-yoon] One of the reasons for the Korea Discount, where the domestic stock market and corporate stock prices are undervalued compared to overseas markets, is the dividend issue. The uncertainty of dividends and low dividend payout ratios are chronic problems plaguing the domestic capital market. To resolve the Korea Discount, voices are growing for not only reforming the dividend system but also strengthening communication between management and investors.

The Financial Services Commission (hereafter FSC) also recognizes the dividend issues in the domestic capital market and is preparing countermeasures. At the 'Policy Seminar for Resolving the Korea Discount' held on November 28 last year, Professor Jung Jun-hyuk of Seoul National University Law School presented on the modernization of dividend procedures and the activation of dividends. Professor Jung suggested that for dividend information to be properly reflected in the market, the system should be improved so that the dividend amount is first confirmed and then the shareholders entitled to receive dividends are determined.

On the 2nd, the first trading day of the Year of the Black Rabbit, the KOSPI, which showed strength in the early session, gave up all its gains and closed lower. Photo by Yonhap News

Currently, the shareholders entitled to dividends are determined first, and then the dividend amount is set. This structure makes it difficult to predict the dividend amount at the time of investment. Since the dividend amount is decided at the regular shareholders' meeting in March, dividend-related information is hard to be reflected in stock prices during the three months from January to March. The FSC is discussing with relevant departments to reform this 'blind' dividend system.

An FSC official explained, "Improving the system to first confirm the dividend amount and then designate the dividend record date later to increase predictability is an issue that involves both the Commercial Act and the Capital Markets Act," adding, "We are consulting with the Ministry of Justice on whether both laws need to be amended or if one can be interpreted while only the other is revised." The official also noted, "Since this involves changing long-standing systems and practices, unforeseen side effects may arise, so we are carefully reviewing the matter."

Experts emphasize that, along with improvements to set the dividend record date after confirming the dividend amount, changes to raise the currently low dividend payout ratio are also necessary. Professor Jeong Do-jin of Chung-Ang University's Department of Business Administration said, "The low dividend payout ratio of domestic companies is something that everyone agrees on statistically, empirically, and experientially," explaining, "This is because Korean managers have low sensitivity to corporate value, especially stock prices in the capital market."

He continued, "Since managers are not held accountable for stock prices, their direct motivation or interest in increasing the dividend payout ratio decreases," adding, "A low dividend payout ratio does not mean management is improper, but it is true that companies are inexperienced in enhancing corporate value through other means such as share buybacks."

There are also calls for more fundamental changes such as strengthening shareholder returns. Nam Gil-nam, a research fellow at the Korea Capital Market Institute, pointed out, "Investors do not know the actual dividend amount and invest based on predictions," adding, "This is very unfamiliar to foreign investors and has been a factor discouraging investment in dividend-related stocks in the domestic stock market." He further stated, "Institutional changes are necessary, but companies must actively pursue shareholder returns to create investment incentives," emphasizing, "It is not enough to simply say 'we will communicate' or 'we will return to shareholders'; companies must strive to create core content that enhances corporate value."

Professor Kang Kyung-hoon of Dongguk University's Department of Business Administration also said, "Corporate governance issues are another factor of the Korea Discount, and this is also reflected in dividend issues," adding, "Efforts to resolve this are also needed."