[The Two Faces of Shareholder Activism]② Will MSCI Advanced Index Inclusion Be Accelerated?

Strengthening Shareholder Return Policies as an Opportunity to Resolve Korea Discount
6.4 to 70 Trillion Won Capital Inflow Expected if Included in MSCI Developed Markets Index

The strong wave of shareholder activism in the domestic stock market is driving various changes. Improvements in governance such as the board of directors, strengthening shareholder return policies including share buybacks and cancellations are representative examples. The financial investment industry expects shareholder activism to break the chain of the Korea discount (the undervaluation phenomenon of the Korean stock market) and become the final puzzle for inclusion in the Morgan Stanley Capital International (MSCI) developed markets index.

Improvement of Shareholder Rights and Value Positive for Foreign Investors

Goldman Sachs analyzed that the possibility of Korea’s stock market being included in the MSCI developed markets index has increased due to corporate governance improvements and policy measures. This is based on the expectation that improving shareholder rights and value will have a positive effect on foreign investors.

The Korea Capital Market Institute expects that if the Korean stock market is included in the MSCI developed markets index, capital inflows of $5 billion to $36 billion will occur. The Korea Economic Research Institute forecasts capital inflows of $15.9 billion to $54.7 billion. Applying a won-dollar exchange rate of 1,280 won, this means that capital ranging from 6.4 trillion to 70 trillion won could flow into the domestic stock market. Since the amount of MSCI-tracking funds and changes in the market capitalization of the Korean stock market and the MSCI market vary, the gap between the minimum and maximum estimates is large.

Due to procedural reasons, the earliest inclusion in the MSCI developed markets index will be two years from now. MSCI first places a country on the watchlist before deciding on inclusion in the developed markets index. If Korea is placed on the watchlist in June this year, actual inclusion could be completed as early as June 2025.

Financial Authorities Also Making Efforts for MSCI Developed Markets Index Inclusion

All past governments have made efforts to be included in the MSCI developed markets index. MSCI has not included Korea in the developed markets index, citing issues such as foreign investors’ accessibility to the Korean financial market, the structure of the foreign exchange market, short selling, dividend procedures, and corporate governance. Kim Jun-seok, senior researcher at the Korea Capital Market Institute, explained, "Korea’s shareholder return level ranks between 37th and 45th among 45 major countries, placing it in the bottom tier. Shareholder return policies and corporate governance have been consistently pointed out as causes of the 'Korea discount,' and efforts are underway to improve related systems and practices."

The government has recently introduced various measures to address the issues pointed out by MSCI. This year, it announced plans such as 'Measures to Enhance Foreign Investors’ Access to the Capital Market,' 'Improvements to Dividend Procedures in Line with Global Standards,' and 'Foreign Exchange Market Structure Improvement Plans.'

The government’s efforts to create a foreign investor-friendly environment are related to the decline in foreign ownership in the domestic stock market last year. The foreign ownership ratio in the KOSPI market fell to the low 30% range, similar to the level in 2015. Over the past three years, foreign net selling on the KOSPI has exceeded 7 trillion won, surpassing the scale of foreign net selling before and after the 2008 global financial crisis.

This year, foreign investors recorded net purchases of 6.99 trillion won in the KOSPI market. Various factors such as exchange rate effects and expectations of semiconductor industry improvement, along with the government’s active commitment to improvements, seem to have influenced this. Park So-yeon, a researcher at Shin Young Securities, explained, "There may have been a change in perception that, as the trade deficit prolongs, it is necessary to attract foreign investment funds through the capital market to ensure stability in the foreign exchange market. There is also an added urgency to induce shareholder returns from domestic large corporations to improve the National Pension Service’s investment returns and delay fund depletion."

Governance Improvement Difficult with Policy Alone

It is difficult to expect inclusion in the MSCI developed markets index without governance improvements. Supervisory authorities have begun emphasizing responsible voting rights exercise by individual asset management firms and stewardship codes. Since this is a private domain that is not easily resolved by legal provisions alone, indirect means have been sought. Kim Jun-seop, a researcher at KB Securities, emphasized, "Corporate governance improvement is an area where change is not easy with government policy introduction alone. Because it may fall under the private domain, efforts to solve problems from the bottom up by companies and shareholders are needed in addition to top-down problem solving through government policies."

After the regular shareholders’ meetings of companies with December fiscal year-ends conclude in March this year, if listed companies accept shareholder activism demands, calls for governance improvements are expected to grow stronger. Researcher Park said, "The tax deferral special provision that allows deferral of corporate tax when contributing shares in kind during holding company conversion expires at the end of this year. A considerable number of companies are planning spin-offs for holding company conversion within this year." She added, "Recently, Hyundai Department Store’s spin-off agenda failed to pass the shareholders’ meeting due to opposition from many institutional investors. Companies planning holding company conversions this year will inevitably have to consider shareholders’ views."