[K-INVESTORS]⑧Alone During Holidays, Drawing Governance of Top 100 Companies... Delving into Causes of Undervaluation in Korean Stock Market

Kang Sung-bu, KCGI Representative Whose Name Means "To Achieve Wealth"
Started as a Bond Analyst and Became Interested in Corporate Governance
Working to Resolve Korea Discount through Shareholder Activism
"Not Corporate Attack but Stock Market Revaluation Movement"

Editor's NoteThe Korean capital market is more turbulent than ever, driven by greed and selfishness. Manipulations and foul play are rampant. However, many investors have carved out their own investment worlds and emerged as role models for individual investors, having weathered crises from the foreign exchange crisis, dot-com bubble, global financial crisis, to COVID-19. Through meetings with these investors, we aim to convey the value of money through their war-like stories of the capital market, their philosophies, failures, and successes. Starting now, we bring you stories from experts across various fields, including the chief investment officers of domestic pension funds who have become global 'big players' in value investing and activism, leaders of private equity and asset management firms, and CEOs of financial institutions.

Kang Sung-boo, CEO of KCGI, is posing while holding 'Kobuli,' a bull character symbolizing the Korea Bull Market.
Photo by So-yeon Park muse@

Kang Sung-bu, CEO of KCGI, known as an activist in the Korean capital market, insists he is not a 'corporate raider' but an investor who loves companies. He says he is conducting campaigns to improve corporate governance as a way to help companies escape undervaluation.

"Only about one-third of the funds I manage are activism (shareholder activism). We became famous for that, but in fact, we have many funds that help major shareholders, benefiting both them and investors. Also, I don't think corporate governance improvement has to be approached so antagonistically. Since I was originally a bond analyst, I like structuring funds that don't erode principal. Such funds are called credit funds, and most of them are friendly funds."

Kang (姜) · Sung (成) · Bu (富). His full name means achieving wealth. His name has shaped his destiny.

"My grandfather was a rural schoolmaster. He personally named all of us siblings, and we all live up to our names. I originally planned to go to medical school. I'm the youngest of five siblings, but my eldest brother-in-law said, 'Your name is Sung-bu; can you go to medical school? You have to go to the College of Commerce to achieve wealth.' From a young age, he made me read autobiographies of entrepreneurs like Chung Ju-yung, Lee Byung-chul, and Kim Woo-joong. Meeting these giants gave me dreams and hope. Even now, I respect those people."

His interest in capital and companies deepened and became more sophisticated during university. He majored in economics as an undergraduate and earned a master's degree in business administration with a focus on financial management at graduate school. During graduate school, he was an early member of the SMIC (Seoul National University Investment Club).

"As I became interested in investment and companies, I naturally transitioned this way. I wondered what the best way to understand companies?the subject?was, so in 2001, I joined Daewoo Securities Research Center. The competition was thousands to one. During graduate school, I helped Professor Park Jung-sik with the 5th edition of his bestselling textbook 'Modern Financial Management.' It is the best-selling financial management book in Korea. Daewoo Securities valued that experience."

I joined the research center knowing how to analyze stocks but was assigned to bond analyst duties. My main job was corporate credit evaluation. I analyzed companies for 15 years. During this time, I got to see the true face of Korean companies. In 2005, I became a star analyst with the report 'Corporate Governance Maps of Korea's Top 100 Companies.' It was the first corporate governance-related material from a securities firm.

Kang Sung-boo, CEO of KCGI, is explaining while looking at the 'Corporate Governance Map of Korea's Top 100 Companies.' Photo by So-yeon Park muse@

Assigned Corporate Credit Evaluation as a Bond Analyst

"I drew them alone every holiday (laughs). At first, I did it after work and on weekends, then I got hooked. Before that, there was no such thing as a corporate governance map. Later, after becoming a team leader, I did it with my team members. When doing bond credit evaluation, you calculate the company's default rate. Especially in Korea, when evaluating credit, you consider whether affiliates can help or not. From that perspective, group research was necessary. Until then, no one had drawn Samsung Group's governance map. It was too complicated. After making it, stock fund managers requested seminars. They also showed great interest in family trees and kinship maps."

Kang judged that the cause and solution to Korea's stock market undervaluation (Korea Discount) lie in governance and later became a manager running activist funds. After establishing KCGI, he engaged in shareholder activism targeting Hanjin KAL and Osstem Implant.

"Korean companies are good, but when analyzing 'why is the stock price like this?' I found that major shareholders have no reason to raise the stock price. From the major shareholders' perspective, excessive inheritance tax is somewhat unfair, but there are many protections for major shareholders and few for minority shareholders. That leads to the Korea Discount. First, dividends are poorly paid, and share buybacks and cancellations are infrequent. Major shareholders turn their eyes to strange related-party transactions or corporate splits and mergers. They try to pay less tax and inherit assets. Because inheritance tax is excessive. If it's too high, they find ways to circumvent it. Smart law firms devise methods. Not illegal ones. While capital gains are taxed at 25%, inheritance tax is 60%. Who would want to pay inheritance tax? That eventually manifests as related-party transactions. This ultimately harms minority shareholders' interests."

Kang Sung-boo, CEO of KCGI, is posing while holding 'Kobuli,' a bull character symbolizing the Korea Bull Market.
Photo by So-yeon Park muse@

The Stock Market Is a Crucible of Creativity

He views the stock market as a crucible of creativity.

"I'm not someone who attacks companies. I talk about ways for companies to succeed. How should a company grow? Creativity must be freely expressed, and top-tier talent must gather. The crucible temperature of the stock market can be measured by price-earnings ratio (PER) or price-to-book ratio (PBR). If these are low, it means the crucible is slowly producing molten metal. It should produce efficiently and abundantly. Would companies want to go public (IPO) in a country with low PER? In the U.S., companies like Coupang get higher valuations. Our PBR is only about one-fourth of the U.S. That means a company valued at 4.6 trillion won in the U.S. trades at 1 trillion won in Korea. Creativity cannot be expressed in such a country. In the long term, we will face low growth and a lost 30 years like Japan."

He expressed concern that Korea's prolonged stock market undervaluation is creating a financial and industrial environment where top-tier companies cannot emerge.

"Many top-tier companies have emerged in Korea. But with the stock market like this, economic vitality visibly declines. Frankly, we lack platforms, data, and markets. Why don't companies like Google, Apple, Nvidia, Amazon, Tesla, Meta emerge in Korea? It would be great if domestic conglomerates could reinvent themselves as companies creating new things through second startups, but can such companies emerge under the current governance? With major shareholders reigning like kings, who would propose new challenges? Even many institutional investors avoid harsh criticism, and many corporate executives lack backbone."

"If Companies Cancel Treasury Shares, KOSPI 4000 Will Come Quickly"

Many companies still seek major shareholder profits through profit transactions or capital transactions. Kang says the entire capital market framework that enables such environments must be changed.

"Profit transactions are like related-party transactions. Capital transactions involve splitting and merging companies or concentrating stock subscription rights to major shareholders. These increase major shareholders' stakes. Companies have also abused treasury shares by allocating them to holding companies when splitting into holding and subsidiaries to increase control. Treasury shares are originally bought with company money, not for the benefit of major shareholders personally. Moreover, holding companies have been discounted by dual listing subsidiaries. From a major shareholder's perspective, if the stock price falls, inheritance tax can be saved. Korea has the highest number of holding companies relative to economic size?over 200. Globally, it's rare for holding companies and subsidiaries to both be listed."

Kang cites the misuse of treasury shares that serve major shareholder interests without cancellation as a major reason for Korea's stock market undervaluation.

"When companies buy treasury shares, they should cancel them, but they don't. They use them for management defense. It's a country where management defense is done with company money. Instead of lowering inheritance tax, if companies buy treasury shares, they should be mandated to cancel them all. If mandatory cancellation is difficult, treasury shares should be excluded from market capitalization the moment they are bought. In the U.S., the total number of shares in the stock market has decreased by over 20% in the past 20 years. Forty percent of the profits from investing in U.S. stocks come from treasury share buybacks and cancellations. Another 40% comes from stock price increases. The last 20% comes from dividends. I'm confident that if Korea cancels treasury shares, KOSPI will immediately reach 4000 points."

Investor Protection Mechanisms Must Be Firmly Established First

"The National Pension Service's domestic stock investment ratio is 15%. If KOSPI reaches 4000 points, the overall return of the National Pension Service will increase by 10%. Even a 1% increase delays pension depletion by 5.6 years. We need to devise ways to make KOSPI rise continuously like the U.S. S&P 500. To do that, general investors must be protected first. Ultimately, if PBR rises and the economy becomes vibrant, companies grow, the country grows, and major shareholders' wealth grows too. Since many companies are short-sighted, using tricks to save inheritance tax, I think it's desirable to halve inheritance tax and firmly establish investor protection mechanisms."

Kang has consistently advocated for a system change: Article 382-3 of the Commercial Act, the duty of loyalty of directors.

"It states, 'Directors shall faithfully perform their duties for the company.' They should not only be faithful to the company but also to shareholders with good faith and sincerity. This should be legally enforced or the legal interpretation changed. It's problematic if the board's judgment is indifferent to investment companies losing 6 trillion or 7 trillion won due to mergers. The policy toward the market is the problem. The framework must be well designed. When biotech is popular in the Korean stock market, retail investors flock and buy at the peak, while institutions, foreigners, and manipulative forces sell off. The same signs appear in electric vehicles and secondary batteries. Why is the Korean market either overvalued or undervalued? It's not just retail investors' problem."

He sees Korea's future as bleak, which deepens his frustration with the capital market.

"The population is declining rapidly, especially aging 2.7 times faster than Japan. Have we already used up the seed money for the future? Mortgage loans total 1800 trillion won, jeonse deposit loans 1200 trillion won, totaling 3000 trillion won in debt. SOHO loans are about 1000 trillion won. That's over 180% of GDP. Few countries have household debt exceeding 100% of GDP. Even the U.S. household debt is only 70%. This small country, dependent entirely on exports and highly sensitive to exchange rates, oil prices, interest rates, and inflation, is borrowing against the future for descendants. Real estate is bleak too. The only hopeful part is raising the value of undervalued stocks."

Hard to Speak Bitter Truths in the Market... It's Not a 'Good Fund' but a Necessary Role

His starting point was frustration. The capital market seemed like a comedy to him because no one spoke out despite obvious problems.

"There were many frustrating parts, and I thought if we improve these, investors and clients would make money. It's not just about me growing but the market growing together. We don't call ourselves KCGI but 'Keuji (KCGI)' meaning 'grow together.' Not only major shareholders should grow; general shareholders should grow too, so companies grow, the country grows, and we all grow. These days, even our toast is 'Keuji Keuji' (laughs). During shareholder activism at Hanjin KAL, we got a villain image. Our efforts to fix a company with repeated management failures and a debt ratio over 1200% were not reported. It was portrayed as if we only demanded more dividends. We never asked for more dividends from Hanjin KAL. We asked to reduce the debt ratio from over 1200% to within 300%. Now it's 210%. We also asked to sell idle assets. Selling catering and unnecessary real estate can sufficiently reduce debt. We demanded governance improvement and growth investment. I also advocated the merger of Korean Air and Asiana Airlines. Now all these are realities, but at the time, only the fighting image was highlighted, creating a 'corporate raider' image. Fortunately, things have improved a lot. I'm not alone in saying these things."

He calls his work a corporate governance improvement campaign and a stock market revaluation movement.

"We're not a 'good fund.' We all want to make money. Because we make money, clients keep investing. We have to make money and take care of employees. We have 82 employees including affiliates. If possible, we want to find ways to make money more wisely while contributing socially. Companies are not originally designed for a single major shareholder. Abroad, the concept of a major shareholder doesn't even exist. When a company history exceeds 200 years, the major shareholder concept disappears. My hope is that as companies grow, shareholders also make money, and the National Pension Service and the country grow together. I believe this belief will come true someday because it benefits everyone. A dream alone is delusion, but a dream shared by all becomes reality. This is not corporate attack but a stock market revaluation movement."

Aiming to Increase Public Fund Returns through Shareholder Engagement

This year, KCGI acquired Meritz Asset Management and relaunched it as KCGI Asset Management. What kind of company will an asset management firm bearing the KCGI name become?

"Until now, as a private equity fund, we only made money for the wealthy. Our returns are very high. Internal rate of return (IRR) is nearly 20%. Maintaining a 20% annual return for over five years is not easy. Now that we have an asset management company, we want to achieve stable and high returns in public funds for the general public. For that, fund managers must study hard and engage with invested companies. Chasing only leading stocks and hopping like locusts prevents long-term investment. This is called engagement?active shareholder activities by institutional investors?where shareholders request companies to change. ETFs can't do this; we have to. We need funds that monitor invested companies, engage shareholders, and persuade them to succeed. We see this as a mission and an opportunity. Corporate governance is a decision-making system. It changes to enable more efficient and effective decisions. Major shareholders, general shareholders, creditors, employees, and customers must grow together to truly grow. In that sense, we tell our employees our fund is a 'fund that catches crayfish while digging a ditch.'"

His corporate governance improvement campaign is just beginning. It has gained the interest and support of 14 million retail investors. Policy changes are needed.

"Looking at Japan's past, former Prime Minister Abe invited activism funds to his official residence for meals. He also invited Elliott's Japan representative. While considering retail investors' votes, fundamentally, it's a national fiscal issue. Japan wanted to eliminate the Japan Discount. A vibrant stock market creates more companies. Such efforts build capitalist culture and assets. Japanese companies' governance has greatly improved. Investor protection mechanisms for individuals have been established. Such changes seem likely in Korea too. We expect a good market over the next five years. Overseas investors are very interested and seek us out."

Investing 4 Trillion Won in Environment and Aging

In which sectors will KCGI strengthen investments? KCGI and its subsidiaries, KCGI Asset Management and KCGI Alternative Investments, manage about 4 trillion won in total.

"We basically hold undervalued domestic stocks. We are also looking at eco-friendly sectors. Companies with carbon capture technology that can contribute to environmental improvement. These technologies are used in incinerators and thermal power plants, reducing carbon emissions by 15-20%. These are domestic companies, but since they don't generate sales in Korea, they may move to the U.S. We want to invest in such companies. This is not naive investment for the world’s sake but because it is a profitable sector. We plan to selectively look at biotech and pharmaceuticals. In alternative investments, real estate should focus on high-end silver town types. There are many wealthy elderly people. It's a high-end niche market."

◇Kang Sung-bu, CEO of KCGI= He studied economics at Yonsei University and earned a master's degree in business administration with a focus on financial management at Seoul National University Graduate School. He worked as a credit analyst at securities firms including Daewoo Securities and Dongyang Securities for 15 years. Realizing that corporate governance plays a crucial role in determining corporate creditworthiness, he completed Korea's first corporate governance map of the top 100 companies in 2005. He published a report stating that Korea's stock market undervaluation, known as the Korea Discount, is due to backward corporate governance rather than the division of the Korean Peninsula, attracting attention from the UK's The Economist and the Financial Times. After serving as CEO of LK Investment Partners, he currently leads KCGI, well known as the 'Kang Sung-bu Fund.'