[Exclusive] F4 Takes the Lead Against 'Korea Discount'... Governance Reform Discussions Begin

[Long Road Ahead for KOSPI] ① F4 Strives to Resolve Stock Market Undervaluation
Governance Reform 'Financial Services Commission Oversees'... Deputy Prime Minister Directly Handles Issues
Advanced Countries' Stock Market Performance Among the Lowest Globally
President Yoon: "We Must Create a System Aligned with Shareholder Interests"
Main Cause of Korea Discount... Outdated Corporate Governance

Choi Sang-mok, Deputy Prime Minister for Economy and Minister of Strategy and Finance, presided over a meeting of the financial authorities' leadership group, F4 (Finance 4), to address the issue of undervaluation in the Korean stock market. This came after President Yoon Suk-yeol stated at a public discussion session combined with the Financial Services Commission's (FSC) work report that "(company) governance must establish a system that aligns with shareholder interests." There is a shared recognition that corporate governance, which operates in ways contrary to the interests of minority shareholders, is a major cause of the Korea discount (undervaluation of the Korean stock market), and institutional improvements are expected to follow.

According to government and investment banking (IB) industry sources on the 30th, last week Deputy Prime Minister Choi held a private 'F4' meeting attended by Lee Chang-yong, Governor of the Bank of Korea; Kim Ju-hyun, Chairman of the FSC; and Lee Bok-hyun, Chairman of the Financial Supervisory Service (FSS), focusing intensively on the chronic problem of Korea discount in the Korean stock market. It is reported that they also exchanged views on governance reform, which is identified as a primary factor behind the domestic stock market's sluggishness. F4 is a closed-door meeting where heads of financial authorities discuss policy issues and is regarded as a control tower overseeing macroprudential stability. In particular, the FSC, as the main ministry, has actively started advancing the governance modernization of financial companies since last year and is known to be operating a task force (TF) for this purpose.

A financial authority official said, "Governance reform is an issue overseen by the FSC, and related ministries gathered to hold a meeting on this matter," adding, "Deputy Prime Minister Choi received a direct report." This is interpreted as a follow-up measure to President Yoon's emphasis at the FSC work report discussion that governance should be established to align with shareholder interests.

At the public discussion session hosted by the FSC, Seok-jae Jeon, known as Shuka World (real name Jeon Seok-jae), who is the number one YouTube subscriber in the economics category, criticized, "Korean companies make decisions favoring specific major shareholders, sometimes even at the expense of minority shareholders' losses," and added that the board of directors does not prevent such decisions.

President Yoon agreed with this criticism, stating, "We must continuously amend the Company Act and Commercial Act to create a system where governance can make decisions that align with shareholders' interests."

Top-tier Products, Third-rate Capital Market Evaluation... Advanced Countries' Stock Market Performance Among the World's Lowest

The undervaluation issue of the Korean stock market is a chronic problem mentioned repeatedly by the president. According to the Korea Exchange, from the beginning of this year until the 24th of last month, the Korean KOSPI index ranked the lowest among 23 major countries used for comparison. The price-to-book ratio (PBR) compared to major countries is also significantly low. PBR is an indicator showing the stock price level relative to a company's net assets; the lower the PBR, the more undervalued the company's stock is. The average PBR of listed companies in Korea was 1.1 times as of the end of last year, lower than Japan's 1.4 times. The United States stands at 4.5 times, much higher than Korea or Japan. Furthermore, from 2012 to 2021, the price-to-book ratio of domestic listed companies was only 52% of advanced countries and 58% of emerging countries, ranking 41st out of 45 countries analyzed. Considering that Korea has many global companies such as Samsung, Hyundai Motor, and LG, and is a member of the Group of Twenty (G20), an economic advanced country group, the stock price level does not keep pace. There is even a saying that products are first-class, but capital market evaluations are third-rate.

Experts mainly cite the backward decision-making structure that insufficiently reflects the interests of minority shareholders as the cause of the Korea discount. Kang So-hyun, a research fellow at the Korea Capital Market Institute, said, "Governance has a high incentive to pursue private interests, but it is difficult to replace incompetent governance," adding, "The means to protect minority shareholder rights, board functions, and institutional investor bases that can check governance are evaluated as weak."

The recent government announcement to launch a corporate value-up program is also linked to governance improvement. Since last year, Japan's stock market has been in a bullish trend, encouraged by the Governance Action Program to enhance corporate value, which has had a positive effect on stock prices.

Nam-woo Lee, professor at Yonsei University's Graduate School of International Studies and chairman of the Korea Corporate Governance Forum, said, "Corporate governance is about striving to receive high valuations, but in Korea, due to major shareholders' private benefit extraction and lack of transparency, the capital market does not properly recognize that value," adding, "Governance improvement is essential to enhance corporate value."

Other factors cited include inadequate shareholder return policies, low institutional investor ownership ratios, and the inherent limitations of Korea's small open economy.