[Exclusive] Mandatory Disclosure of Corporate Value Improvement... Under Review for All KOSPI Companies and KOSDAQ150 Targets

[Long Road Ahead for KOSPI]③ Disclosure, 1,000 Listed Companies as Priority Targets
Backward Governance Structures, Encouraging Corporate Voluntary Improvement
Korea Exchange to Announce Detailed Plan by End of February

The government is reportedly considering recommending that all companies listed on the KOSPI market and 150 companies listed on the KOSDAQ market disclose corporate value improvement plans. As part of the financial authorities' governance reform policy for this year, called the 'Corporate Value-Up Program,' it is expected that about 1,000 listed companies will be prioritized as targets. However, given the differences between the Korean and Japanese stock market environments, there are calls for meticulous policy design to enhance effectiveness.

Considering Disclosure of the List to Impose Mandatory Measures

According to the financial investment industry and financial authorities on the 30th, the Financial Services Commission is reviewing a plan to select all KOSPI-listed companies and 150 KOSDAQ-listed companies as targets for disclosing corporate value restructuring plans. To impose mandatory measures, they are also considering announcing a list distinguishing companies that implement the plan from those that do not. This is a 'Name & Shame' strategy, a form of public shaming. According to the Korea Exchange, as of now, there are 840 companies listed on the KOSPI, and combined with 150 KOSDAQ-listed companies, about 1,000 (990 companies) could be included as targets.

The Corporate Value-Up Program focuses on encouraging companies to autonomously improve the backward governance, which has been cited as a major cause of the Korea Discount (undervaluation of the Korean stock market), and to actively communicate with the market. The policy's main points are ▲ publicly comparing key investment indicators of listed companies (such as Price-to-Book Ratio (PBR) and Return on Equity (ROE)) by market capitalization and industry, and ▲ recommending listed companies to announce corporate value improvement plans. The authorities plan to ▲ develop a 'Korea Premium Index' (tentative name) composed of companies excelling in corporate value improvement, and ▲ encourage the development of Exchange-Traded Funds (ETFs) based on this index as an underlying asset.

On the 24th, Financial Services Commission Chairman Kim Joo-hyun explained at a meeting, "The purpose is to have companies analyze the reasons for their undervaluation themselves, prepare response strategies, and actively explain and communicate these to investors." The specific methods and targets will be disclosed by the Korea Exchange after consultations with listed companies by the end of February. Cooperation from domestic asset management firms is also expected to be necessary during the ETF development process.

In preparing this improvement plan, the financial authorities benchmarked the strong stimulus measures recently credited as the driving force behind the Japanese stock market. On the 25th, Financial Services Commission Vice Chairman Kim So-young appeared as a speaker at the 'Seoul IB Forum,' a high-level meeting of investment banking (IB) industry officials, and stated, "We have benchmarked the Japanese case extensively." Previously, the Japanese government and Japan Exchange Group (JPX) strongly requested management improvement plans from companies listed on the Tokyo Stock Exchange (TSE) with a PBR of 1 or less. JPX also warned that such companies could be included on a delisting list. Additionally, companies were required to publish governance reports, and only excellent companies were gathered to create a benchmark (BM) index called the 'JPX Prime 150 Index.' Along with strong performance by Japanese companies due to the weak yen effect, investment sentiment greatly improved as it became known that 'value investing guru' Warren Buffett invested in five major trading companies.

Research Fellow Kang So-hyun of the Korea Capital Market Institute said, "It will be meaningful in that it provides investors with an opportunity to pay attention to shareholder companies and gives companies a penalty, prompting them to care about evaluations." She added, "We expect that efforts to improve corporate issues will accompany this in the long term, rather than just a temporary stock price boost."

Considering Differences Between the Two Countries... Criticism Over Lack of Effectiveness

However, some have suggested that differences in management environments and governance between Japan and Korea must be considered. A senior official in the financial investment industry pointed out, "If it remains a recommendation as it is now, companies may not comply, so if it is to be done, it must be done decisively." He added, "Like Japan reorganized its stock market leagues, measures should be taken to subdivide the KOSPI and KOSDAQ, which are simply classified by size, so that companies actually feel pressured." The TSE reorganized its market in April 2022 into three segments: 'Prime' for global companies, 'Standard' for mid-sized companies, and 'Growth' for emerging companies.

Criticism has also been raised that there are limits to simply following Japan’s policies because the corporate ownership structures of the two countries differ. Professor Lee Sang-hoon of Kyungpook National University said, "In Japan, there is no concept of 'chaebol,' and financial institutions are often the major shareholders of companies, whereas in Korea, individuals often own companies." He pointed out, "Therefore, unlike Japan, where companies actively participate in setting and implementing policy agendas by financial authorities, it is difficult to expect the same effect in Korea." He emphasized, "It is more important to prevent problematic behavior in advance rather than fixing the disclosure system at the post-stage." He suggested expanding the duty of loyalty of directors stipulated in Article 382-3 of the Korean Commercial Act from the existing 'company' to 'company and shareholders.'

Meanwhile, as part of governance reform, the financial authorities plan to promote the institutionalization of online electronic shareholder meetings to increase small shareholders' attendance at general meetings, along with the Corporate Value-Up Program. Improvements to the treasury stock system will also be pursued.