Foreigners Eye K Stock Market "400 Value-Up Conference Calls"... Activist Funds Expected to Flock [Manbo Jeongdam]

Interview with Lee Nam-woo, Chairman of the Korea Corporate Governance Forum
Regularly manages health by hiking Maebongsan near home
Consulted by major conglomerates in their teens
Forum on PBR reform at Tokyo Stock Exchange on the 19th

Namwoo Lee, Chairman of the Korea Corporate Governance Forum, is South Korea's top international investment expert with 30 years of experience. In his late 20s, he made a name for himself as Vice President and analyst responsible for Korea, Japan, and Taiwan at J.P. Morgan's Asia-Pacific headquarters in Hong Kong. In his mid-30s, he served as the inaugural head of the Research Center at Samsung Securities. Many foreign media outlets such as CNN, CNBC, and The Wall Street Journal paid close attention to his market insights, as he consistently diagnosed the market one step ahead. In 2003, he attracted industry attention by becoming the first Korean to secure $20 million in seed funding from Man Group, one of the world's largest hedge fund groups, by creating a hedge fund exclusively for foreigners. He also served as co-CEO of Merrill Lynch Korea, one of the top three U.S. securities firms. Currently, he is a visiting professor at Yonsei University's Graduate School of International Studies, teaching subjects such as financial analysis, industry analysis, and corporate governance. As an advisor to the Graduate School's CDC, he helps foreign students find employment in Korean companies and public institutions, contributing to the globalization of these organizations. The Korea Corporate Governance Forum, which he has chaired since this year, is a non-profit organization established in December 2019. It includes prominent figures from academia, the legal sector, and finance such as Kyusik Kim, portfolio manager at Turnary Asset Management; Jin-Hyung Joo, former CEO of Hanwha Investment & Securities; Woojin Kim, professor at Seoul National University Business School; Changhwan Lee, CEO of Align Partners Asset Management; Joonchul Choi, CEO of VIP Asset Management; Seongbu Kang, CEO of KCGI; Chaewon Lee, chairman of Life Asset Management; and lawyer Kwangjoong Kim, all seeking to improve corporate governance in Korea.

"This is the first time since the 1997 Asian financial crisis that Korea is being discussed on a single topic in the international financial market. Foreign investors had almost given up on the Korean market after the crisis, believing Korea would not change. However, these foreign investors have started to regain interest in the Korean market following the introduction of the 'Corporate Value-Up Program.'"

Namwoo Lee, Chairman of the Korea Corporate Governance Forum, has recently become extremely busy, dividing his time by the minute. As the government announced plans to implement the Corporate Value-Up Program, more people have been seeking him out. Requests for conference calls from foreign investors have also increased. On the 6th, a conference call hosted by CLSA Securities saw participation from 300 overseas institutions, indicating strong enthusiasm. This is evidence that foreign investors are paying close attention to Korea's changes. Recently, he also proposed implementation measures for the Corporate Value-Up Program through an open letter addressed to the Financial Services Commission Chairman and the Korea Exchange Chairman. On the 19th, he will hold a forum titled 'Learning from Japan's Corporate Governance Reform,' focusing on the core and success factors of the Tokyo Stock Exchange's Price-to-Book Ratio (PBR) reform. The Corporate Value-Up Program includes measures to enhance corporate value and encourage shareholder returns by mandating comparative disclosure of key investment indicators such as PBR and Return on Equity (ROE) for listed companies.

Professor Namwoo Lee of Yonsei University Graduate School of International Studies (Chairman of the Korea Corporate Governance Forum) is walking near IFC in Yeouido, Seoul on the 6th. Photo by Jinhyung Kang aymsdream@

Strongest Interest in Korea Since the IMF... If Corporate Value-Up Takes Root, KOSPI Could Reach 3000

- You have been working under time pressure for 30 years. How do you usually manage your health?

"In spring and autumn, I climb Maebongsan near my home. From Dongjak Bridge, it looks like a low hill about 175 meters high, but I make sure to go hiking 2-3 days during spring and autumn. I maintain my health by walking regularly." On the day of the interview, Chairman Lee was wearing sneakers. He has a habit of walking everywhere. Even in the biting cold weather, he showed no sign of fatigue while walking and talking with the reporter in Yeouido Park.

- What are foreign investors most curious about regarding the Korean capital market recently?

"There are conference calls scheduled with 300 to 400 participants including groups. I explain the governance-related policies Korea is promoting. Foreign investors mainly ask about the government's commitment to implementing the value-up program, corporate responses, and whether the system will take root. They are curious whether a system that worked in Japan will function properly in Korea."

Although foreign investor outflows from the Korean stock market have been severe, expectations for change have been detected throughout the market. According to the Korea Exchange, foreign investors purchased 4.9 trillion won worth of Korean stocks from the beginning of this month through the 8th. Considering that foreign investors' net purchases of domestic stocks in January were less than 3 trillion won for the entire month, this is an explosive buying spree in just six trading days. This reflects the belief that if companies actively work to enhance corporate value through governance reforms promoted by the government, stock prices will rise. He confidently stated that if corporate value improves through the Corporate Value-Up Program, the KOSPI index could reach 3000.

However, it remains uncertain how actively domestic companies, which have been passive about shareholder returns, will participate. Japan enforced strong measures such as delisting warnings to drive corporate change, but Korea's Corporate Value-Up Program is a soft norm that encourages companies to voluntarily increase their market capitalization. Chairman Lee emphasizes the government's strong will to execute the program.

- You will announce detailed implementation plans for the Corporate Value-Up Program at the end of this month. How are companies responding?

"Two large companies contacted me. One is among the top 10 chaebols, and the other is among the top 30 chaebols. They wanted to know exactly what the Corporate Value-Up Program is and how to respond. Companies are feeling pressure to change. However, it is not easy for companies to change voluntarily. The government needs to provide guidelines and drive the process. This is why our forum recently sent an open letter to the Financial Services Commission Chairman and the Korea Exchange Chairman."

The Korea Corporate Governance Forum sent an open letter to financial authorities on the 6th, urging that the value-up program be promoted for at least three years. It also insisted that the program's implementation body should be the board of directors, not management. He says that ultimately both companies and boards must change. "A company is a living organism. It must continuously evolve. When pressure comes, the board must make independent judgments. If the board finds it difficult to decide, it can seek external consulting."

Professor Namwoo Lee of Yonsei University Graduate School of International Studies (Chairman of the Korea Corporate Governance Forum) is walking among the buildings near IFC in Yeouido, Seoul on the 6th. Photo by Jinhyung Kang aymsdream@

The Cause of Korea Discount is Governance Issues

The Korea Discount (undervaluation of the Korean stock market) cannot be explained by one or two factors. Experts mainly cite backward governance, low shareholder return rates, and inherent limitations of the Korean economy as reasons for the undervaluation.

- Where do foreign investors find the causes of the Korea Discount?

"They see governance that is overly considerate of controlling shareholders as the problem. Because there is a controlling shareholder, the board atmosphere has hardened so that it does not faithfully represent shareholder interests. Then why are bank stocks without controlling shareholders discounted? They say it is due to government-controlled finance. Also, Korea's industrial structure is volatile. Profit volatility is high, making stock price predictions difficult."

With 30 years of experience, the country's top international investment expert gave an unreserved answer. His sharp market insight is evident from past anecdotes. In February 2000, while serving as executive director at Samsung Securities, he was reported to the then-opposition Grand National Party for alleged election law violations. This was due to his report stating, "The ruling party's defeat in the general election will be perceived as a retreat from restructuring, leading to foreign investor outflows and market instability." At that time, the market paid close attention to his voice, which influenced the general election. Industry insiders say he sees the market more clearly than anyone else.

In early 1997, while working at Hong Kong Peregrine Securities, he gained attention by publishing a pessimistic report on the Korean economy. He warned of asset deflation following the bursting of the bubble. At that time, domestic private research institutes and government-affiliated organizations painted a rosy picture of the Korean economy. This is why he was appointed head of Samsung Securities' inaugural Research Center in his mid-30s after writing a report predicting the 1997 Asian financial crisis. Later, he moved to Singapore, established a hedge fund, and managed it for three years, gaining direct global market experience. Having mainly worked at foreign securities firms such as Merrill Lynch Seoul branch co-CEO, Taurus Investment & Securities head of sales, and Nomura Securities Asia client management head, he is now focusing on governance reform.

Young Analyst Who Found Answers in 'Quality of Management'... Efforts by Authorities Are Most Important

Since joining Daewoo Securities in 1988 as a young analyst, Chairman Lee pondered why Korean companies' products had become 'world-class' but their presence in financial markets remained stagnant. At that time, he identified the answer as the 'quality of management,' namely governance. The governance gap between Japan and Korea is about ten years.

"It is meaningful that financial authorities are now benchmarking Japan's Corporate Value-Up Program and showing moves to implement it. However, for this plan to take root in the market and advance the domestic capital market, the government's strong will to execute is most necessary." This means that leadership from financial authorities who can drive corporate change is paramount.

Because the Corporate Value-Up Program is a soft norm, he also said it would be efficient to establish a hard norm protecting 'proportional shareholder interests' under the Commercial Act. Currently, Article 382 of the Commercial Act stipulates directors' duty of loyalty only to the 'company,' but this should be expanded to include proportional shareholder interests.

- Do you think the short-selling ban helps resolve the Korea Discount?

"Illegal short selling accounts for less than 5% of trading volume in the Korean stock market. Most foreign investors use short positions for hedging. This is a classic hedge fund strategy involving both buying and selling. If short selling is impossible, they leave the Korean market. This ultimately reduces liquidity. If the government had not imposed short-selling restrictions, the KOSPI index would have reached the 2800 level by now."

He did not hide his views on the short-selling ban. He said the reason Korea's market has ranked low in long-term investment returns worldwide and has not shaken off the Korea Discount dishonor for over 30 years is not because of foreign investors' short selling. He believes the positive functions of short selling have a greater effect on the market.

Throughout the interview, he maintained a gentle tone but spoke quite firmly at this point. Watching foreign financial firms close their doors in Korea due to overlapping regulations rather than capital market advancement, he often thought, "This is not right."

"Among foreign investors, there is a widespread perception that making money in Korea is extremely difficult. Citigroup and HSBC have withdrawn, and medium-sized securities firms have also eventually exited Korea. Illegal short selling should be detected and legally punished, but we must consider whether other measures are reasonable. For example, if Korea requires building a Korean-style short-selling IT system, foreign financial firms have no reason to endure such burdens and stay in Korea."

As a result of the short-selling ban, many foreign investors left the Korean stock market, and individuals filled the gap. While the influx of individual investors increases liquidity and is welcome, individual investors tend to prefer high-turnover short-term trading, which is criticized for increasing market volatility. The recent situation where low PBR stocks have become a theme stock alongside the implementation of the Corporate Value-Up Program also reflects this.

Professor Namwoo Lee of Yonsei University Graduate School of International Studies (Chairman of the Korea Corporate Governance Forum) is being interviewed on the 6th at Align Partners in Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

This Year, Many Overseas Activist Funds Will Enter Korea... Careful Calculation of Investment Returns

It is said that the hidden force behind the Japanese stock market's strength is the UK-based activist fund Palisade Capital. Since October last year, Palisade Capital pressured Japan's Keisei Electric Railway, in which it invested, to sell Oriental Land, the operator of Tokyo Disneyland, and reinvest in the railway business. Activism refers to an investment approach that actively exercises shareholder rights such as expanding dividends, share buybacks, and management replacement to raise stock prices and gain profits. Japanese companies raised stock prices through dividend increases and share buybacks due to pressure from activist funds.

- Some say activist funds are only interested in acquiring controlling stakes.

"I see activist funds as playing the role of a catfish in the capital market. They have many positive functions. They change companies that inefficiently hoard cash and manage poorly. In fact, 99% of activist funds are not interested in controlling stakes."

- Will many overseas activist funds enter Korea?

"American activist funds have all entered Japan and contributed to changes in Japanese companies. Korea has an industrial structure similar to Japan, and in fact, when investing in Japan, Korea is often considered together. This year will be the year when overseas activist funds officially enter Korea. However, who and how they will come remains to be seen."

He positively evaluated Flashlight Capital Partners' (FCP) lawsuit against KT&G, claiming that current and former outside directors neglected their monitoring duties and caused losses to the company, and predicted that activist fund activities will become more active this year.

- As an international financial investment expert, please give investment advice.

"Instead of investing directly in Chinese companies, invest in Western companies that make money in China. Also, I think a portfolio ratio of 40:60 or 50:50 between Korea and the U.S. is appropriate."

He also reminded investors to constantly review total returns. "Koreans have a habit of not calculating with numbers. Every investment should be carefully evaluated by calculating total returns to see how much total return was earned during the investment period in a company."

He is always sincere in giving investment advice. His book, Good Stocks, Bad Stocks, is regarded as the most popular introductory investment book among university students. As stated in his book, Chairman Lee emphasizes that three elements are essential to find good stocks: intellectual curiosity, the ability to observe delicately, and a diligent attitude to personally experience new products.