[Value-Up Success Conditions] ② The Key to Plan Success is the 'Capital Efficiency' Item

Key Indicator is 'ROIC'
Enables Practical Management Efficiency Assessment
If Below Average, Cost Structure Changes and New Revenue Discovery Needed

Editor's NoteThe corporate value-up program has been unveiled. It is a policy promoted at the pan-government level to resolve the 'Korea Discount' (undervaluation of the Korean stock market). The core is to provide incentives without penalties to encourage voluntary participation by listed companies. The market expresses disappointment over tax support and doubts the success of the corporate value-up program. Is that really the case? Capital market experts emphasize that the success of the corporate value-up program depends not on tax policy but on the 'will of the listed companies.' The return on equity (ROE) of domestic companies is similar to that of Japan, but the dividend payout ratio is about 10% lower than Japan's. Unlike CEOs in the U.S. who meet shareholders directly, Korean listed companies hold formal investor relations (IR) meetings. It is not the listed companies who should demand incentives but those who must respond. It is time for listed companies to promise shareholders through disclosures what and how they will do to enhance corporate value.

The success of the corporate value-up program depends on the content of the 'corporate value enhancement plans' disclosed by listed companies. These are broadly divided into financial and non-financial indicators, with goals and specific execution plans disclosed. Capital market experts point out that among the financial indicators, 'capital efficiency' is the most important because it reflects the actual management efficiency of a company.

A representative indicator to gauge capital efficiency is Return on Invested Capital (ROIC). For example, if Company A and Company B both invest 10 billion KRW in capital, and their operating profits are 2 billion KRW and 1 billion KRW respectively, Company A can be considered to have earned money more efficiently.

ROIC is an indicator that shows how much operating profit a company has generated from assets invested in its operations. If a company's ROIC is lower than the industry average, it implies the need to change cost structures or find new revenue sources. When planning value-up disclosures, listed companies should specify indicators like ROIC that can gauge capital efficiency as much as possible.

Lee Chang-hwan, CEO of Align Partners Asset Management, said, "The return on capital is lower than the cost of capital," adding, "It is important to discuss how to change capital allocation."

Not all companies need to use a specific financial indicator as a key metric. It is important to select the indicator that best reflects the financial situation depending on the industry and individual company circumstances. For example, ROIC is mainly used in manufacturing but is rarely used in finance. Securities firms mainly use Return on Equity (ROE), and banks use Return on Assets (ROA).

The financial indicators used vary depending on the company's situation. Even within the same large business group, holding companies and affiliates have different circumstances. The main income source for holding companies is dividends received from affiliates. It is also important that many small and medium enterprises are subcontractors of large companies, meaning their performance can vary depending on the business strategies of large companies. An official from the Korea Chamber of Commerce and Industry said, "Financial indicators presented in key value-up plans should be set differently considering company size, industry, and other circumstances."

Non-financial indicators can also be used as financial indicators. This is because some non-financial indicators have high financial relevance. Carbon emission permits fall into this category. In countries implementing carbon pricing systems, these are treated as tax-like expenses, so they are directly related to financial indicators. Moreover, carbon emission permits are assets that can be sold to other companies.

Dividends are similar. Whether interim dividends such as quarterly or monthly dividends are paid is a non-financial indicator but has high financial relevance. Depending on the company's situation, it can be emphasized as shareholder returns or used as a financial indicator. Corporate risk factors are clearly recognized as non-financial indicators, unlike provisions. However, if they significantly impact performance and can be visualized, they can be used as financial elements.

Lee Nam-woo, Chairman of the Korea Corporate Governance Forum, said, "It is important for each company to identify the most appropriate indicators through accounting firms or consulting and set goals at the board level based on this," adding, "Because Korean companies have high volatility, periods shorter than three years are meaningless, and it is important to conduct relative evaluations with domestic and international competitors over five to ten years or more."