[Value-Up Success Factors] ③ Warren Buffett Meeting Shareholders... Korea Showing Off Shareholder Returns

US CEOs Communicate Directly with Shareholders at AGMs
Active in Dividends and Share Buybacks and Cancellations
Korea Falls Short of Dividend Yield Expectations

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 key is to provide incentives without penalties to encourage voluntary participation of listed companies. The market has expressed disappointment over tax support and doubts about 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 that should demand incentives, but they must respond. It is time to promise shareholders through disclosures what and how they will do to enhance corporate value.

Warren Buffett, Chairman of Berkshire Hathaway, is attending the annual shareholders meeting held on the 3rd (local time) in Omaha, Nebraska.

# On the 6th (local time), Warren Buffett appeared riding a cart at Berkshire Hathaway’s annual shareholders meeting held in Omaha, Nebraska, USA. Berkshire Hathaway’s shareholders meeting is considered an event among shareholders because Warren Buffett, known as the 'Oracle of Omaha,' communicates directly with shareholders. This year was the first shareholders meeting held alone after the death of his partner Charles Munger. At this meeting, Warren Buffett explained why he sold Apple shares and acknowledged responsibility for the Paramount loss.

# On the 2nd (local time), Apple announced a $110 billion share repurchase program during its earnings presentation. This is 22% more than last year’s $90 billion and is the largest share repurchase in Apple’s history. Apple also raised its dividend from 24 cents per share to 25 cents per share. The market responded immediately. Apple’s stock price rose 6.4% in after-hours trading.

Consistency and Sustainability in Dividend Policy Needed... Share Buybacks Also Beneficial for Companies

Another key success factor for the corporate value-up program is undoubtedly shareholder returns. The representative forms of shareholder returns are dividends and share buybacks. From a shareholder’s perspective, the attractiveness of shareholder returns increases as dividend income (dividend yield) grows.

According to the Korea Exchange, last year the dividend yield of KOSPI 200 companies was 2.0%. This was slightly higher than the advanced countries’ average (1.9%) but significantly lower than emerging markets (2.7%). Compared to European countries such as the UK (3.8%) and France (2.8%), it remains low.

Another problem is the inconsistency of dividend policies. According to a report on the 'Korean Corporate Value-Up Program' analyzed by S&P Global Market Intelligence, only 55% (110 companies) of KOSPI 200 companies clearly disclosed their dividend policies. In contrast, 76% (170 companies) of Nikkei 225 companies have quantified dividend policies. Furthermore, only 18% (35 companies) of KOSPI 200 companies maintained their dividend amounts. Over the past 10 years (2014?2023), 39% (78 companies) reduced dividends three or more times.

Professor Alex Edmans of London Business School said, "If a listed company has paid dividends, it should maintain a similar level," adding, "In the U.S., when dividends are cut, stock prices typically fall by an average of 4% due to concerns about management difficulties."

For mid-sized companies or those lacking dividend capacity, it is advised to utilize share buybacks and cancellations. Share buybacks and cancellations have been shown to increase corporate value by an average of 12%. Unlike dividends, varying the amount of share buybacks annually does not affect stock price declines.

Korean Listed Companies Must Become Firms That Communicate with Shareholders

A shareholder asking Warren Buffett a question at Berkshire Hathaway's 2024 annual shareholders meeting (Photo by CNBC, YouTube capture)

One thing domestic listed companies overlook is investor relations (IR). This is a major difference from U.S. companies. Experts point out that simply communicating well with shareholders greatly helps increase corporate value. The willingness to communicate with shareholders is evident at shareholders meetings.

In the U.S., CEOs attend in person to share annual performance and explain management strategies. Berkshire Hathaway is a good example. Top executives like Warren Buffett attend and hold Q&A sessions with shareholders. Moreover, side events such as marathons and shopping are held before and after the shareholders meeting, creating a festival-like atmosphere. Because of this, Berkshire Hathaway’s shareholders meeting is called the 'Woodstock of Capitalism.' Major companies like Tesla and Apple also have CEOs like Elon Musk and Tim Cook appear and take questions from shareholders.

In contrast, in Korea, it is very rare for the board or management to attend shareholders meetings. A private equity fund manager said, "Major shareholders in Korea do not recognize that 'shareholders' are the owners of a stock company," and criticized, "In Korea, IR events are held by inviting only a small number of institutional investors and securities analysts, which means there is no willingness from management to communicate with shareholders."

Given this situation, shareholders cannot access IR information or even have IR opportunities. This means that listed companies communicate unilaterally rather than engaging in two-way communication with shareholders. The Japanese government emphasized communication with shareholders when implementing its version of the value-up program. As a result, Japanese listed companies hold separate shareholder seminars, receive shareholder proposals through their websites, and disclose responses.

Researcher Hyo-seop Lee of the Korea Capital Market Institute pointed out, "In Korea, conflicts of interest between controlling shareholders and minority shareholders often occur, such as in subsidiary physical spin-offs," and emphasized, "Two-way communication with shareholders is essential for the success of the value-up program."