[Inside Chodong] Diverging Dreams of Governance Restructuring and Value-Up

The term ‘value-up (enhancing corporate value)’ has emerged as a hot topic in the business community. This discussion, aimed at resolving the so-called ‘Korea discount’ and increasing the value of listed companies, is expected to attract significant attention in the second half of the year as it requires a legislative process for tax benefits.

It is a fundamental principle in business management that a corporation shares its management performance with its shareholders. However, the current heightened interest in value-up may indicate that this basic concept has not been properly functioning in the domestic capital market until now. This discussion to reclaim shareholders’ interests and rights is expected to serve as an important turning point to advance the undervalued domestic capital market. Choosing to expand dividend income as a private pension alongside public pensions amid rapidly progressing aging is also timely from a societal perspective.

Along with value-up, there are calls to amend the Commercial Act. The core proposal is to include shareholders’ proportional interests within the scope of the ‘duty of loyalty of directors’ stipulated in Article 382, Paragraph 3 of the Commercial Act. This means protecting not only the interests of major shareholders but also those of minority shareholders, which is said to be a turning point that will accelerate the advancement of the domestic capital market.

However, companies are strongly opposing these moves due to concerns about side effects such as lawsuits against major shareholders and the board of directors or threats to management rights. In a recent survey conducted on listed companies, half of the respondents felt a significant burden, stating that if the duty of loyalty of directors is expanded, they would reconsider or withdraw their merger and acquisition (M&A) plans.

There is a saying that a company is like a living organism. It means that companies must adapt to changing environments and constantly pursue change. Recently, companies have been actively restructuring their governance in response to the major transformations occurring across all areas, from carbon neutrality to artificial intelligence (AI). Notably, Doosan Group and SK Group have formalized their governance restructuring efforts, which can be summarized as securing funds for new businesses by utilizing valuable affiliates.

Doosan announced the delisting of Doosan Bobcat, which generates about 1 trillion won in annual operating profit, by transferring it to Doosan Robotics, a subsidiary that has been running deficits annually, in November. SK is splitting SK E&S, which has paid dividends of over 400 billion won annually to the holding company, and merging it with SK Innovation. SK On and SK Innovation’s subsidiaries SK Trading International and SK Entum will also be merged.

From the shareholders’ perspective, there is dissatisfaction with the sudden division and merger of otherwise sound companies overnight. Some have criticized that the board rushed into governance restructuring before the amendment of the Commercial Act, which could expose them to breach of trust lawsuits. There is a widespread perception that this governance restructuring will be positive for major shareholders but cause losses for minority shareholders.

Evaluating the choices of management is not a simple arithmetic task. No one can guarantee when Doosan’s robotics or SK’s secondary battery businesses will flourish. It is also difficult to predict how the results of these choices will be evaluated in the future. The beginning of value-up is for shareholders to understand the uncertainties of management and the value of the challenges undertaken to overcome them.