Governance Forum Presents Seven Recommendations
for the Capital Market to the New Administration
On April 22, the Korea Corporate Governance Forum held a press conference at the Conrad Hotel in Yeouido titled "Seven Recommendations for the Capital Market for the New Administration." The forum stated, "The next government must address the Korea Discount issue, which is as disastrous as the low birth rate problem." The Governance Forum is a non-profit incorporated association composed of about 120 domestic and international members, including financial professionals, legal experts, and academics, aiming to advance the capital market through improved corporate governance.
First, the Governance Forum emphasized that the "first button" to resolving the Korea Discount is the amendment of the Commercial Act, which previously failed to pass the National Assembly due to the government's exercise of veto power. In particular, they highlighted the need to amend the Commercial Act to protect minority shareholders. At the same time, they called for the introduction of the "discovery system," which would require defendants to disclose evidence before trial, and stressed that criminal penalties for management activities should be restrained.
Lee Namwoo, chairman of the Governance Forum, who attended the press conference, said, "The international financial community points out that the biggest obstacle to investing in Korea is the lack of investor protection systems." He explained, "In the United States, the discovery system makes it easier for ordinary people to file lawsuits against companies, as it allows for the forced submission of internal documents and the ability to prove illegal acts."
Second, the forum advocated for the mandatory retirement of treasury shares. Specifically, they recommended that, as in advanced countries such as the United States, existing treasury shares should be retired immediately, and a best-practice regulation should be introduced requiring retirement of newly acquired shares within three months. Lee stated, "If treasury shares remain on the books as dormant shares, they become a major factor in stock price discounts," criticizing that "Korean treasury shares exemplify the inconsistency between law and accounting in governance and are a representative case of disregarding global standards."
Additionally, the Forum criticized the current system in which, if annual financial income exceeds 20 million won, even long-term investors are subject to the highest dividend tax rate of 50%. They argued for the introduction of separate taxation and a reduction in tax rates. Lee pointed out, "This is double taxation and a factor that hinders long-term investment from the perspective of capital market development," adding, "It is a harsh tax for middle-aged and older investors who invest in stable companies for dividends." This is also a reason why controlling shareholders are reluctant to pay high dividends.
Recently, Kim Soyoung, Vice Chairman of the Financial Services Commission, also publicly pointed out these problems and stressed the need for improvement, stating, "There should be tax reductions or separate taxation." In Hong Kong and Singapore, there is no dividend tax at all. On this day, the Governance Forum recommended that dividend income tax should be separately taxed, and that a 15-20% tax rate would be reasonable for dividend income exceeding 20 million won.
The fourth recommendation is that, as a factor deepening the Korea Discount, the listing of subsidiaries should be fundamentally prohibited. Both inside and outside the industry, there has been ongoing criticism that such duplicate listings dilute the value of already listed parent companies and harm investors. However, as duplicate listings serve as a means for controlling shareholders to expand their business, controversy continues, especially among major conglomerates such as LG and SK. There are currently no clear regulations regarding duplicate listings under existing law.
In response, Lee emphasized that in the case of major U.S. tech companies, only holding companies are listed in principle to maximize shareholder value and eliminate conflicts of interest. He cited Japan's Hitachi and Korea's Meritz Financial as exemplary cases of conversion to holding companies, and argued, "In exceptional cases where listing a subsidiary is unavoidable, legal systems must be in place to ensure that the interests of parent company shareholders are not infringed."
Furthermore, the forum mentioned the necessity of mandating the cumulative voting system, which was one of the main topics during this year's regular shareholders' meeting season. If the cumulative voting system, which became widely known to the public through the Korea Zinc management dispute, is introduced, minority shareholders will be able to unite to elect directors of the company.
In addition, the Governance Forum argued that in mergers between listed parent and subsidiary companies or between affiliates, fair value should be used for evaluation instead of the current market price. Lastly, they commented that the value-up initiative promoted by the financial authorities last year ended up as an "anticlimax" despite its good intentions, and added that all listed companies should be required to announce and implement such plans.
Lee stated, "The Korean economy has already stopped growing. The main reason is that listed companies are obsessed with expanding their business as desired by controlling shareholders, rather than increasing corporate value." He explained that such lax management has ultimately undermined corporate competitiveness, led to increased debt, and caused stock prices to fall.
He also pointed out that while Taiwan's TSMC is included in MSCI's list of the world's top 10 blue-chip companies, there are no Korean companies, including Samsung Electronics, on the list. He noted that TSMC's market capitalization, which was only half that of Samsung Electronics just ten years ago, has now grown to three to four times that level, emphasizing, "When we talk about TSMC, we only mention technological prowess, but the real foundation is governance reform and implementation."
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