The Korea Corporate Governance Forum has argued that if the next administration amends the Commercial Act to strengthen shareholder protection, the KOSPI 5000 could be achieved within five years. The forum analyzed that such reforms would help address the chronic Korea Discount caused by corporate governance issues, paving the way for increased inflows of foreign investment. It also presented a detailed scenario demonstrating the feasibility of reaching KOSPI 5000.
In a statement released on the 27th, the forum said, "From the perspective of the capital market, amending the Commercial Act would be a major positive event of a different magnitude compared to non-binding value-up initiatives." The Governance Forum is a non-profit incorporated association composed of more than 120 members, including financiers, legal professionals, and academics from Korea and abroad, aiming to advance the capital market through improvements in corporate governance.
The forum first noted, "The international financial community is just as interested as the domestic market in our proposed amendment to the Commercial Act, which would expand directors' fiduciary duties from the 'company' to include 'shareholders.'" It added, "Sovereign wealth funds, pension funds, family offices, and alternative investment funds?large-scale overseas investors who have so far been hesitant to invest in Korea due to insufficient investor protection?are now closely watching the legislative process of the Commercial Act amendment," reflecting the current market sentiment.
The forum also claimed, "If the Commercial Act is amended and the remaining tasks previously outlined are swiftly implemented, we can expect annual inflows of tens of trillions of won in foreign investment." Recently, through its commentary "Seven Capital Market Proposals for the New Administration," the forum stated that, in addition to the failed amendment of the Commercial Act due to the government's veto and the National Assembly's failure to override it, measures such as mandatory cancellation of treasury shares, introduction of separate taxation for dividend income, a general ban on dual listings, and mandatory cumulative voting should be adopted.
In particular, regarding Democratic Party presidential candidate Lee Jaemyung's campaign pledge of "KOSPI 5000," the forum said, "We believe that this is achievable within five years through the enhancement of shareholder value and an upgrade in stock valuation levels following the amendment of the Commercial Act." The forum assessed that "if the KOSPI rises 14% annually on a compound basis for five years, it is possible."
Specifically, for its base case scenario to achieve KOSPI 5000, the forum assumed: ▲ 4% annual earnings growth over five years based on the projected 2025 earnings per share (EPS), ▲ cancellation of treasury shares equivalent to 2.5% of outstanding shares held by listed companies, ▲ annual repurchase and immediate cancellation of 1% of outstanding shares by listed companies, and ▲ a 30-year price-to-earnings ratio (PER) of 12.3 times, reflecting enhanced shareholder value, improved growth prospects, and dividend rationale. Under these assumptions, the KOSPI index could reach 5,030. In its best-case scenario, with 5% annual earnings growth and 3% treasury share cancellation over five years, the index could approach 6,000.
The forum emphasized, "The most important factor is building 'trust' in Korean companies over the long term. Initially, foreign capital will flow in on the basis of 'expectations' following the Commercial Act amendment, and later, this will be sustained by 'trust.'" It added, "If listed companies focus their efforts and simultaneously reduce debt, they can easily achieve 4% annual earnings growth by 2030, surpassing the 2-3% annual growth rate of the past decade."
The forum also criticized, "It is regrettable that some overseas-based economists have opposed the amendment of the Commercial Act and criticized shareholder capitalism due to their lack of understanding of the capital market and cash flow." The forum further argued that these economists' claims?that Korean companies' focus on shareholder returns would ultimately undermine productive corporate activity and harm the national economy?are "baseless assertions stemming from ignorance."
The forum pointed out that Korean companies have the lowest dividend payout ratios among advanced economies. "Considering their cash holdings and cash generation capacity, the current payout ratio of 26% could be doubled. Of course, legislation is needed to separate dividend income and apply a lower tax rate," the forum said. "Dividends not only get reinvested in the financial market but can also be used for consumption, making them more beneficial than leaving cash in the company where it reduces capital efficiency," it added.
Furthermore, the forum noted that companies such as Apple return 100% of their net profits to shareholders after investing tens of trillions of won in facilities. "Korean companies have not failed to invest because of shareholder returns, but rather, due to poor decisions and arrogance by controlling shareholders and management, they have repeatedly made misguided investments, failing to generate profits and leaving only company debt," the forum criticized. It continued, "While it is true that large Korean companies contributed greatly to industrialization during the 1960s and 1970s, over the past decade, as management has shifted to the second to fourth generations, an unhealthy mindset that 'shareholders' money is free' has led to massive waste and distortion of Korea's resources." The forum concluded, "This is why amending the Commercial Act is absolutely necessary."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
