Activist Returns: "Board Entry" Outperforms "Shareholder Returns"

Analysis of Japanese Cases: "Focus on Companies with Weak Governance"
"South Korea Emerges as a Hotspot for Activist Funds After the US and Japan"
Last Year: 325 Shareholder Proposals in the US, 151 in Japan, 49 in South Korea

South Korea has become one of the world's top three countries for shareholder activism, alongside the United States and Japan. Last year, the number of shareholder activism campaigns was 325 in the United States, 151 in Japan, and 49 in South Korea. In Japan, where capital market regulations and corporate governance are similar to those in South Korea, statistically significant stock price increases were observed at companies targeted by shareholder activism campaigns. With amendments to the Commercial Act expected to further invigorate activist fund activities in South Korea, the Japanese experience can serve as a reference for identifying stocks that may see price increases.

On July 18, Hanwha Investment & Securities released a report titled "Japan-South Korea Shareholder Activism and Governance Premium," which analyzed that while demands for shareholder returns such as increased dividends and share buybacks are rising due to activism, in Japan, campaigns aimed at "securing board seats" have delivered the highest excess returns in terms of profitability.

There are various ways in which activist funds enhance corporate value. First, the fact that companies targeted by activist funds are "responsive" to their proposals can itself be considered a success. There are increasing cases where companies actually implement value-enhancing measures suggested by funds, such as expanding shareholder returns, restructuring business operations, or improving corporate governance. These changes send positive signals to the market, driving stock prices higher. Additionally, activist funds often pursue long-term returns by improving company fundamentals, rather than seeking short-term trading gains. When a company accepts these demands and improves its structure, this becomes a sustained driver of stock price appreciation.

Looking at last year's cases in Japan, shareholder activism campaigns focused overwhelmingly on "capital returns" such as increased dividends and share buybacks, accounting for 69% of all campaigns. However, in terms of returns, campaigns aiming to "secure board seats" recorded the highest average one-year cumulative excess return at 15.6%. This appears to be because the market expects fundamental improvements in corporate governance through changes in board composition. Capital return measures such as dividends and share buybacks, as well as business spin-offs and divestitures, also showed relatively high average one-year cumulative excess returns of 11.3% and 9.8%, respectively. Simple stake-only activism recorded just 4.6%.

Park Seyoun, an analyst at Hanwha Investment & Securities, commented, "The virtuous cycle shown by the Japanese model?governance improvement leading to ESG (Environmental, Social, and Governance) capital inflows, which in turn lead to excess returns?is already taking shape in our market as well," adding, "The activation of activism campaigns and the increase in shareholder proposals in the Japanese market provide attractive investment opportunities for activist funds aiming to enhance corporate value."

Hanwha Investment & Securities advised investors to pay attention to companies targeted by shareholder activism that, beyond low price-to-book ratios (PBR) or high cash holdings, also exhibit governance vulnerabilities such as board imbalance, low independence, or excessive executive compensation. The firm also recommended considering strategies such as preemptively buying stocks among the value-up candidates that have clearly announced plans to increase dividend payout ratios or conduct share cancellations.