[Economy Pulse] Suggestions for True Capital Market Development from an Investor's Perspective

KOSPI 5000, living off dividends, one-strike-out for stock price manipulation. The creation of the National Growth Fund. These are the ambitious blueprints for the capital market unveiled by the Lee Jaemyung administration. "Achieving the Korea Premium and ushering in the era of KOSPI 5000" is also one of the 12 key strategic tasks of the National Policy Planning Committee. Detailed implementation plans to realize these goals are being steadily prepared. The administration's intention to utilize the capital market as a driving force for economic growth is welcome. The proposed agendas seem to align with the new government's philosophy, which emphasizes pragmatism and fairness.

Discussion on capital market development is a grand discourse. It encompasses the advancement of corporate governance, improvement of profitability and growth potential, restructuring of exchanges and over-the-counter markets, strengthening long-term capital supply to growth companies, setting the direction for digital assets, and establishing rational taxation and regulatory systems. The answers may already be public. However, the process of reaching those answers remains arduous. The most fundamental aspect among these is enhancing investor trust. Belief in fairness and confidence in improved returns are prerequisites for sustained growth through the inflow of long-term capital.

It is not easy to discuss fairness in the Korean market. This is because individual investors account for 70% of total trading value?more than twice the share in major countries. This structure compels the political sphere to be sensitive to individual investors' opinions. The recent controversy over the major shareholder transfer tax threshold and the past implementation of short-selling bans are examples. Public opinion among individual investors takes precedence over logical consistency, empirical analysis, or even right and wrong. Finding common ground between fairness, equality, and justice and the interests of individual investors is a daunting task.

Nevertheless, there are numerous trust-building measures that any well-intentioned market participant would agree with. First is the elimination of unfair trading. Insider trading, price manipulation, and fraudulent transactions are the axis of evil that destroy investment motivation. Illegal acts are repeated because the profits from violations far outweigh the costs. It also takes a long time to impose final sanctions, and the penalties are not severe. The sanction process, which currently involves the exchange, the Financial Supervisory Service, the Financial Services Commission (Securities and Futures Commission), and the prosecution, should be shortened and unified under a single agency. Although a joint task force for stock price manipulation has been launched, there are doubts as to whether inter-agency interests will be properly coordinated. The entire process?from detecting abnormal transactions, inspection, investigation, deliberation, resolution, to prosecution?should be conducted in a one-stop manner. This is why I have long advocated for a Korean version of the Securities and Exchange Commission (SEC). If it is difficult to establish an independent agency to handle sanctions on financial institutions or violations related to accounting and disclosure, at the very least, a dedicated organization should be established to handle unfair trading exclusively.

Strengthening shareholder rights is also essential, especially in Korea where there is a significant gap between ownership and control. The introduction of directors' fiduciary duties to shareholders is therefore highly significant. The second round of Commercial Act amendments, which include mandatory cumulative voting and expanded separate election of audit committee members, are also highly anticipated. Institutional investors must fulfill their fiduciary responsibilities by actively exercising shareholder rights. While most institutional investors have adopted the stewardship code (guidelines for institutional investors' exercise of voting rights), it is largely ineffective. In Japan, the results of voting are disclosed by company and by agenda item, and reasons for support or opposition must be clearly explained. The Government Pension Investment Fund (GPIF) of Japan adjusts the proportion of entrusted assets or revokes the status of asset managers based on analysis of the consistency of their voting. In contrast, the National Pension Service restricts the voting rights of asset managers for companies in which it directly holds even a single share. This, in effect, renders the stewardship code meaningless.

Establishing a culture of long-term investment is key to enhancing market trust. The "ppalli-ppalli" (hurry-hurry) culture prevails even in the capital market. Last year, the annual turnover rate of KOSPI-listed stocks was 187%. For KOSDAQ, it was 426%. Even with the stock market at its lowest in 15 years, the rates were this high?more than twice those of the United States and Japan. The dividend tax rate for long-term holdings should be differentiated and significantly lowered. In the United States, the threshold is one year; in France, it varies by holding period; in Japan, different dividend income tax rates are applied through the Individual Savings Account (ISA) system. Strengthening tax incentives for retirement pensions and personal pensions is also worth considering. Reforming the performance evaluation system to encourage longer investment horizons for pension funds, including the National Pension Service, is also proposed.

For the true advancement of the capital market, it goes without saying that investors, companies, and financial authorities must establish an organic relationship. In these times of deepening social and political polarization, I hope that measures to enhance investor trust based on fairness can be developed through dialogue and compromise. Through this, companies will be able to secure quality capital, and investors will be able to increase their returns, allowing the capital market to become healthy and dynamic. If, by the end of the Lee Jaemyung administration, the KOSPI index actually reaches 5000 and truly showcases the real face of Korea, there will be nothing left to wish for.

Lee Junseo, Professor of Business Administration, Dongguk University