Stewardship Code Reveals Limits of Self-Regulation... Will It Overcome Effectiveness Debate? [why&next]

Limitations of Industry Self-Regulation... First Revision in Nine Years Since 2016 Introduction
Compliance Checks Introduced... Expanded to Environmental and Social Sectors
"Lack of Concrete Incentives and Sanctions for Non-Compliance"

The financial authorities have decided to revise the "Stewardship Code," which had been left to industry self-regulation for the past nine years, due to ongoing concerns about its effectiveness. Despite an increase in the number of participating institutions, the code is still not being properly implemented. Especially for the Lee Jaemyung administration, which has set its sights on the "KOSPI 5000 era," there is a pressing need to drive capital market reform by strengthening the Stewardship Code and encouraging responsible investment by institutional investors to enhance corporate value.

According to the Financial Services Commission and related agencies on December 29, the "Plan to Enhance the Effectiveness of the Stewardship Code," released the previous day, focuses on strengthening the effectiveness of fiduciary duty implementation by institutional investors through the introduction of regular compliance checks and disclosure of results. The scope of assets covered by the Stewardship Code, which was previously limited to stocks, has also been expanded to include all assets such as bonds and real estate. Introduced in December 2016, the Stewardship Code is a private, voluntary code that requires institutional investors to fulfill their fiduciary duties in the asset management process.

"Lack of Effectiveness... Fails to Reflect Capital Market Changes," Criticism Mounts

Concerns over the effectiveness of the Stewardship Code are nothing new. While the number of participating institutions has increased to 249 since its introduction, as of the end of November, only 23 institutions-less than 10%-had disclosed their shareholder engagement activities. Because both participation and the level of implementation are left entirely to the discretion of each institution, there is no compliance monitoring system, and even the core principles have not been properly upheld.

Hwang Hyunyoung, a research fellow at the Korea Capital Market Institute, pointed out, "Most participating institutions do not systematically disclose their fiduciary duty activities, and in many cases, the exercise of voting rights is only formally disclosed. If an institution merely announces its participation or intention to participate in the Stewardship Code but does not actually engage in activities, it is failing to fulfill its fiduciary responsibility to clients and beneficiaries." As of the end of November, out of 55 institutions that had declared their intention to participate, as many as 51 had remained in the "pending" status for over a year.

Another major criticism is that the code has not been revised even once since its introduction in 2016, failing to reflect changes in the capital market. This stands in stark contrast to countries such as the United Kingdom and Japan, where the code has already been revised more than three times. In particular, in Japan, the introduction of the Stewardship Code is regarded as a key driver of capital market reform and is credited with playing a major role in the development of the capital market. Hwang emphasized, "With growing interest in capital market advancement and corporate value enhancement, the importance of the Stewardship Code in encouraging responsible investment by institutional investors is increasing."

Examining the Revised Plan... Why Add ESG and Broaden Asset Scope?

Under the new revision, beginning next year, participating institutions will be required to prepare self-assessment reports on 12 items, and the Stewardship Code Development Committee will review and approve these reports as part of a new compliance monitoring process. Starting with asset management companies and pension funds in 2026, the revised code will be gradually applied to private equity fund (PEF) managers and insurance companies in 2027, securities firms, banks, and investment advisory firms in 2028, and venture capital (VC) and service providers in 2029. In particular, "corporate value enhancement engagement activities" will be newly established as a separate assessment item, and the extent to which institutional investors have actively engaged in expanding shareholder returns at investee companies will also be disclosed.

The code will also be amended to align with global standards. First, the scope of fiduciary duty will be expanded to cover the full range of ESG-environmental (E) and social (S) factors. The range of applicable assets will also be broadened from domestic listed equities to include bonds, infrastructure, real estate, unlisted equities, and overseas assets. This reflects the fact that, unlike when the code was first designed to focus on listed equities and voting rights, the asset composition of institutional investors has changed significantly. A market insider commented, "This is in line with global standards that take ESG into account. Today, investors cannot ignore environmental risks, governance and internal control failures, or social issues."

Will Effectiveness Be Ensured? "The Role of the National Pension Service Is Crucial"

Experts agree that if the Stewardship Code is properly implemented, it could have a significant positive impact on the advancement of the domestic capital market, especially in conjunction with recent amendments to the Commercial Act and efforts to enhance corporate value. However, there are still doubts as to whether the new measures alone will be sufficient to ensure the effectiveness of the code. Some have already pointed out that the evaluation criteria, such as for ESG, remain ambiguous.

There are also concerns because, as a voluntary code, there are no specific sanctions for non-compliance. Many experts have previously cited the lack of clear incentives for faithful implementation or penalties for non-compliance as a key reason for the code's limited effectiveness. The latest revision only mentions providing one-on-one feedback to underperforming institutions, without including concrete details on incentives or sanctions.

Currently, both inside and outside the market, attention is focused on the role of the National Pension Service. As the largest institutional investor in Korea, with over 1,300 trillion won in assets under management, the degree to which the National Pension Service responds to the authorities' policies is expected to set the tone for the market. Hwang stressed, "Pension funds such as the National Pension Service should faithfully implement and disclose their own fiduciary duty activities, and at the same time, qualitatively evaluate and announce the code implementation of their external managers, thereby strengthening their role as a key driver of overall market compliance."