Seoul considers shaming companies in effort to boost valuation

SEOUL: South Korea is looking at naming companies with poor governance structures, as it seeks to replicate Japan’s success in boosting stocks by corporate reforms.

The financial regulator in Seoul is considering measures that are similar to the Tokyo bourse’s “name and shame” policy, according to an official at the Financial Services Commission (FSC), who declined to be named discussing internal deliberations.

Korea Exchange will come up with an indicator that measures the effort companies put in, the person said, adding that the plan will be finalised in the first quarter.

FSC chair Kim Joo-hyun said last week that companies trading below their book value will be asked to disclose reforms on a voluntary basis.

The regulator plans to then publish a list of companies that improved, and those that didn’t – a measure similar to what Japan did.

The underperformance of South Korea’s stocks versus Japan has frustrated legions of retail investors, who now hold major political sway.

The MSCI Korea Index has gained 5.5% over the past 12 months, trailing the Japanese gauge’s near 30% rally on hopes of improved governance and a boost to earnings from the yen’s weakness.

A Korea Exchange official said, when reached by Bloomberg, that the bourse will survey companies, investors and other market players before launching the initiatives.

“Japan and South Korea have for the longest time been twinned as Asia’s corporate governance laggards,” Jonathan Pines, a portfolio manager at Federated Hermes Ltd, said in his recent letter to investors titled “South Korea – enough is enough.”

“Now we witness Japan improving while South Korea lags as that country’s powerful controlling families continue to win support for the retention of regulations that, in our opinion, are not fit for purpose.”

Investors have long blamed the outsized power of families controlling South Korean conglomerates and the mistreatment of minority shareholders as among the elements holding back valuations of listed firms.

The so-called “Korea discount” phenomenon has seen stocks on the Kospi benchmark trade at a price-to-book ratio less than 0.9, versus 1.3 in Japan and 2.1 in Taiwan.

While resolving that discount has been a decades-long agenda for the country’s presidents, the initiative ratcheted up under Yoon Suk Yeol, who took office after more than 14 million retail investors emerged as a key voting bloc.

Yoon has been vocal on various stock-related issues including a short selling ban and a capital gains tax.

The financial regulator this week said the country is seeking a revision in the commercial law to improve minority shareholders’ rights and added steps to boost share price values of listed companies will be released next month.

Earlier this month, the Tokyo Stock Exchange published a list of companies that have complied with its request to come up with business plans to improve capital efficiency, putting pressure on companies that are reluctant to change.

Japan’s benchmark Topix and Nikkei 225 trade near multi-decade highs.

“It would be fantastic if that sort of things happen in South Korea,” said William Lam, a London-based fund manager at Invesco Asset Management Ltd.

“Naming and shaming is a good idea too because that’s what companies respond to sometimes.

“They don’t want to be making bad news headlines.” — Bloomberg