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Corporate Cleanup in South Korea Fails to Impress Foreign Funds

Corporate Cleanup in South Korea Fails to Impress Foreign Funds

Ever since President Moon Jae-in came into power three years ago, South Korea has been trying to reduce its reputation for having a stockmarket dominated by family controlled conglomerates that lack accountability. Fund managers say efforts so far have failed.

One reason for the lack of real change: Many companies seem to view corporate governance as a “box ticking” exercise, said Ronnie Lim, an engagement specialist who handles active and sustainable investments at Robeco, a long-only firm with 155 billion euros ($182 billion) assets under management .

South Korea’s stockmarket has long suffered from a deep conglomerate discount, reflecting the dominance of the sprawling businesses, or chaebol, in the country. Activists like Paul Singer’s hedge fund Elliott Management and some local investors have been pushing for change.

So far, they have had little success: Firms remain stingy with dividends and continue to allocate capital inefficiently, reflected on returns on equity of Kospi members at 3.2% this year from 4.3% last year, and a widening gap in valuations with global peers. With Moon’s presidency running out in 17 months, it’s unlikely Korean companies will make any real changes soon, fund managers said.

Corporate Cleanup in South Korea Fails to Impress Foreign Funds

“Governance is a fundamental issue, and should be the responsibility of 100% of the board.,” said Lim who noted that many Korean companies see their corporate governance responsibility over once they appoint a director to be in charge of it. Many Korean companies also “pay high prices for unproductive assets” in the name of expansion without attention to commercial logic.

One of the highest profile cases showing the relaxed governance involves Jay. Y Lee, Samsung Electronics Co.’s billionaire scion, who is currently facing a retrial for a previous conviction of bribing Moon’s predecessor in return for the government’s support in a merger of two of the chaebol’s affiliates in 2015.

Moon and his presidential secretary, the so-called “chaebol sniper” Kim Sang-jo have on paper instituted several reforms: Every large-listed firm now has to issue annual reports on their governance. Large companies are now being increasingly pressed to honor an old 2003 law that they appoint outside directors with experience in finance to their audit committees, and shareholders need to adopt a “stewardship code” requiring them to be more engaged with companies they own.

Corporate Cleanup in South Korea Fails to Impress Foreign Funds

A more controversial move is in store for Korean companies: The government is planning to amend existing laws this year so that minority shareholders can appoint independent board members, a move many of the country’s chaebol bosses oppose.

Nearly 60% of Korean companies with at least 2 trillion won in assets lack an independent auditor, despite rules since 2003 stipulating that they should. Almost half the 394 independent auditors that were appointed in 2019 by Korean companies are former government officials or lawyers, and not financial professionals, said Lee Su Jeong, analyst at Economic Reform Research Institute.

Corporate Cleanup in South Korea Fails to Impress Foreign Funds

All those have contributed to the depressed valuation of the Kospi index, which has for years traded at less than half those of global peers in terms of price-to-book ratios. Its forward price-to-earnings ratio is about 30% lower than the MSCI All-Country World index.

“I don’t know what has changed when it comes to corporate governance in Korea so far,” Choi Kwangwook, chief investment officer at J&J Investments, said. “It is hard to change the fact that no matter how much shareholders demand improvement, companies don’t seem to listen to minority investors carefully.”

©2020 Bloomberg L.P.