South Korean stocks soar on governance reform hopes

South Korea’s National Assembly passed a long-awaited revision to the Commercial Act last week in a bid to enhance corporate governance and improve minority shareholder rights. The move is part of efforts to tackle the so-called Korea Discount: that South Korean companies persistently trade at lower valuations than global peers.

The amendment comes one month after Lee Jae-myung was elected president, following months of upheaval triggered by former president Yoon Suk-yeol’s declaration of martial law in December and his subsequent impeachment. The revision to the act — coupled with the launch of the Corporate Value-Up Programme last year — has helped bolster optimism among investors. The Korean Stock Exchange (KOSPI) has risen 33% year-to-date and is now close to an all-time high.

Questions remain

While the amendment should support efforts to improve corporate governance and attract more foreign investment into the country several questions remain, says Jonathan Pines, Head of Asia ex-Japan at Federated Hermes Limited, who has long been an advocate for improved minority shareholder rights in South Korea.

“With the fiduciary duty law change, at least some of the reason for the Korea discount has been removed. The immediate impact will be to hopefully end the most egregious, but frequent, conduct of group restructurings that favour controlling shareholders at the expense of minority shareholders. It should also contribute to a gradual governance culture shift already underway,” he says.

But, while the law is still on paper, its long-term effectiveness will depend on judicial interpretation, Pines warns. “The next key measure to watch for is differential taxation on companies with higher and lower dividend payout ratios. If properly formulated and implemented, this could be as significant as the fiduciary duty law, as it might result in fewer companies hoarding cash. Pitfalls to watch for are a decline in improving governance momentum as controlling shareholders resist substantive change, particularly in regard to capital management, preferring to pay lip service to minority shareholders’ and government’s desires.” With the fiduciary duty law change, at least some of the reason for the [Korea] discount has been removed.

A potential headwind to the strong performance of South Korean stocks this year is the implementation of higher US tariffs on the country’s export-reliant economy. US President Donald Trump announced a 25% tax on goods imported from Japan and South Korea this week, in addition to new tariff rates on a dozen other nations, that will go into effect August 1. Trade talks between Seoul and Washington are ongoing.