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South Korea has passed a key corporate reform bill aimed at improving shareholder returns, giving a further boost to what is already the world’s best-performing stock market this year.
The National Assembly on Wednesday passed a revision of the Commercial Act requiring Korean companies to cancel newly acquired treasury shares within a year.
The law ends a practice that investors say has helped owner families maintain control over their conglomerates at the expense of minority shareholders.
It is the latest step in the ruling party’s attempts to tackle poor corporate governance and the so-called Korea discount that has typically suppressed valuations for the country’s shares relative to other markets.
The parliament in July passed a law making it a legal duty for directors to consider the interests of all shareholders rather than just the company, which, according to critics, often means the interests of ruling family members of chaebol, the family-run conglomerates that dominate the economy.
It has also mandated cumulative voting, which allows minority shareholders to concentrate their votes on specific board candidates, and separate elections of auditors.
The reform measures have helped the Kospi become the world’s best-performing major stock index for the second year running. It has jumped more than 40 per cent since the start of the year to a record high above 6,000 after its world-beating 76 per cent rally last year.
Investors have long called for the mandatory cancellation of treasury shares. While many chaebol do buy back shares, they will often hold them for intragroup mergers or as ammunition against hostile takeover bids. Since these treasury shares are not cancelled, buybacks often do not result in price increases.
“Buying back their own shares is one of the best ways to boost shareholder returns, but Korean companies have used it for different purposes like protecting their control,” said HK Kim, executive director at Tcha Partners, a Seoul-based asset manager. “This is a step in the right direction.”
President Lee Jae Myung, from the Democratic Party of Korea, won elections last year promising the country’s army of retail investors, commonly known as “ants”, that he would improve corporate governance and boost the stock market.
Lee has already achieved a target for the Kospi to hit 5,000 during his term. His party, which controls parliament, is expected to speed up reform measures ahead of provincial elections in June.
Many companies including Samsung, SK Hynix and Hyundai Motor have already announced plans to cancel treasury shares even before the parliamentary move.
“People were thirsty for the advancement of the capital market. We have achieved [our goal] earlier than expected,” said ruling party lawmaker Min Byung-duk on Wednesday. “Still, the discount issue has not been fully resolved . . . it is not too late [to do more] to become a premium market.”
The ruling party is also pushing a bill to strengthen the fiduciary duty of institutional investors including the state-run National Pension Service to encourage active shareholder engagement.
“The next step for [the ruling party] will be to revise a stewardship code for institutional investors,” said Changhwan Lee, chief executive of Seoul-based activist fund Align Partners.
“Despite the recent progress, the country still has a long way to go in terms of improving corporate governance compared with the US and Japan.”
