Last month's parliamentary election ended with an emphatic win for the left-wing opposition Democratic Party of Korea (DPK), who took 175 of the 300 seats contested. The ruling conservative People Power Party (PPP) managed to secure a bare minimum of 108 seats to avoid a catastrophe (i.e. impeachment). That is only a small consolation though as the ruling party now has to contend with a potential repeat of the past four years during which the opposition’s absolute majority made it difficult to pass pro-business legislation through the National Assembly. The equity market’s reaction to the election outcome was unequivocal, as the Corporate Value-up Program (CVP)-related theme continued to weaken going into the polls. But before the CVP theme is considered defunct, we should consider the silver lining.
Firstly, the stage has been set for the CVP theme to sustain support by the four key players: the government, corporate management, investors and the left-wing opposition. All four must be synchronized in their efforts for change; this is an important and under-appreciated part of the reform theme and critical to the future of the CVP. Amid an economy struggling with a plummeting birthrate, declining exports and stagnant financial markets, three major players — the government, management and investors — want to see the reform program through and their desire is growing. With a resounding win in the election, the fourth major player, left-wing politicians, will now also need to buy in. And the recent global spotlight on the Tokyo Stock Exchange’s (TSE) successful reform initiatives has helped set the stage to encourage a consensus at home. A significant portion of the CVP could become a bipartisan project; signs of solidarity have already been emerging. For example, a revision of the Commercial Act article 382 to give legal rights to minority shareholders against company management was proposed by members of both parties and will likely garner support, particularly from the left.
From the very early days of the reform theme, I have highlighted the FOMO (Fear Of Missing Out) factor as a critical part of the plan’s ultimate success. In Japan, the FOMO factor has been vital in engineering sustainable reform for a culture that derives much of its momentum from herd mentality and consensus-driven outcomes. In Korea, the three key players took turns initiating corporate governance reform but failed in part due to a lack of support from the other two. In the past, the failure of Korea Inc., arguably the most important player, to buy in to reform has chronically left efforts frustrated and ineffectual. Korean management’s attitude towards corporate governance has been notoriously sporadic and noncommittal during the economic "miracle" of the past four decades.
For example, in 2015 the right-wing government tried to promote dividends by urging chaebols to convert to a holdings company structure. Even though many implemented the holding company conversion, they did not aggressively pay out dividends due to Korea’s prohibitive dividend taxation policy. Both domestic and foreign investors have also attempted to pressure Korean companies every few years, and although there has been some progress, none was large or structural enough to lead to systemic change. However, in an era of rising awareness for ESG and with the third generation of chaebol leaders taking charge, the importance of corporate governance has never been greater for Korean companies large or small.
In addition, the Korean government has taken cues from Japan and recently acknowledged the need to inject growth via investments. This has effectively aligned the government with foreign investors for the first time, a significant turnaround from the government’s historical indifference to foreign investors’ efforts to exert influence. Furthermore, domestic investors are joining in. With the government and investors, both foreign and domestic, teaming up to press for reform, Korea Inc. could finally be genuinely motivated to implement real change. And if investor conviction rouses to drive the equity market, it could be the incentive needed to impel the fourth player, left-wing politicians, to join the program. Even the opposition is unlikely to jeopardize the financial windfall that comes with a bull market.
Secondly, fears that a lack of legislative support behind the CVP will impede its success are overblown. Looking again to Japan, much of the TSE's roll-out of reform initiatives did not require legislative action. The TSE focused on guiding, educating and promoting its goals and has been deliberate in encouraging management and investors to build consensus for progress rather than enforcing short-lived draconian rules and forcing implementation. In Korea, we have recently seen regulators emphasize a softer approach with domestic companies in an effort to reverse a long corporate track record of circumventing regulations over time. That said, the tax reform portion of the CVP will require legislation backing to move forward. This may (or may not) include the capital gains tax and dividend tax policy. Given the current political environment, these will likely have to wait for the time being.
The latest election win by the left wing is sure to leave many investors doubting the ultimate success of the CVP. However, notwithstanding the ruling party's limited legislative power, there are many other measures that will impact the continuing momentum of the reform program, including a burgeoning alliance among the four key players and the government's shift to a softer approach. Just like the anti-China theme became a bipartisan policy for Republicans and Democrats in the U.S., the CVP could become one of the rare common agreements ahead of the presidential election in three years.
Peter S. Kim is a managing director at KB Financial Group.