The Government announced that it would introduce a Corporate Value-up Program. The program is intended to encourage listed companies to achieve higher valuation and to improve the overall Korean stock market valuation in an effort to overcome the undervaluation of Korean listed companies relative to their total earnings and book value (Link). It forms a part of financial policy reforms the Government is undertaking to create an investor-friendly capital market. The announcement was made during the Government’s fourth round of town hall meetings, “Strengthening the Role of Finance to Foster Co-Prosperity and Expand the Ladder of Opportunity,” that was held on January 17, 2024. Under the Corporate Value-up Program, the Government will pursue the following initiatives to create a stock market environment in which investors can more confidently and actively engage in investments:
 

• Companies will be required to include corporate value-up plans in their corporate governance reports; 

• Benefits will be awarded to those selected for outstanding disclosure practices; and

• A new index will be launched made up of companies with high shareholder yields and exchange-traded funds (“ETFs”) will be listed based on such index.
   

At a meeting between the Financial Services Commission (“FSC”), the Financial Supervisory Service, and securities firms on January 24, 2024, the FSC’s Chairman, Kim Joo-hyun, emphasized the importance of companies’ roles in addressing the undervaluation of Korean stocks and announced that the FSC will kick-start and operate the Corporate Value-up Program to encourage and support companies’ efforts to increase shareholder returns. According to the handouts provided at the meeting, the Corporate Value-up Program will include various initiatives to help listed companies analyze the causes for undervaluation (such as low price book value ratio (“PBR”) or low return on equity (“ROE”)) and develop response and communication strategies at their board of directors meetings. Chairman Kim also noted that further details of the initiatives will be provided in February 2024 at the “Emergency Meeting on Macroeconomic and Financial Stability.”
 
The FSC reportedly took a leaf out of Japan’s playbook, the Tokyo Stock Exchange (“TSE”)’s initiatives announced in April 2023 to support companies trading below PBR 1, to boost the country’s undervalued stock markets. The TSE published “actions to implement capital cost and stock price conscious management practices” in March 31, 2023 and requested all listed companies in the Prime and Standard markets to accurately identify their capital costs and profitability, analyze market valuation (PBRs below 1x), develop improvement plans at their board of directors meetings, and disclose them to investors. The TSE also demanded the companies to take measures to achieve capital costs and stock price-conscious management in accordance with such plans and to proactively communicate with investors based on the disclosed information. The TSE did not designate a specific method of disclosure. Companies may issue a disclosure on their website or use another medium widely available to the public. However, they must explain to the public the purpose of disclosure and access information (e.g., URL) in their corporate governance reports to facilitate investors’ access.
 
As a follow-up announcement, during the First Policy Seminar on the Corporate Value-up Program for the Advancement of the Korean Stock Market that the FSC organized with Korea Exchange (“KRX”) and other related institutions on February 26, 2024 (Link), the FSC laid out the major initiatives of the Corporate Value-up Program, the details of which are as follows, and received comments from stakeholders.
 

• Guidelines will be established for voluntary disclosure by listed companies of their corporate value-up plans: The guidelines will provide key principles, details and disclosure method for listed companies that intend to voluntarily develop and implement corporate value-up plans and communicate them to their investors. Listed companies, led by their board of directors, will be advised to draw up mid to long-term corporate value-up plans ((i) identifying current status, (ii) setting goals, (iii) preparing plans to achieve such goals, and (iv) implementing such plans, evaluating the implementation, and communicating with investors) every year and publish the plans on their website as well as the KRX’s website.

• Incentives will be provided to encourage companies’ voluntary participation: Companies selected for outstanding disclosure practices for the year will be granted an award with a number of benefits. For example, they will be granted priority in the selection of exemplary taxpayers (who can enjoy special tax benefits), beneficiaries of R&D tax credit, and participants in the Government’s consulting services in relation to corporate income tax deduction or exemption as well as tax correction claim reviews. Other tax benefits will include consulting services relating to family business succession.
   

• A new Korea Value-up Index will be developed and ETFs will be listed: A Korea Value-up Index composed of best practice companies (referring to listed companies with proven records of profitability and those expected to achieve higher valuation) will be developed for institutional investors, including pension funds, who may use it as a benchmark. ETFs based on such index will be listed on KRX to attract retail investors.

• Stewardship code will be revised: The revised stewardship code will include matters regarding institutional investors’ exercise of their shareholder rights relating to their shares in the company by stating in their guidelines that institutional investors must check whether their contemplated companies have corporate value-up plans and implement and communicate them with investors.

• Comparative data of major financial indicators will be published: The KRX will compile data scattered across its Market Data System, categorize financial indicators, including PBRs, price earnings ratios (“PERs”), ROEs, by market segment and business sector, and publish such comparative data for investors’ convenience.
   

• A new dedicated support team will be established: The KRX will establish the new support team and an advisory board to support the implementation, supplementation and improvement of the Corporate Value-up Program.

• A Corporate Value-up Program’s website will open: The website will enable investors to search matters related to the Corporate Value-up Program, such as a list of companies that have disclosed their corporate value-up plans.

• Town hall meetings with listed companies will be held throughout the year: Town hall meetings organized by the KRX, the Korea Listed Companies Association (“KLCA”), and KOSDAQ Association will be scheduled throughout the year. During such meetings, the organizers will provide clarification and updates on listed companies’ disclosures, encourage their participation in the program by offering consulting services to SMEs, and otherwise engage in effective communication with them.
   

The FSC will receive feedback from companies on the draft details of the guidelines at the upcoming Second Policy Seminar, which will be held in May this year, and finalize them in the first half of this year.

Under the Corporate Value-up Program, undervalued companies with low PBR or PER will be advised to develop, disclose and implement plans to address the undervaluation of stock price itself (other than measures to improve performance such as sales and profits). Companies’ managements are advised to pay close attention to the Corporate Value-up Program as it is attracting significant attention from players and investors in the market.

The Corporate Value-up Program basically requires listed companies to disclose important information that may influence their stock price and investors’ decisions, including shareholder return, re-capitalization, and long-term investments. Those who fail to fulfill such requirement will be treated as having made an incomplete disclosure or failed to disclose, which may lead to civil, criminal, and administrative liability and penalties based on violation of unfair trade practices under the Financial Investment Services and Capital Markets Act. 

Activist shareholders and institutional investors may take this momentum as an opportunity to express their opinions on companies’ measures to tackle undervaluation and make advisory shareholder proposals to increase dividend payouts and pursue re-capitalization. Listed companies are also advised to be aware of such possibility in responding to minority shareholders and operating general shareholders’ meetings.

Considering that the TSE’s guidelines suggest using remuneration plans as a sound incentive for sustainable growth by applying profitability and corporate value index when determining executive remuneration, shareholders may eventually raise issues with respect to bonuses that are paid to executives of listed companies depending on the success of the Corporate Value-up Program.

[Korean Version]