FSC Meets With Institutional Investors to Promote the Corporate Value-Up Program

The Corporate Value-up Program the Financial Services Commission (“FSC”) announced on February 26, 2024, has been the subject of considerable attention from both investors and businesses (see our latest legal updates, Link). The program requires the board of directors of undervalued listed companies (i.e., such as those with a low price book value ratio (“PRB”) or low return on equity (“ROE”)) to analyze the cause behind the undervaluation, establish response strategies, and actively provide explanations to and communicate with investors. The FSC noted that it will (i) develop guidelines for voluntary disclosure of listed companies’ corporate value-up plans, (ii) assist investors in assessing best practice companies and making investment decisions, and (iii) establish a dedicated team to support the Corporate Value-up Program.

On March 14, 2024, the FSC held a town hall meeting and met with ten major institutional investors, including pension funds, asset managers, insurers, and securities firms, as well as related organizations, such as the Korea Exchange (“KRX”), the Financial Supervisory Service, the Korea Institute of Corporate Governance and Sustainability, and the Korea Capital Market Institute, to promote the Corporate Value-up Program. At the meeting, the FSC and the participants discussed revisions to the stewardship code and the development of the Korea value-up index, which are closely related to institutional investors, among the initiatives laid out by the FSC on February 26, 2024 (Link).

The details of the Corporate Value-up Program as explained during the meeting are as follows.

Revision of the Guidelines for the Stewardship Code

The Korean stewardship code is a set of principles that must be observed by institutional investors in their management and operation of customers’ assets as custodians. Currently, 222 institutional investors, including four major pension fund operators and 125 asset management firms observe the stewardship code. The Korea Institute of Corporate Governance and Sustainability revised the guidelines for the stewardship code to permit institutional investors to assess whether an investment target company is establishing and implementing plans to improve the value of the company in the mid to long-term (assessing the current situation - establishing plan - implementing and assessing) and effectively communicating with investors and shareholders on such plans. This will provide concrete grounds based on which institutional investors can check if a company is participating in the Corporate Value-up Program and encourage those who are not.

Development of the “Korea Value-Up Index”

The KRX will develop the Korea value-up index composed of companies with outstanding valuations and those demonstrating improvements in their valuations. Companies with outstanding performance in their valuation enhancement efforts (e.g., companies awarded at the “Corporate Value-Up Awards” to be held for the first time next year) may be eligible for preferentially being listed on the value-up index. The KRX is reviewing major issues, such as how to differentiate the corporate value-up index from existing major indexes, the appropriateness of indicators used to select different components, and ways to encourage active use by pension fund operators. The KRX said that it would further discuss with institutional investors, including pension fund operators and asset management firms, to establish the Korea value-up index by the third quarter.

When the stewardship code is revised, major institutional investors, including the National Pension Service and Government Employees Pension Service, will express their opinions more assertively on the revision to the internal regulations on custodians’ duties and asset management in order to address undervaluation.

Prompted by major institutional investors’ policy changes, it is possible that shareholders such as activist funds and minority shareholder coalitions will make advisory shareholder proposals calling for higher shareholder returns to minority shareholders and reallocation of capital. This should be a scenario to keep in mind when responding to minority shareholders and operating general shareholders’ meetings.

Depending on the progress of the development and operation of the Korea value-up index, domestic and foreign institutional investors, including pension fund operators, may expand their investment in the companies listed on the index, which is expected to lead to rising stock prices and improved valuations of such companies.

[Korean Version]

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