Dear editor,
Many local investors frequently ask me why Korean equities are priced at a relative discount to other major market equities. There are many reasons as for the relative discount.
Besides perceived political instability due to the division of the Koreas, the single major reason is simply bad corporate governance and the lack of shareholder criticism and effective participation in voicing discontent when the managers of such firms falter.
On Tuesday, I noticed a public announcement by a Kosdaq firm for massive third-party allotment offer for new shares priced at deep discount to market price.
The new shares issued will be equivalent to over half its current market capitalization and almost a doubling of shares, effectively lowering significantly the percent a shareholder owns and the price of shares.
This type of decision could be interpreted positively if it was initiated by a firm that has consistently made money for the shareholders and has given back dividends in good times.
However, this announcement came from a firm (the company is called “C-motech”) that has not made money consistently and has in the past squandered shareholder money in businesses that yielded minimal returns or often negative returns.
This action of raising more money for dubious business endeavors is tantamount to a parent (i.e. the shareholders) giving more money to a child (i.e. the company) who has a habit of typically squandering money.
I wonder how much of the new money the management will make good use of. In reality, what I often observe is that such management is even worse in managing money because they have been rewarded for bad decisions by the shareholders.
It is highly likely they will spend a large amount of the funds for partying and drinking, clearly not the intent of the fundraising. Investors should reward highly able management with new funds for high return projects but also should punish bad managers by expressing their voice through the legally allowed mechanisms of shareholder participation available in Korea.
In essence, Korean shareholders have all the rights of shareholders in other developed countries, however, they seldom exercise those rights.
In short, bad corporate decisions should be punished, not rewarded with more money. This is the path toward higher market valuation of Korean stocks, which is positive to society.
Um Joon-ho