Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
INTERVIEW Core of 'Korea discount' lies in poor investor protection
Kim Woo-jin, SAMICK chaired professor of finance at Seoul National University Business School, speaks during a one-on-one interview with The Korea Times at his office on campus in southern Seoul, Jan. 5. Korea Times photo by Choi Won-suk
By Anna J. Park
SNU Business School professor criticizes excessive control wielded by largest shareholders
Weak investor protection and poor corporate governance are the key causes of the so-called "Korea discount," according to a famed professor of finance at Seoul National University who has long delved into the matter. The Korea discount refers to the unique characteristic of the Korean stock markets where listed companies' shares are traded at prices lower than their fundamentals.
During a one-on-one interview with The Korea Times, Kim Woo-jin, SAMICK chaired professor of finance at Seoul National University Business School, highlighted that the two factors — weak investor protection and poor corporate governance — are actually two sides of the same coin, both of which point to excessive private benefits of control enjoyed by the largest shareholders of Korean corporations.
"When a company is listed, the profits of that listed company are, in principle, supposed to be distributed fairly to all shareholders in proportion to their ownership over the shares. However, it's somewhat prevalent in Korea that people in control — mostly largest shareholders, including a founder or family members of the founder — use it to exploit the profits of the listed company for their own benefits in various ways," the professor said.
Kim illustrated that corporate activities such as spinoffs or mergers between the affiliates of a business group can result in losses for ordinary shareholders. That's because either the new shares of the spun-off business are not given to existing shareholders or merger ratios are determined unfairly against the interests of ordinary shareholders. The impact of such behaviors on the company is tantamount to the decrease of the firm's market capitalization by the exploited amount.
"As a result, corporate profits are not distributed proportionally among all shareholders. It is the crux of the matter," Kim emphasized.
He also added that the Korea discount has been extended due to the fact that controlling shareholders of Korea's major business groups, who wield de facto control over the groups' affiliate firms without holding corresponding cash flow rights, do not prefer to have their firms' share prices rise further.
"When the share prices of listed companies go up, the largest shareholders have to pay more inheritance tax, which they prefer to avoid," the professor explained.
Korea's inheritance tax rate for those who succeed the place of the largest shareholders of a company is the highest among OECD countries, reaching up to 60 percent.
"When it comes to examining the fundamental causes of the Korea discount, it's true that one aspect to consider is the inheritance tax issue. That's why activist funds are actually now advocating for a reduction in inheritance taxes," the professor said.
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Poor corporate governance
While acknowledging the peculiarly high inheritance tax scheme in the country, Kim underscored that the most crucial problem is the rampant perception that listed companies are considered "personal assets of the largest shareholders."
"When a company goes public, it's no longer a personal asset. However, this basic perception of capitalism doesn't seem to be well understood by both corporate moguls and the public," the professor criticized.
He also made an issue with a widely used Korean expression of referring to the founders or the largest shareholders of a corporation as the "owner" or "owner family," saying that the common expression reflects the Korean people's subconscious belief that they are an actual proprietor of a listed company.
"Koreans actually should stop using the term 'owner' to describe the founder or the largest shareholders of a listed company. Once you call them 'owners,' it implies that the corporations are theirs. Thus, the term should be avoided, and refer to them as a 'controlling shareholder' instead," he said, underlining that the real owners of a company are the collective shareholders.
The lack of general perception to view collective shareholders as the true owner of a listed corporation leads to poor corporate governance in the country, the professor emphasized.
Kim stressed that the real purpose and significance of corporate governance ultimately lie in protecting the interests of shareholders, adding that this understanding falls tragically short in Korea. He explained the concept of corporate governance is mostly misunderstood among the general public and corporations in the country that it is merely a system of decision-making without the clear indication of "whose interests" the system should protect.
"Saying that corporate governance is good is essentially the same as saying that investor protection is well-established. The presence of the Korea discount all boils down to the failure of protecting shareholders properly," the professor accentuated.
Kim Woo-jin, SAMICK chaired professor of finance at Seoul National University Business School, speaks during a one-on-one interview with The Korea Times at his office on campus in southern Seoul, Jan. 5. Korea Times photo by Choi Won-suk
Need for strengthened legal protection of shareholders' rights
Professor Kim also touched on the need to strengthen the country's legal framework to better protect ordinary shareholders' rights. Although Korea's Commercial Act stipulates the duty of loyalty to act in the best interests of a company, Korean courts tends to interpret the clause as a duty to the entity of the company itself, rather than to collective shareholders. In the U.S., meanwhile, such obligation is interpreted to serve the rights of shareholders, resulting in strong protections for shareholders' rights.
"It is regretful that Korean courts are too passive in recognizing the interests of shareholders. I hope to see the courts in the future establish precedents that are more investor-friendly," the professor said.
Yet, the professor still sees a bright future for the Korean capital market, as he positively assesses the government's move to improve the country's capital markets law more in line with global standards, such as the adoption of a mandatory tender offer rule and stricter investigation and punishment for financial crimes. He also views Korean startup companies' drive for aggressive innovation as one of the essential strengths of the country.
"Korea has ambitious young entrepreneurs, who are aiming to achieve innovation through business. This dynamic system of raising capital through the capital markets and then distributing the fruits of such attempts to shareholders is relatively well-established in Korea, as seen in the success stories of Naver and Kakao, and this is one of the major strengths of the Korean capital markets," Kim said.