KOSPI's next rally hinges on tangible governance reform

An electronic display shows the KOSPI and Kosdaq indexes at the Korea Exchange in Seoul, Oct. 27, when the benchmark KOSPI surpassed the 4,000 level for the first time. Yonhap

Amar Gill, secretary general of the Asian Corporate Governance Association (ACGA) / Courtesy of ACGA

Few years have been as remarkable for the KOSPI as 2025. The index began the year at 2,398.94, grappling with the political fallout from a failed martial law declaration, and has since surged by about 60 percent — making it the best-performing benchmark among G20 markets this year.

Driving the rally is an unprecedented artificial intelligence (AI) boom, benefiting Samsung Electronics and SK hynix, two of KOSPI’s largest market-cap constituents.

Also playing a significant role is the government’s push to improve corporate governance — which, according to APG Asset Management, had remained stuck in a framework dating back to the 1997 Asian financial crisis until as recently as May.

The government’s campaign began under former President Yoon Suk Yeol in 2024 with the so-called "Corporate Value-Up Program." But real momentum has emerged under the administration of Lee Jae Myung, who took office in June following Yoon’s impeachment.

Under the slogan "KOSPI 5,000," Lee pledged to redirect capital from real estate into equities, aiming to make investing more accessible and rewarding.

Within just six months, the administration has amended the Commercial Act twice. Despite resistance from the business community, the reforms have expanded directors’ fiduciary duties to explicitly include not only companies but also shareholders, and made cumulative voting mandatory. A third amendment — which would require companies to cancel treasury shares within one year of acquisition — is also gaining traction.

Despite these efforts, foreign investors launched a net selling spree worth 13 trillion won ($8.8 billion) this month, pulling the index down from above 4,200 in early November to below 3,900, amid mounting concerns over a potential AI bubble. Meanwhile, retail investors have continued to favor overseas equities, with outbound investment reaching new highs in recent months.

To sustain the rally, markets are looking for tangible results on governance reform amid a less business-friendly outlook.

"The 5,000 target is now only about 25 percent higher than the current market level, and market momentum could carry the index to that level in the near future," said Amar Gill, secretary general of the Asian Corporate Governance Association (ACGA), in a written interview with The Korea Times.

"Going forward, if investors become more convinced that corporate governance reforms will lead to greater economic value being shared with investors, that could provide further momentum."

Gill has more than two decades of experience in financial markets, having worked with CLSA and BlackRock, and has witnessed Asia-Pacific market turmoil firsthand. He now leads ACGA, an independent organization promoting effective corporate governance practices throughout Asia. ACGA represents 102 members — including pension funds and asset managers — who collectively manage $40 trillion across 18 global markets.

From Nov. 12 to 13, Gill led a delegation to Korea for ACGA’s 24th annual conference, held in Seoul. During the visit, he met with a wide range of stakeholders, including the Korea Exchange and members of the National Assembly, among them members of the special committee on KOSPI 5,000.

"There is a sense that both policymakers as well as regulators are serious about companies focusing on shareholder value," Gill said.

However, companies still lack sufficient incentives to fully engage, according to Gill. Participation in the program is not mandatory, nor are there meaningful tax benefits.

A major obstacle is the high inheritance tax, which requires heirs of family-run conglomerates to pay over 50 percent of inherited assets. This creates a strong incentive for controlling families to intentionally suppress the market value of their listed companies, to reduce their tax burden.

Perhaps most disappointing is the absence of Korea’s flagship firms — including Samsung Electronics and SK hynix — from active participation in the program.

Participants attend the 24th annual conference of the Asian Corporate Governance Association (ACGA) at Fairmont Ambassador Seoul, Nov. 12. Courtesy of ACGA

History of poor governance

Over time, Korean corporations’ poor governance has been cited as a key reason for the "Korea discount," or the persistent undervaluation of the Korean stock market. Many deceptive practices have let down investors and offered little incentive for long-term holding.

Some companies have intentionally suppressed their share prices to minimize inheritance taxes. Others have funneled profits away from shareholders through practices such as awarding lucrative contracts to affiliates or engaging in related-party transactions.

In other cases, they have spun off high-performing business units and listed them separately, maintaining control while unlocking capital market access. Dividends have often been minimal or nonexistent, offering little tangible return to shareholders.

A core reason often cited is the country’s unique corporate leadership structure, dominated by the chaebol conglomerate system. With ownership and management not clearly separated, controlling families have wielded outsized influence over corporate decisions — frequently prioritizing their own interests over those of shareholders — while boards have had limited power to provide oversight.

Many investors left as a result, leading to the Korea discount. According to the Korean Corporate Governance Forum in 2024, a 100 million won investment made 10 years ago would now be worth 340 million won in the U.S., 280 million won in Japan and 260 million won in Taiwan — but only 160 million won in Korea.

Love it or not, chaebol are deeply embedded in Korea’s corporate landscape. How can the country achieve effective corporate governance reforms under such a structure?

According to Gill, the key lies with independent directors on the board.

"When there are controlling shareholders, as we see with chaebol, it is important that there are credibly independent directors on the board who keep in mind the interest of all shareholders — including minorities — in major decisions," Gill said.

"If the board is to be effective in overseeing management, then the information it receives to evaluate performance shouldn’t come solely from management. It should also come from investors who are comparing the company’s performance with other firms in the sector, both regionally and globally," he said.

To accomplish this, Gill suggests that independent directors should meet directly with investors to hear their concerns and perspectives, and bring those views back into boardroom discussions. He also emphasizes the need for directors to have access to professional training, provided by an independent organization outside the company.