Do Share Prices Rise When Directors Look After Shareholders? A Look at Advanced Markets < Video < Article

※ This content was broadcast on the 'Economy ON' program of Yonhap News TV at 4 PM on Tuesday, March 11th. (Featuring: Kim Kyung-lim, Yonhap Infomax reporter, Hosted by: Lee Min-jae)

[Anchor Lee Min-jae] While the Commercial Act amendment bill has passed the Legislation and Judiciary Committee's plenary session, it still faces the hurdle of the main session. The opposition is demanding swift processing, but opinions remain divided. Today, industry reporter Kim Kyung-lim has prepared related content.

[Reporter] As the Commercial Act amendment bill is set to be re-introduced at the National Assembly plenary session on the 13th, the conflict between supporters and opponents shows no signs of narrowing.

The biggest point of contention is that the bill includes a plan to expand the target of directors' fiduciary duty from the existing company to 'all shareholders', which could hinder corporate activities.

The core of the bill is to expand the subject to whom directors must faithfully perform their duties from the current 'company' to 'shareholders'. In other words, it stipulates that obligations should be performed for the protection of the interests of 'all shareholders', not specific shareholders. The term 'all shareholders' is used here to reduce conflicts of interest between controlling shareholders and general shareholders.

The key point is that in Korea, where ownership concentration by controlling shareholders is severe, management activities are often based on the interests of owners or special related parties rather than general shareholders. Therefore, the target of directors' fiduciary duty should include general shareholders.

[Anchor] Does this mean that if ownership is dispersed, the company's value is properly evaluated?

[Reporter] It's generally accepted that markets in countries with lower ownership concentration by controlling shareholders tend to have their market value properly evaluated. This is because external investors have higher trust in companies in an environment where the pursuit of private interests by management or controlling shareholders is limited. Conversely, when investor protection is inadequate, the possibility of management pursuing private interests increases, leading to undervaluation of corporate value.

Warren Buffett is often cited as a representative example. Known as the epitome of long-term value investors, Buffett is said to not own a single share of Korean stocks. On the other hand, he has been gradually increasing his investments in Japan, where corporate governance improvements are taking place. In fact, recent news of his investment in Japanese trading companies led to a rise in the stock prices of those companies.

To verify this, we attempted various analyses.

First, based on the 'Corporate Governance Factbook 2023' published by the Organization for Economic Cooperation and Development (OECD), we identified 'major countries with low controlling shareholder concentration'.

Excluding countries with very small stock markets, we could find examples such as the UK, US, Canada, and Japan.

For US companies, the average shareholding of the largest shareholder was only 5-10%, and in the UK, most cases did not exceed 10% for the largest shareholder's stake. In contrast, in Korea, the average shareholding of the largest shareholder in listed companies is 29.2%, with special related parties holding 10.5%, bringing the controlling shareholders' stake to nearly 40%. This percentage increases further when including treasury shares or employee stock ownership.

[Reporter] So how about the price-earnings ratio (PER) of these markets? We looked at the valuation compared to the operating profit of listed companies.

First, we compared the 'Quality Index' for each country announced by Morgan Stanley Capital International (MSCI). The Quality Index can be described as an index created by selecting companies with 'good' PER, PBR, etc. for each country. In short, it can be called a blue-chip index.

Based on a 12-month forward basis, Japan had the highest at 18 times.

Following that, the UK was at 14 times, and the US was also at 14 times. On the other hand, Korea was at 9.8 times, lower than the global average (10.107 times).

Taiwan, which is not part of the OECD, showed 17.691 times.

[Anchor] Wouldn't a high PER not necessarily be directly linked to the concentration of controlling shareholders?

[Reporter] That's correct. It's difficult to say that PER alone was influenced by the concentration of controlling shareholders. However, even considering factors like performance or interest rates, it's possible to argue that the Korean stock market is somewhat undervalued.

First, in terms of earnings, we can see a steady upward trend for the US and Japan. The fact that PER is high despite increasing earnings means that stock price levels are proportional to growing performance.

Next is interest rates. As you know, when interest rates are low, it becomes easier to raise funds, leading to abundant liquidity in the stock market and potentially higher PERs.

Japan, which had the highest PER based on MSCI, has a base rate of 0.5%, almost at zero level. One could say that the PER rose due to high liquidity.

However, looking at other countries, this isn't always the case.

Let's look at the UK and US, which had high PERs based on the MSCI Quality Index. Both countries have a policy rate of 4.5%. This is 175bp higher than the Bank of Korea's base rate of 2.75%. In other words, the funding cost itself is much more expensive in the UK or US.

Although we've only looked at three variables, we can conclude that the current valuation of the Korean stock market cannot be explained by earnings or interest rates alone. While we can't solely blame the concentration of controlling shareholders, it seems to somewhat support the saying that 'if there is governance reform, the stock market valuation will be re-evaluated'.

[Anchor] In fact, if we only listen to the logic of the proponents, it seems there's no reason not to pass it. The business community has been consistently voicing that 'corporate activities will be hindered', but was there actually an impact?

[Reporter] Recently, the Korea Chamber of Commerce and Industry, a leading domestic economic organization, announced the results of a survey of 300 listed companies.

It was found that 120 out of 300 companies, or 40%, responded that they had received 'shareholder engagement' from shareholders in the past year.

In particular, 83.3% of the responding companies expressed concerns that shareholder activism would increase if the Commercial Act is amended.

[Reporter] According to the Supreme Prosecutors' Office, from 2021 to 2023, the number of cases prosecuted by prosecutors for embezzlement and breach of trust totaled about 6,500, with a prosecution rate of 21% compared to the number of cases received. This is a significant increase compared to the prosecution rate of 13% from 2014 to 2020.

In this regard, it's necessary to look at the history spanning over a decade.

First, there's the case of the Commercial Act amendment in 2011. After the implementation of the amendment, which included 'restrictions on directors' self-dealing and usurpation of company opportunities', companies such as Hanwha, DL, and Hyosung became subjects of prosecution investigations.

In addition, in 2020, there was an 'adjustment of investigative powers between prosecutors and police'.

In other words, even if the police conclude a case as unfounded and it doesn't go to the prosecution, the scope of breach of trust crimes has expanded due to the Commercial Act amendment, leading to an increase in cases recognized by the prosecution, which is cited as the main reason for the rise in prosecution rates.

[Anchor] Then, are there no measures to prevent indiscriminate accusations or shareholder activism?

[Reporter] In the case of the US and UK, they allow the listing of 'multiple voting rights' stock structures, recognizing to some extent the control of company founders. Multiple voting rights stocks allow holders to exercise more voting rights at shareholders' meetings even if they only hold one share.

The US has gone further by leaving room for interpretation of 'fiduciary duty' through state laws or case law.

(Yonhap Infomax Industry Department Reporter Kim Kyung-lim)

※This content is from the video news covered in the Yonhap News TV Investigation File corner.

klkim@yna.co.kr

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Kyung Lim Kim klkim@yna.co.kr