But South Korea has become a successful model of economic development and its governance is also changing accordingly. The implementation of democracy and an expectation of shareholder capitalism are part of the country’s new social contract. As it happens, South Korean authorities have recently imposed more severe punishment on business executives found guilty of corruption. In the past, courts were fairly lenient with chaebol tycoons, often pardoning them with comments such as “in consideration of past contributions to the national economy.” In terms of public sentiment in recent years, the reputation of Korea's chaebol has also changed from that of “an export powerhouse” that can benefit the overall economy to that of an independent interest group whose expansion into domestic businesses might threaten the prosperity of the average citizen. Reflecting this new attitude, recent government measures have imposed limits on the expansion of such chaebol-owned businesses as franchise discount stores, bakeries and restaurants.
From the perspective of ownership in the local market, we can also observe a change. The assets under management of the country’s 14-year-old National Pension Fund have grown at a brisk pace. It now commands a considerable 6% of total ownership in the country’s stock market, up from about 3.6% in 2009. Given the continuously growing stake of the National Pension Fund in numerous Korean companies, it is not surprising that there will be incremental demand for better corporate governance and shareholder value, which may be mirrored in dividend payouts. The dividend yield of the Korean Composite Stock Price (KOSPI) Index is a mere 1.14%, while that of the MSCI All Country Asia ex Japan Index is 2.47%. Lower dividend payouts may reflect lower efficiency of invested shareholder capital, and may indicate that a company is sitting on excess cash. This scenario has been key to the so-called “Korea Discount” among global equity markets.
Interestingly, demand for better corporate governance in Korea has been initiated by liberal-minded social activists rather than capitalists. The group of political activists, who have also contributed to the nation’s political democracy, have been more vocal than activist investors about corporate governance issues. The fact that Korea’s somewhat conservative legal system has begun to react in favor of shareholder returns and economic democracy is an encouraging indicator of the formation of a new social contract for Korean society, and one I am optimistic about.
Soo Chang Lee, CFA
The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.
© Matthews Asia