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South Korean companies trade at valuations which are on average the lowest among emerging market peers,1 even though the market hosts some of the most globally dynamic and innovative companies in the semiconductor and materials industries. The so-called “Korea discount” is driven by weaknesses in corporate governance, and poor treatment of minority investors. The Chaebol2 structure, which features cross shareholdings and family control of businesses, without a commensurate economic stake, is also a factor weighing on valuations.

Policymakers have decided to tackle the Korea discount via a program called “Value-Up.” The program focuses on raising stock valuations via goal setting to enhance corporate value, tax incentives to encourage change and market recognition via the launch of a Value-Up index and exchange-traded funds. Value-Up is based on three principles: value improvement, transparency and self-assessment. The program is voluntary, which contrasts with the Japanese corporate governance code, which is based on “comply or explain.”

The government has committed to implementing tax reforms and revising the Commercial Act Article 382. The latter is designed to enhance corporate governance and protection of minority shareholders. However, a timeline and details on tax changes are yet to be announced. An added challenge is the change in parliamentary control, which is now held by the opposition Democratic Party of Korea (DPK) following recent elections. Its success will make the government’s passage of tax reform laws a challenge.

While Value-Up is voluntary, regulators believe that the market will reward, via higher valuations, companies which embrace the program's goals. While the reforms may contribute to a narrowing of the Korean discount for individual companies, the full benefits for the market may not be achieved without additional incentives to promote the voluntary approach.

Download the full paper to learn more about the Value-Up program, including recent improvements in corporate governance, and the potential for promoting minority shareholder engagement, changes in tax code and legislative reform.

Endnotes

  1. Based on MSCI indexes between 2014 and 2024.
  2. A Chaebol is a large industrial South Korean conglomerate run and controlled by an individual or family. It often consists of multiple diversified affiliates, controlled by a person or group.

 

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