"The Most Important Issue in the Korean Stock Market"... Foreign Investors Assess the Amended Commercial Act [One Year of the Commercial Act Amendment] ③

"Amendments Are a Starting Point,
Effective Implementation Is Crucial"

"Remedies for Minority Shareholders,
Improvement of Board Practices Needed"

Editor's NoteOne year ago, the implementation of the amended Commercial Act, which focused on strengthening shareholder rights, marked the first step for the Korean capital market toward addressing the so-called "Korea Discount" (the undervaluation of the Korean stock market). Over the past year, starting with expanding directors' duties of loyalty, the government has introduced a series of institutional reforms to enhance shareholder rights and improve corporate governance. However, there remain significant tasks ahead to further enhance the effectiveness of these measures. To mark the first anniversary of the amended Commercial Act, The Asia Business Daily is publishing a four-part series that examines the act's impact on the capital market based on surveys and domestic and international interviews with experts in the financial investment industry, academia, business circles, and the legal community. The series also explores challenges to usher in an era of “Korea Premium.”

Foreign investors have expressed the view that the amended Commercial Act helps to improve corporate governance, which has been identified as a key cause of the "Korea Discount." As additional measures to ensure effective implementation of the amendments, they suggested introducing relief mechanisms for minority shareholders and improving board practices.

"The amended Commercial Act is a positive change... It will contribute to improving corporate governance"

Jonathan Pines, Head of Asia at Hermes Investment, remarked in an interview with The Asia Business Daily ahead of the first anniversary (July 22) of the amended Commercial Act, "We assess the changes already made as meaningful, effective and we believe that there is a genuine recognition by government of the need and desirability of change," adding, " cultural shift is underway in Korea among both investors and directors. There is clear positive momentum."

The amended Commercial Act, in particular, received high marks for its impact on improving corporate governance. Isil Erel, Chair Professor of Finance at The Ohio State University, said, "The amended Commercial Act is a very positive measure to improve Korea’s corporate governance," and emphasized, "The Korea Discount originated from relatively inadequate corporate governance, including insufficient protection for minority shareholders, but the recent reforms will help close this gap."

Amar Gill, Secretary General of the Asia Corporate Governance Association (ACGA), also described it as "the most important issue in the Korean stock market" and said, "Through our commentary, ACGA has already highlighted the significance of the amendment by noting that boards have become structurally more responsible and that the trick of using treasury shares to shore up management control has been blocked."

However, there are also cautious views that its impact on the stock market has so far been limited. David Roche, founder of Quantum Strategy, described it as "a positive step that is leading the stock market in the right direction," but added, "It is not the main factor driving the market in the short term." He analyzed, "Because the Korean economy and stock market are excessively exposed to the artificial intelligence (AI) bubble, they will be significantly impacted when the AI bubble bursts."

Key Challenges for Effective Implementation

Foreign investors widely agreed that for the amended Commercial Act to have full effect, relief mechanisms for minority shareholders should be put in place and board practices must be improved. Professor Erel said, “Reforms are meaningful only when they can be executed in practice,” adding, “In Korea, it is crucial to establish relief mechanisms that allow minority shareholders to file class actions if companies, boards, or major shareholders fail to comply with the amended law.”

Secretary General Gill emphasized, "It is essential to focus on practical improvements in board operations and corporate practices, such as ensuring board independence and efficiency and establishing decision-making processes that align with shareholder interests."

There were also calls to strengthen checks on controlling shareholders. Pines pointed out that the primary structural impediment is that over 90% of Korean companies remain family-controlled. "This builds in both resistance to change and a mindset among controlling shareholders of seeking to prioritize their own interests when making decisions about the companies they control – to the extent they can," he added. He suggested multi-pronged institutional improvements, including the introduction of a Majority-of-Minority (MoM) rule in dual listings, enhanced Value-Up disclosure requirements and advisory voting rights for minority shareholders, and reforming inheritance tax assessment methods.

This content was produced with the assistance of AI translation services.