Companies to shape up or be delisted: Financial watchdog

2024.02.29 10:33:48

FSS Governor Lee Bok-hyun. [Photo by Yonhap]이미지 확대

FSS Governor Lee Bok-hyun. [Photo by Yonhap]

South Korea’s Financial Supervisory Service (FSS) Governor Lee Bok-hyun said during a meeting with heads of financial think tanks on Wednesday that listed companies that do not meet certain standards should be removed from the stock market in a push for measures to support the government’s corporate value-up policy.

The corporate value-up policy unveiled on Monday calls for listed companies to disclose plans to enhance their corporate value while offering incentives, including tax benefits, to encourage them to participate voluntarily.

But a big challenge is that the government‘s proposed tax incentives are viewed as insufficient to encourage companies to participate. In this regard, the Ministry of Economy and Finance plans to introduce additional tax support measures, including those for shareholder-friendly activities, such as share buybacks and dividends, by July 2024.

Delisting is categorized as an ultra-stringent measure that is not adopted by Japan’s Tokyo Stock Exchange (JPX), which is considered a benchmark for the Korean government’s corporate value-up policy.

According to the Financial Services Commission (FSC), JPX recommends voluntary participation by listed companies in disclosing plans to enhance their corporate value and taking practical steps, without imposing direct disadvantages for non-disclosure. As a result, only about 20 percent of listed companies have actually participated in the disclosure program a year after its implementation.

Lee‘s threat of delisting also points to a chronic problem in the Korean stock market, which is characterized by listing but no delisting with only 25 stocks delisted from the main Kospi market and 77 from the secondary Kosdaq market since 2018. The annual average is 4 and 12.6 respectively, which is less than 1 percent of the total number of stocks on the Kospi and Kosdaq. The number of shares in the Korean stock market continues to increase steadily as no companies are expelled and companies are stingy in shareholder returns.

According to Shinhan Securities Co., the number of shares on the Korean stock market has increased by an average annual rate of 3.6 percent from 2000 to the present, compared to a 0.12 percent increase over the same period in the United States, which is experiencing a historical boom.

The continued growth in the number of shares in the Korean stock market is also in stark contrast to the United States, where about 3 percent of market capitalization is lost to stock buybacks and cancellations annually. This has led to a decrease in stock prices, causing losses for individual Korean investors and perpetuating the situation known as ’boxspi.‘

In this regard, Lee also raised the need to discern good companies in the Korean stock market.

“It is difficult to evaluate the appropriateness of excellent companies while the stock market continues to deteriorate,” he said, and “we need to enable funds to flow into future growth industries by allowing a quick exit when needed. He specifically mentioned that “among the listed companies, there are those that have not shown significant growth for a long time or have poor financial statements or have become a means for mergers and acquisitions (M&A) while remaining in the market for more than 10 years,” highlighting the question of whether it is appropriate to simply let these companies continue to be listed in the market.

The Korean government is currently focusing on amending the Commercial Act to support its corporate value-up policy, and aims to improve the anti-opportunity misappropriation regulations, which were introduced to regulate directors’ pursuit of personal gains, in the latter half of 2024. The main focus is to specify board approval when using opportunities and clarify the scope of directors‘ compensation liability.

Particularly crucial is how the system will be reformed to expand the scope of directors’ liability. Industry observers call for the Commercial Act to specify that the board of directors is responsible for shareholders, not the company, or at least to establish a principle via consistent court precedents.

“If responsibilities are specified, the board of directors can function as a minimum brake mechanism to take responsibility for shareholders, rather than the controlling shareholders,” Kim Woo-chan, a professor at Korea University Business School, said.

Lee plans to serve as a promotional ambassador, introducing Korea‘s government policies and corporate efforts for capital market development, including corporate value-up measures, at a joint public-private investor relations event with securities and financial investment industry representatives in New York in May 2024.

By Kim Tae-sung, Choi Hee-seok, and Yoon Yeon-hae

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