2nd Year of Mandatory Disclosure of Governance Reports

The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.

 

 

[ESG Issue] 2020 corporate governance report: Second year of mandatory disclosure; corporate value to rise further

This is the second year of mandatory disclosure of corporate governance reports, an objective evaluation indicator for corporate governance. The enabling of y-y basis comparisons of key indicators satisfies the original intention of introducing corporate governance reports—ie, promoting investor understanding and accelerating governance improvement.

Changes reflected in second year of mandatory disclosure

In order to enhance corporate value by offering uniform and detailed information on corporate governance, Korean firms are mandated to provide corporate governance reports—2020 marks the second year of such.

In 2020, revisions to the report guidelines have improved the accuracy of disclosure. Enabling y-y basis comparisons of a firm’s key indicators, corporate governance reports now satisfy the original intention of promoting investor understanding and accelerating corporate governance improvement. Of note, the number of firms with assets of W2tn or more that must disclose reports totals 211 (non-financial: 171; financial: 40).

Governance (G) continuing to display quality improvement

A look at 2020 reports shows that the average rate of compliance with key indicators of the 171 non-financial firms subject to mandatory disclosure improved 5.2%p y-y to 58.6% (9 out of 15 indicators complied with on average). Also, three indicators (②, ⑪, and ⑭) showed significant y-y improvement. Only one indicator (⑤) declined y-y. As in 2019, SKT and POSCO displayed the highest scores, posting 93.3% compliance rates. Also standing out was the average compliance rate of HMG affiliates, which improved from 45.8% in 2019 to 61.5% in 2020.

While global ESG indices have outperformed the market during the Covid-19 crisis, domestic ESG indices have underperformed. We believe that it is crucial to create a virtuous cycle of expanding socially responsible investing (SRI), fine-tuning ESG indices, and boosting ESG integration practices among market participants. In line with the NPS leading SRI, ESG should become the post-Covid-19 new normal.

Implications of changes made in Japan

In Japan, some improvements have been made to the quality of corporate governance reports that carry implications for Korea. First off, we note that amid Covid-19, the introduction of e-voting systems has become widespread in Korea. But, Japan has begun to introduce online shareholders’ general meetings from this year (after having online shareholders’ general meeting guidelines confirmed). Second, revisions to Japan’s stewardship code have led to a strengthening in SRI, including (starting from this year) the disclosure of the reasons for affirmative and dissenting votes cast by institutional investors at general shareholders’ meetings. Third, revisions to Japan’s foreign exchange laws have beefed up the requirements for foreign capital to acquire domestic stocks, a development which could limit the exercise of shareholder rights moving forward.

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