Shareholder Value to Be Enhanced
The author is an analyst of NH Investment & Securities. He can be reached at dongyang.kim@nhqv.com. -- Ed.
Korea’s National Assembly has passed the three ‘fair economy’ bills. Due to pre-emptive governance reforms and exemptions to the regulations, the actual impact on corporate governance structures should be limited. Also, corporate interest in enhancing shareholder value should increase on the establishment of systems aimed at keeping major shareholders in check. As holding companies will now be able to establish CVC firms, we expect their roles as business portfolio control towers to be highlighted.
Revised laws aimed at changing governance structures finalized
The three ‘fair economy’ bills passed by the National Assembly will take effect sequentially, starting with a revision to the Commercial Act in early 2021, a bill on supervising business groups that have financial units in 2H21, and a revision to the Fair Trade Act in early 2022. Considering the preemptive measures taken by corporates—including resolving circular shareholdings and adopting holding company structures—and the fact that the bills are less strict than feared, we believe that additional governance structure changes will be limited.
As the requirements for holding companies are to strengthen, we expect SK Telecom (SKT) to make a decision on converting to a holding company structure within 2021. The number of firms subject to regulations on work funneling will increase; however, given the preemptive measures taken by large corporates, we believe that stake disposals by major shareholders will be limited to unlisted and small-sized firms.
Shareholder value and holding companies’ roles to be enhanced
The revisions to the Commercial Act will take effect from early 2021. Changes to keep controlling shareholders in check, such as the separate election of audit committee members (with voting rights of major shareholders limited to 3% in such elections) and the relaxation of requirements for exercising minority shareholders’ rights, together with the spread of shareholder activism, should reinforce the necessity to enhance shareholder value. In particular, we expect to see dividend policy reinforcement and treasury stock buybacks/cancellations.
As holding companies will now be able to establish corporate venture capital (CVC) firms—which was previously impossible due to the separation of financial and industrial capital—we expect their roles as business portfolio control towers to be highlighted. We also believe that holding companies’ valuations will differentiate depending on their CVC investment performance.