One reason Korean stocks are undervalued is the discount rate resulting from the deterioration of major corporations' governance structures. In particular, issues like dual listings and the pursuit of private profit by controlling shareholders during the management succession process have a significant impact. In this sense, the amendment to the Commercial Act is an attempt to prevent conflicts of interest arising from the pursuit of private interests by controlling shareholders.

Director General Lee Sang-hun of iM Securities' Research Center noted during a meeting with ChosunBiz at the iM Securities headquarters in Yeouido, Seoul, on the 1st, regarding the value of the Commercial Act amendment. Lee, a capital market expert who has analyzed corporate governance for a long time at iM Securities after working at Daewoo Securities and Korean Re, highlighted the importance of this legislation.

Lee Sang-heon, Director General of iM Securities Research Center, conducts an interview with ChosunBiz on July 1st. He evaluates that the amendment to the Commercial Act establishes a foundation to reduce conflicts of interest between controlling shareholders and minority shareholders and to normalize corporate governance./Courtesy of Lee Byeong-cheol, reporter

The amendment to the Commercial Act has been promoted as a party proposal by the Democratic Party of Korea, expanding the duty of care for shareholders and mandating electronic shareholders' meetings since last year. It passed the National Assembly's main session earlier this year, but was vetoed by former Prime Minister Han Duck-soo, who was acting president at the time, resulting in its dismissal. The Democratic Party has shown a renewed willingness to process the amendment since the establishment of the Lee Jae-myung government. On the 2nd, a proposal that included the '3% rule,' which only recognizes a maximum of 3% voting rights when appointing audit committee members, combining those of the largest shareholder and special related parties, passed in the Legislation and Judiciary Committee. The Democratic Party stated it would finalize the passage of the amendment to the Commercial Act in the National Assembly's main session on the 3rd.

Domestic stock markets are buzzing with expectations surrounding the amendment to the Commercial Act. Stocks of large corporate holding companies, which had not attracted investor interest, are soaring. When the duty of care of directors is expanded from 'the company' to 'the company and shareholders,' there are expectations that corporations will strengthen shareholder-friendly policies, such as increasing dividends or repurchasing and retiring shares to bolster their stock prices after the amendment.

However, the Director General pointed out, 'The expectation that the amendment to the Commercial Act will lead to expanded dividends and share buybacks is a misunderstanding,' adding, 'The core point of the amendment is to strengthen the monitoring of conflicts of interest between controlling shareholders and minority shareholders.'

He identified the deterioration of governance structures as one of the issues facing the domestic stock market. Controlling shareholders can easily dominate boards of directors and shareholders' meetings, while the oversight functions of outside directors and auditors are not operating effectively. As a result, there are virtually no ways to prevent controlling shareholders from pursuing their own interests, even if they acquire shares cheaply or increase friendly equity through third-party capital increases. For instance, actions that infringe on the interests of existing shareholders, like partitioning listings, are often easily carried out at the discretion of controlling shareholders.

The Director General said, 'After the 1998 IMF crisis, issues regarding unilateral decision-making by controlling shareholders were raised in the domestic industrial sector, leading to the amendment of the Commercial Act in 2000 upon the IMF's recommendation,' adding, 'Although it contained provisions that required companies with assets over 2 trillion won to appoint half of their directors as outside directors, now those outside directors have essentially become mere rubber stamps, losing their effectiveness.'

The Director General diagnosed that this situation has led to the undervaluation of the domestic stock market. He stated, 'As corporate governance deteriorates, holding companies have become distant from investor interest, resulting in holding company price-to-book ratios (PBR) being unable to exceed 1,' and added, 'With transactions being neglected and partitioning listings continuing, the stock prices of holding companies have stagnated for a long time.'

One of the key contents of the amendment to the Commercial Act is to expand the duty of care of directors from 'the company' to 'the company and shareholders.' The Director General stated that if the duty of care is extended to shareholders, it will allow for better monitoring of the deterioration of governance structures in domestic corporations.

The Director General explained, 'Most other countries' laws set the duty of care of directors to corporations, but legal judgments are made considering the interests of shareholders,' adding, 'If the amendment to the Commercial Act is enacted, it will lead to an increase in legal disputes regarding conflicts of interest between controlling shareholders and minority shareholders in Korea, and cases where courts rule based on shareholder interests are likely to increase.'

The Director General positively assessed the possibility of a change in investor perception. He explained that if the issues surrounding the pursuit of private interests by controlling shareholders become publicized, the monitoring of minority shareholders will naturally strengthen. For instance, regarding decisions that might infringe on the interests of existing shareholders, such as partitioning listings, he remarked, 'That would be an action contrary to the amended Commercial Act,' stating, 'There will likely be an increase in cases where shareholders unite their voices.'

The Director General stated, 'The Commercial Act has a normative aspect, so it leans more toward solving problems through a shift in people's perceptions rather than through legal compulsion.'

※ This article has been translated by AI. Share your feedback here.