South Korea parliament passes amended bill to target low equity valuations

South Korea's parliament has approved a revised Commercial Act bill designed to enhance corporate board accountability to shareholders, strengthen audit committee oversight, and empower minority shareholders to elect their own representatives. This legislative push, led by the ruling Democratic Party, aims to improve corporate governance and address the 'Korea Discount' to boost equity valuations. However, the measure faces strong opposition from South Korean businesses, which anticipate increased management disputes and litigation risks.

Analysis

South Korea's parliament has passed a revised Commercial Act aimed at enhancing corporate governance and addressing the 'Korea Discount,' a term for the persistent undervaluation of the country's equities. The legislation, pushed through by the ruling Democratic Party's majority, mandates that large companies conduct separate votes for audit committee members to bolster oversight and, according to a Citi Research analyst, enables minority shareholders to elect their own board representatives through a cumulative voting system. This reform is a key part of President Lee Jae Myung's pledge to curb abuses by controlling shareholders. However, the move has been met with strong opposition from the business community, with The Federation of Korean Industries formally expressing regret and warning of a 'significant potential for increased management disputes and litigation risks,' which introduces a notable headwind to the legislation's intended positive effects.

Key Decisions for Investors

• Investors should evaluate the potential for a long-term re-rating of South Korean equities, as the new legislation directly targets the 'Korea Discount' by strengthening minority shareholder rights and board oversight.
• It is now critical to conduct deeper due diligence on the corporate governance structures of portfolio companies, specifically assessing the potential for activist-led changes and the influence of controlling shareholders.
• Monitor for an increase in management disputes and litigation risks, as highlighted by industry groups, which could introduce near-term volatility and operational headwinds for affected corporations.