BREAKINGVIEWS-Politics can shove Korea’s value push forward

By Hudson Lockett

HONG KONG, March 27 (Reuters Breakingviews) - Global investors’ gaze is trained on the long-awaited expiry of South Korea’s ban on short-selling at the end of this month — a welcome end to restrictions that have kept foreign financial institutions with hedging requirements from fully buying into a tech and AI-powered rally that has pushed the benchmark KOSPI .KS11 up about 10% this year despite political chaos. But the real test for Korean equities is whether acting president Han Duck-soo will veto legislation meant to improve shareholder protection.

The bill passed by the left-leaning Democratic Party on March 13 expanded boards’ fiduciary duty to include shareholders — rather than just companies — and mandated virtual investor meetings for listed companies. It signals the legislature is serious about improving corporate governance to tackle a stubborn Korea Discount.

The window to veto the bill, however, closes on Friday for Han of the business-friendly People Power Party, who was restored to office this week by the Supreme Court. He took over after President Yoon Suk Yeol was suspended from office for declaring martial law in December. Han had vetoed six bills from the Democratic Party by the time it impeached him after just two weeks in power.

Han's conservative party would prefer to spur higher valuations via tax incentives and has already called for the acting president to kill the legislation. As did a business lobby comprised of the country's powerful family-run conglomerates, or the chaebol, including Samsung, Hyundai, SK and LG, whose disregard for minority shareholders has long dragged down valuations. The Lee family flag carrier Samsung Electronics 005930.KS, for example, trades on a five-year average price-to-book ratio of 1.3, trailing TSMC's 2330.TW 4.9 times, as well as the 1.8 and 1.7 times for Intel INTC.O and Micron MU.O, respectively, per LSEG data.

Yet nixing the reforms would deal a huge blow to South Korea's corporate value programme, modelled after Japan’s reasonably successful push to improve returns. It will probably anger the country's 14 million retail investors, too. Peter Kim, managing director at KB Securities, says such a move would be “very risky” given the political blowback already stoked by Yoon, who is awaiting a final decision from the Supreme Court on his impeachment. With presidential elections likely in the next few months, Han will want to avoid his party becoming next in a long line of global incumbents tossed out by angry voters. The smart move may be no move at all.

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CONTEXT NEWS

Han Duck-soo of the conservative People Power Party was restored to office on March 24 by the Supreme Court after being impeached by the opposition Democratic Party in December. Han had vetoed six bills from the left-leaning opposition while serving in the stead of President Yoon Suk Yeol, who had been impeached over his imposition of martial law.

South Korea’s opposition Democratic Party on March 13 passed a revision to the country’s Commercial Act expanding the fiduciary duty of board members to protect the interests of minority shareholders. The ruling conservative People’s Power Party has called on the acting President to kill the legislation during a veto window which ends on March 28.

Separately, a ban on short-selling stocks in Seoul will be lifted on March 31. Analysts say the change is likely to spur inflows from large foreign institutional investors, who have not been able to hedge exposure to the country’s market since November 2023.