South Korea's attempt to replicate Japan's measures to stimulate its stock market may not succeed.

• The Financial Services Commission unveiled its "Corporate Value-up Program" on Monday, which aims to boost shareholder returns via tax benefits and other incentives.
• The FSC program is similar to Japan's, which has resulted in increased shareholder returns and strong earnings, leading to record highs in Tokyo's stock market after 34 years.

The implementation of Japan-style measures for enhancing corporate governance in South Korea may not be sufficient to revitalize its undervalued stock markets and address the "Korea discount."

The Financial Services Commission unveiled its "Corporate Value-up Program" on Monday, which aims to boost shareholder returns through tax benefits and other incentives.

The "Korea discount" refers to the low stock market valuations in Asia's fourth-largest economy, which is attempting to increase them to be more in line with its peers.

Tokyo markets have reached record highs after 34 years due to Japan's corporate governance push, which aims to increase shareholder returns and earnings.

While South Korea's actions mirror those of Japan, their outcomes may not be as fruitful.

The ‘chaebol’ problem

Large family-owned global conglomerates, typically controlled by the founder's family, make up South Korean markets. Notable examples of these conglomerates are Samsung Electronics, LG, SK, and Hyundai.

Family-owned chaebols are a contributing factor to the Korea discount, as they limit the influence of minority stakeholders on strategic decisions.

The challenge lies in the fact that Korea has more companies with strong controlling shareholders, which results in the existence of the "Korea discount," as controlling shareholders take disproportional benefits, according to James Lim, senior research analyst at Dalton Investments.

If authorities align their actions with the interests of both controlling and minority shareholders, changes can be implemented faster despite resistance from controlling shareholders.

The Korean Stock Exchange's listed companies have been requested by FSC to create and disclose valuation enhancement plans, in an effort to increase transparency and market returns.

In June, the FSC will establish a web portal and create detailed guidelines for companies to disclose their plans in the second half of 2024.

According to Jonathan Pines, the lead portfolio manager of Asia ex-Japan at Federated Hermes, there are numerous family-owned businesses in South Korea that are currently profiting significantly from the current regulatory environment.

Pines stated that South Korea's low stock prices are driven by motivated behavior, making it unlikely to persuade controlling families to treat minority shareholders kindly through appeasement.

More steps needed

In an effort to enhance market valuations, South Korean authorities have taken measures such as simplifying registration procedures for foreign investors, limiting short selling, extending trading hours, and adjusting dividend record dates.

To increase the markets, experts advise FSC to intensify its efforts.

Daniel Tan, a portfolio manager at Grasshopper Asset Management in Singapore, stated that while recent initiatives indicate Korea moving in the right direction, larger steps must be taken to tackle corporate practices that prioritize controlling stakeholders, typically founding families, over smaller shareholders.

Tan stated that the recent measures, which aim to encourage listed companies to establish and reveal valuation-enhancing strategies, mostly depend on voluntary actions instead of being enforced as compulsory adjustments.

To achieve a similar rally in South Korea markets, experts suggest implementing targeted and powerful reforms.

Federated Hermes' Pines suggested that Korean authorities implement laws that make company directors responsible for increasing shareholder returns, rather than simply being loyal to the company.

To increase their stock prices to at least their book value, South Korean companies should present plans, it was suggested.

The price-to-book ratio is an indicator of whether a company's shares are undervalued, with a value below 1 suggesting that the stock's price may be below its fair value.

The P/B ratio of Samsung Electronics is 1.40, while that of Taiwan-listed companies is 5.23, and that of U.S.-listed companies is 37.80.

This story was contributed to by Lim Hui Jie and Clement Tan of CNBC.