Value-up program: Market disappointment does not mean a failure, just yet

The Korean government's corporate value enhancement guidelines revealed last week may have disappointed investors, yet experts believe there is room for improvement.

After a three-month wait following the initial announcement of the corporate value-up program in February, the Financial Services Commission on Thursday issued several pages of guidelines detailing how companies should create their value enhancement plans and associated regulations.

Under the guidelines, companies first select key indicators, including stock-based metrics like the Price-to-Book Ratio and Price-to-Earnings Ratio as well as shareholder return measures like dividends and share buybacks. Based on such indicators, they are required to come up with detailed goals and plans, including evaluation measures, at least once a year.

The plan also covers non-financial metrics, such as corporate governance, aiming to address issues that could harm shareholder benefits, like the potential risks from company split-offs.

The overarching theme throughout the guidelines is autonomy. Companies have the flexibility to choose whether to disclose information and what to include.

“We aim to avoid disclosures for the sake of disclosure, as they might produce a flood of meaningless reports,” an FSC official stated, adding, “Creating a virtuous cycle is crucial, with companies presenting robust plans, investors responding positively and more capital flowing into the stock market.”

There will be no penalties if companies do not meet their goals. They can make adjustments at any time and issue correction notices if there are errors or significant changes in management plans.

While voluntary participation might seem ideal, the emphasis on flexibility has led to concerns over the lack of a binding force and specific incentives to boost participation.

One major incentive that had been expected was tax benefits, such as corporate tax credits or separate taxation for dividend income, but these were not addressed in the recent guidelines. The FSC noted these issues would be covered in later announcements.

Market disappointment led to a drop in stock prices, with the benchmark Kospi experiencing two consecutive days of losses. The KRX Insurance, Banking and Securities indices, known for their low PBR, dropped over 2 percent Thursday, significantly underperforming the broader Kospi.

Market watchers suggested instability in the market from disappointment could persist for a while. Lee Kyoung-min, a senior strategist at Daishin Securities, commented, "There is still a significant gap between market expectations and the actual progress of the program. This could lead to high short-term volatility in low PBR stocks and pressure on the lower boundary of the trading range coming under pressure."

Kim Jee-hyun, a researcher at Kiwoom Securities, highlighted the absence of key benefits, saying, “Without specific tax incentives, it’s unlikely we’ll see the same strong upward trend that we witnessed earlier in the year (with the initial value-up announcement).”

However, experts agree that the value-up program could eventually generate positive momentum in addressing the undervaluation of domestic companies in the stock market.

Shinhan Securities' strategist Noh Dong-kil remarked, “Investors viewed the second announcement as a 'sell' signal, yet this skepticism stems from the past behavior of companies that were reluctant to enhance corporate value. Now, they're looking to the value-up program for solutions.”

He projected that sectors like automotive and banking, which are improving their shareholder returns, will remain the market leaders for a while.

"Market disappointment does not equate to policy failure," Lee from Daishin reassured. "The program will help improve the fundamental structure of the local companies and market. As the program solidifies with time, the market will also respond positively."

Nonetheless, experts and industry representatives continue to call for improvements.

"Kosdaq-listed companies are generally smaller and more risk-oriented, which makes it difficult for them to pursue aggressive shareholder returns while operating in a venture-oriented market," said an official from Koh Young Technology, a Kosdaq-listed firm, during a seminar held by the FSC and Korea Exchange on Thursday.

A financial executive from CJ CheilJedang, the nation's top food maker, called for more industry-specific guidelines, pointing out that manufacturing firms like his require greater investment in maintenance and other capital projects. He also cautioned against an overemphasis on specific metrics, like PBR, which could create unnecessary stigmatization and place undue pressure on firms.

Experts also advocated for enhancements to increase efficiency. "Voluntary disclosure could raise trust concerns," an official from Mirae Asset Global Investment's Responsible Investment Strategy Center noted, suggesting additional documentation to explain decisions made by the board of directors and related approvals to ensure accountability.

The FSC plans to finalize the guidelines in May after gathering further opinions, and companies ready to proceed will be encouraged to start disclosures from that point.

The agency is also developing a "value-up" index, set to launch in the third quarter, with an associated exchange-traded fund expected by the end of the fourth quarter.