Samsung C&T headquarters in Seoul / Newsis

The "Korea discount," a chronic undervaluation of Korean shares relative to their global peers, remains unresolved, stifled by the undue influence of the National Pension Service (NPS) and family-controlled conglomerates, a London-based proxy advisory said, Tuesday.

According to a report titled, "K-discount and shareholder activism in Korea,'' published by SquareWell, Korean conglomerates known as "chaebol" are one contributor to the undervaluation of the listed stocks, despite the country's robust economy and corresponding enhanced growth profiles of businesses and investment conditions.

Further amplifying the concern is inconsistencies in stewardship practices of Korea's pension fund, the world's third-largest market player with over 1,000 trillion won ($722 billion) under management.

The months of government efforts to advance the Corporate Value-up Program notwithstanding, Korea continues to lag behind global investment standards, at the expese of the interests of minority shareholders and the long-term healthy growth of the country's capital market. The stalled financial initiative of the Yoon Suk Yeol administration encourages companies to outline plans to boost the value of shares of below-1 price-to-book ratio.

Image capture from a SquareWell report / Courtesy of SquareWell

Contributor

"One contributor to the Korea discount is chaebol," the report said.

The conglomerates were established after the 1950-53 Korean War with government support. Korea's five largest chaebol — Samsung, Hyundai, LG, SK and Lotte — account for 61 percent of Korea's GDP.

The latest Corporate Value-up Program lacking specifics remains a source of disappointment to investors, eclipsing years of efforts to reform Korea's corporate governance. Included are the non-binding Code of Best Practices put in place in 1999 and the 2017 Stewardship Code.

The pension fund demonstrated, it added, notable evolution in its stewardship practices in recent years, despite inconsistencies at times.

While the NPS has engaged in activist practices with some of its portfolio companies, its preferential treatment of chaebols "remains a subject of intense scrutiny," it said.

Samsung C&T

A major case in point was the NPS' contentious opposition to a group of leading global and proxy investors seeking improved governance practices of Samsung C&T ahead of the firm's shareholder meeting in March.

An investor consortium led by the City of London Investment Management recommended that the de facto holding firm of Samsung Group increase shareholder dividends and share buybacks, as part of a collective push to address the firm's above-65 percent discount relative to its net asset value.

The move was supported by almost all of investors, including major proxy advisers Institutional Shareholder Service ( ISS) and Glass Lewis.

Even management-friendly investors Norges Bank IM, a Norweigian soverign wealth fund, and BlackRock chimed in, as well as local proxy advisers including Sustinvest and Korea Corporate Governance Service.

However, the pension fund with a 7.2 percent stake in the Samsung affiliate voted against the proposal, in an unexpected turn of events.

The widely disputed decision called into question the role of the public pension fund in improving governance practices here, long criticized for lacking transparency.

Many market participants grew dismissive of the Corporate Value-up initiative thereafter, frustrated by the NPS decision many characterize as "nothing short of the government paying lip service to local retail investors."

"The problem was left essentially unchanged," SquareWell Partner Ali Saribas said.

"It was a controversial corporate transaction revealing the deep ties between chaebols and the government. Samsung C&T's significant discount remains due to its poor capital allocation decision-making, poor governance practices and unfocused strategy."