飞翔的荷兰人：韩国：公司治理的新视角

Issuer of report:The Hongkong and ShanghaiBanking Corporation LimitedView HSBC Global Research at:https://www.research.hsbc.comListen to our insightsFind out moreHSBC Global Research PodcastsHerald van der Linde*, CFAHead of Equity Strategy, Asia PacificThe Hongkong and Shanghai Banking Corporation Limitedheraldvanderlinde@hsbc.com.hk+852 2996 6575Prerna Garg*Associate, Equity StrategyThe Hongkong and Shanghai Banking Corporation Limitedprerna.garg@hsbc.com.hk+852 9831 6901Adam Qi*Associate, EquityStrategyThe Hongkong and Shanghai Banking Corporation Limitedadam.x.l.qi@hsbc.com.hk+852 2288 9311* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and isnot registered/ qualified pursuant to FINRA regulationsEquity StrategyAsia ◆◆◆ A fresh start1.Korea has experienced a leadership vacuum since lawmakers suspendedformer presidentSuk-yeol for his failed attempt to suspend civilian ruleand declare martial law. After losing toMr Yoon by a razor thin margin in the presidential election in 2022,DPKcandidateLeeJae-myunghasnowreplaced his political rival.Hislife storysets him apart from mostofthecountry’spolitical elite.Mr Leedroppedout of school to work at a factory to support his family.Aftersufferingaseriouselbow injury in an industrial accident,he earned a scholarship to studylaw and become an attorney.MrLee has used hisbackstory to frame himself assomeone whounderstandsthe struggles of the underprivileged(source AFP, 29 May 2025).Two key pointsThe underlying idea is to address the discount Korean stocks tradeatversus the rest of the regionby improving corporate governance.Firmshave respondedbyraisingdividend payments andconductingmore share buybacks. Yet,we think much more can be doneand in many casestheseinitiatives havefailedto drainthelarge amounts of cash thathavepiledup oncompanybalancesheets.While we await detailsabout hisplans, when President Lee was onthe electioncampaign,he made severalproposalsabout howto improve corporate governance in Korea.Two points stand out:◆Boardmembers.Make it mandatory for companies above a certain size to appoint acertain percentage of independent directors. And these appointments need to betrulyindependent from management.There are also plans to expand thefiduciary dutiesoftheboardvia achangeintheCommercialActandmakedirectorsmore accountable to minorityshareholders.The spinning offoffast-growing assets from listed firms (for majorshareholders to acquire) will increasinglybe scrutinized.◆Returning cashthrough dividends and share buybacks.One issue is that sharesthatarebought backareoftennot cancelled, meaning they can be issuedagainat a later stage.The suggestion is to makecompaniescancelpurchases oftreasury staresafter a buyback.Itis useful to look athowthese two issuesplayed out in Japan, where similarinitiativeswere putin place in thepast few years.Lessons from JapanBoard composition can, over time, change how firms operate and how they manage theirbalance sheets.In Japan, there is evidence thatif aCEO actsin a dual capacity (as thechairman of the board and CEO)thistends to increase the firm’s cashlevelsby 1.04% of itsassets (i.e., less oversight results in inefficient use of cash). Astudy of 3,400 Japanese firmssuggests that improving corporate governance significantly reducesthe level ofcash holdings1.Thecomplexcorporate structure ofthecountries’giant conglomerates–Japan’skeiretsuandKorea’schaebol–resemblesabowl of noodles.The widespread existence of cross-shareholdingsmakes it difficult for minority shareholders to pressure management which,in turn,weakensbalance sheet discipline.The multitude of linkages between companiesoftenresults in focusingonsharing mutual benefitsrather than maximising ROE. If one firmstruggles,anothercompanywithin the groupcanprovidesupport, irrespectiveof whetherthis is beneficial to shareholders.______________________________________1"Unstashthe Cash! Corporate Governance Reform in Japan", IMF Working Paper WP/14/140, Chie Aoyagi and GiovanniGanelli, August 2014 Akeyissueisthe role of outside directors,who are expected to monitor management andensure they run the firm forthe befit ofshareholders2. However, boardsin Japanareoftendominated by long-term employees who play a major role in decision-making.Theycan beless independent than their titles suggest.Not only do they conductoversight,but theyalso mediate.When disputes arisewithin Japanesefirms,executives often end up competing forcontrol of the corporate group. Thiscanlead to deep-seateddivisionsacross theconglomerate.This is how independent directorsin Japantend to become mediators in such conflicts3.Perhaps this explains whyforeign ownership isviewedpositively,given thiscanlead totheappointment of independent directors andincrease the value of a company4;the directors areexpected to do more oversight and less mediation.The result is thatthemanagementoftendoesnot mindcarryinglarge amounts of cash on thebalance sheet despite this having a negative impact on ROE.And thereislittlet