(Dec 2): South Korea’s top financial regulator opposes proposed changes to corporate law sought by investors as a way to address undervaluation of the nation’s stock market.

Amending the nation’s Commercial Act to expand corporate boards’ fiduciary duty to all shareholders could backfire, as such a move would affect smaller and non-listed companies as well as large corporations, Financial Services Commission (FSC) chairman Kim Byoung-hwan told reporters in a briefing on Monday.

The main opposition Democratic Party, which controls Parliament, has vowed to revise the commercial code so that boards have an obligation to serve the needs of all shareholders not just those of companies, whose decision-making is often swayed by controlling shareholders. The pledge was welcomed by investors who seek to erase the “Korea discount”, which causes foreign traders to shun the nation’s stocks over corporate governance concerns.

A better alternative would be revising clauses in the Financial Investment Services and Capital Markets Act that pertain to mergers and other financial transactions of publicly traded companies, said FSC chair Kim. Whereas the commercial code applies to all companies, capital markets law applies only to listed companies.

“Under the view that the protection of general shareholders should be strengthened, the government has come up with the proposal to revise the Capital Markets Act,” the nation’s top financial regulator said, adding that he would communicate the proposal to Parliament and to investors. This will help minimise the negative impact on private and smaller companies, he added.

The FSC’s latest comments represent a major setback for market reform, according to Namuh Rhee, the chairman of the Korea Corporate Governance Forum. “It means there will be shareholder protection only in extremely limited cases such as mergers. It’s like mandating that you need to comply with traffic rules on highways only, instead of all roads.”

Investors haves argued that current law enables controlling shareholders at family-run conglomerates and other firms to pursue actions that benefit the founding family at the expense of minority investors. 

While the opposition party’s lawmakers control the National Assembly, which may help them pass their proposal, the president can veto it. The FSC plans to submit its rival proposal to the legislature later this week.

South Korean stock markets have been one of the worst performers in the world in 2024. The equity benchmark Kospi has lost more than 7% so far this year, while MSCI Inc’s broader measure of global stocks has climbed 19%. 

Uploaded by Tham Yek Lee