Korea Inc’s Japan makeover only scratches surface

Copycat caution. South Korea and Japan rarely see eye to eye. But Seoul is now copying its neighbour's corporate reform drive to lift anaemic valuations. Voluntary disclosures and tax breaks, though, lack teeth and are unlikely to spur change among the family-run conglomerates, or chaebol, that dominate the $1.9 trillion stock market.

The financial regulator's ambitious plan requires broad support. Dubbed the "Corporate Value-Up Program", the preliminary guidelines encourage companies to publish plans on how to improve valuations - similar to Japan. South Korea is going one step further by proposing preferential tax treatments as well as a "Korea Value-Up Index" comprised of top-performing stocks to motivate firms.

It's a timely move to fix the stubborn Korea Discount, whereby years of weak corporate oversight and underwhelming shareholder returns have resulted in giants like Samsung Electronics and Hyundai Motor trading at lower valuations than global peers. In contrast, Japanese stocks have surged to record highs as entities heed the local bourse's call to focus on shareholder value. Investors shunning Chinese equities plus a mania for all things artificial intelligence-related have also helped. The Nikkei 225 Index is up 38% over the past year, versus just 15% at Korea's Kospi 200.

Powerful chaebol led by Jay Y. Lee's Samsung empire means Japan's playbook of voluntary disclosures can only go so far. The top 10 family-controlled conglomerates account for two-thirds of the market value of the Kospi 100 index, per Societe Generale. Unlike in consensus-driven Japan, influential families like Samsung's Lee clan have little incentive to make their companies more attractive to investors. On the contrary, South Korea's up to 60% inheritance tax, versus a 25% average for OECD nations, can be a deterrent for many to lift share prices. Roughly two-thirds of Korean-listed firms trade below book value.

Seoul can take bolder steps. Treasury stock, or shares that have been repurchased but not retired, for instance, has long been used to strengthen control of insiders at the expense of minority investors. Requiring companies to cancel any such unused securities could yield quick benefits. Some 17% of the Kospi 200 index constituents hold over 10% of their shares as treasury stock versus 8% in Japan's Topix, per SocGen. Tougher rules, rather than incentives, will revitalise Korea Inc.