For over two decades, South Korean equities have traded at a discount to emerging markets more broadly, averaging 35% on a trailing P/B basis.
This is not because of macroeconomic weakness or inferior businesses, but primarily due to the way those businesses are run. The chaebol system (family-controlled conglomerates with opaque cross-shareholding structures that enable control over assets far exceeding economic ownership) has produced a corporate culture in which capital allocation decisions are made with one primary beneficiary in mind: the founding family.
A structurally low return on equity has persisted at 9.8%, with many South Korean equities trading below book value. Despite strong cash flows and robust balance sheets, hoarding cash by controlling shareholders is common. Dividends have been suppressed both by high dividend tax rates (up to 49.5%) and because low payouts kept valuations depressed, reducing inheritance tax costs when controlling stakes pass between generations.
A pattern of governance issues
One of South Korea’s major consumer companies exemplifies this, in our view. Its product has been a dominant brand for 24 consecutive years with 50%+ domestic market share – a cash-generative franchise with no meaningful competition.
Yet, the stock has delivered negative shareholder returns over 15 years. This is not because the business performs poorly, but because value extraction runs through related-party channels: brand royalties paid to the controlling family’s holding company, related-party supply contracts, and intra-group transactions whose terms are opaque.
Governance concerns extend further. A leading technology group’s founding family faced criminal bribery convictions (with imprisonment), while a leading automotive group was investigated for illegal fund transfers and accounting irregularities.
These are not historical footnotes – they reflect a corporate culture in which the interests of the controlling family have, in practice, superseded those of minority shareholders, creditors and stakeholders.
Reform momentum: the Value-Up programme
South Korea launched its Value-Up programme in 2024, inspired by Japan, but with a key difference: voluntary participation. The more structurally significant reforms came through the Korean Commercial Code in summer 2025, extending directors’ duty of loyalty explicitly to shareholders (previously owed only to the company) and requiring at least two audit committee members to be independently elected.
That government intervention was needed to establish an independent audit committee as late as 2025 illustrates the depth of the governance gap.
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Reform has continued in 2026, with legislators requiring companies to cancel treasury shares within one year of acquisition (excluding employee compensation purposes). This is meaningful given that many South Korean business groups have long used treasury shares to consolidate family control.
As with the audit committee reform, the fact that mandatory cancellation had to be legislated (rather than adopted voluntarily) reveals much about prevailing governance standards.
Market response
As a result of the reform narrative, and supported by significant AI-driven demand for semiconductors, the Korean stock market has attracted stronger foreign participation and delivered exceptional returns, with the Korean ETF rising 95.4% in US dollar terms in 2025 alone, and in April, it surpassed the UK to become the world’s eighth-largest stock market, as the rally continues.
Buybacks have surged. According to ISS, companies repurchased a record USD 12.6bn in 2024, more than double the prior year and the highest since 2009. Share cancellations are also accelerating, with SK Group cancelling treasury shares equal to nearly 20% of its free float.
Board independence remains largely cosmetic. As per ISS, over 75% of major listed companies still combined chair and CEO roles as of June 2025. According to Glass Lewis research, chaebols including Samsung, Hyundai and LG recorded no dissenting votes from independent directors between 2019 and 2024; 70% of outside directors come from academia, government or legal backgrounds.
ESG and disclosure gaps
The governance dimension of reform has attracted most attention, but the E&S picture warrants equal scrutiny in our view. Korea’s mandatory sustainability disclosure timeline has been repeatedly revised; climate is the only mandatory component, and Scope 3 emissions (significant, given that petrochemicals, steel, semiconductors, automotive and shipbuilding dominate the Korea Composite Stock Price Index), will not initially be required. We believe this is not just a disclosure gap; it is an accountability gap.
South Korea’s reform agenda is a step in the right direction, but it is not a clean break from the past. The Value-Up programme has improved the conversation around capital allocation and shareholder returns, and some companies are responding. But the bigger question – whether corporate behaviour has genuinely moved away from the opacity and self-interest of chaebol structures – remains open.
Because the framework is largely voluntary and family control persists, progress is likely to be uneven and sometimes superficial.
Despite ongoing talk of a Developed Market upgrade, Korea still lags many Emerging Markets on essential issues: E&S disclosure, treatment of minority shareholders, and board independence. Structural change will take time. For investors, selectivity remains key – the opportunity lies in identifying companies where reform translates into genuine accountability and reduced ESG risk.
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