A Country Without Shareholder Rights (주주 권리가 없는 나라) - A Book Review

• This insight is a book review of 주주 권리가 없는 나라 (A Country Without Shareholder Rights), which is one of the best books on the corporate governance in Korea.

• There are so much wisdom that are included in this book. The author really goes into details about numerous corporate governance problems in Korea and ways to fix them.

• This book was published in January 2024 and it was written by a famous Korean retail investor called Park Young-Ok.

I recently read a book called 주주 권리가 없는 나라 (A Country Without Shareholder Rights), which is one of the best books on the corporate governance in South Korea in the past several years. This book was published in January 2024 and it was written by a famous Korean retail investor called Park Young-Ok. Several years ago, it was estimated that his investments in Korean stocks was worth more than 200 billion won (US$150 million).

There are so much wisdom that are included in this book. The author really goes into details about numerous corporate governance problems in Korea and ways to fix them. This is a fantastic book and if you are able to read Korean and follow Korean markets, it is a must read. If you are unable to read Korean, that's all right as I will attempt to capture some of the key highlights of this book. The author mentions that the overall corporate governance levels in Korea are similar to the US corporate governance levels in 1970s to 1980s so there is a lot of catching up to do.

Many of the insights that I publish on Smartkarma are related to various corporate governance issues. My regular readers are likely to be familiar with some of the key topics that Park Young-Ok includes in this book. One of the major reasons why this book is such a good read is that it does not just state the problems but also attempts to provide concrete steps to fix them.

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Top 10 Highlights of the Book 'A Country Without Shareholder Rights'

The following are the top 10 highlights of the book 'A Country Without Shareholder Rights.' For all the highlights, I classified them into two categories including PROBLEM (with Korean corporate governance) or POTENTIAL SOLUTION (which is highlighted in blue).

1) Corporate Governance Comparisons between Korea and Taiwan stock markets [PROBLEM]

In these pages, Park compares Korea versus other countries, especially with Taiwan. Korean stock market trades at much lower valuation multiples versus Taiwan. Some investors point out the risks associated with South Korea/North Korea which could result in a military confrontation. However, Taiwan also faces political risks associated with China which could also result in military confrontation.

Park points out that a key difference is that Taiwan has much better corporate governance as compared to Korea. The average shareholder return ratio for companies in TAIEX (Taiwan) is 65% which is similar to the developed markets (excluding United States) at 68% (annual average from 2012 to 2022). However, the average shareholder return ratio for Korea is just 29%. As of end of 2023, Taiwan's PBR was 2.2x versus 0.9x for Korea.

The average dividend yield of listed companies in Taiwan is 4.4%, which is nearly the double the ratio for Korean companies (2.2%). In 2021, the average dividend payout ratio of listed companies in Taiwan was 52% versus only 19% for listed companies in Korea. Therefore, the much higher dividend yield and dividend payout ratios among companies in Taiwan are key factors that result in higher valuation multiples as compared to Korean companies. (pp. 22-25).

KOSPI vs TAIEX comparison (5 years) (Source: Google finance)

2) Destroying Shareholder Value Through Physical Divisions (Split) of Subsidiaries (SK On/SK Innovation; LG Energy Solution/LG Chem; SK Bioscience/SK Chemical; Kakao Bank/Kakao Corp) [PROBLEM]

Park highlights numerous cases of destroying shareholder value through physical split of attractive companies in Korea. They include SK On/SK Innovation (096770 KS), LG Energy Solution (373220 KS)/LG Chem (051915 KS), SK Bioscience (302440 KS)/SK Chemicals (285130 KS), and KakaoBank (323410 KS)/Kakao Corp (035720 KS).

One of the key problems with the physical split of these attractive subsidiaries is that when they are listed, the parent companies' existing shareholders do not receive the appropriate distributions in ownership stakes of these subsidiaries companies. For long term investors in companies such as LG Chem and SK Innovation, when these companies decided to split off their major subsidiaries such as LG Energy Solution and SK On, this had a negative impact in their parent companies' share prices since many investors would rather invest in LG Energy Solution directly rather than through LG Chem, for example.

When the attractive subsidiaries are listed in Korea, the extra demand for shares increase for these newly listed subsidiaries but this is often offset by draining demand for shares in the parent companies. This 'double counting' issue is rarely found in more advanced countries such as the United States.

Park provides the example of Alphabet and Google. Alphabet is the holding company owning many world-class companies such as Google. However, only Alphabet is listed. If Google is also listed, this would dilute ownership and many investors would rather own just listed Google instead of Alphabet. (pp. 30-36)

5 year share price comparisons (Source: Google finance)

3) Flawed Merger Method in Korea Which Could Destroy Shareholder Value [PROBLEM]

Park highlights that the merger method for listed companies in Korea is flawed and not aligned with global best practices for M&As. According to Korean financial regulations, when two companies decided to complete a merger, the merger ratio is determined by the average of prices of one month, one week, and one day.

In comparison, in other developed countries such as the United States, Japan, Germany, and the United Kingdom, the mergers are based on 'fair market' M&A valuations that are approved by each company's board of directors. In these developed countries, the general shareholders could agree or disagree with these merger decisions. In Korea, it is awfully difficult for general shareholders to disagree with mergers since the companies that are trying to merge with other companies argue that the merger ratio is already determined by average market prices (one month, one week, and one day).

Park highlights the merger between Samsung Corp and Cheil Industries in 2015. At this time, Samsung Corp was trading at its near historical low valuations and Cheil Industries was trading at its near historical high valuations. So, when the merger was completed, it had a distinct advantageous impact on Cheil Industries' shareholders and negative impact on Samsung Corp shareholders. (pp.43-53)