With nearly half of domestic listed corporations trading below a price-to-book ratio (PBR) of 1, experts said the way to resolve this is to lift return on equity (ROE) relative to the cost of equity (COE). A PBR below 1 means a corporation's market value falls short of even its liquidation value.
The office of lawmaker Kim Hyeon-jeong of the Democratic Party of Korea and the Korea Corporate Governance Forum held a discussion session titled "Capital market advancement plan through mandatory disclosure to enhance the value of listed corporations with PBR below 1" on the 16th at the National Assembly Members' Office Building in Yeongdeungpo-gu, Seoul, and discussed these points.
The session was arranged to discuss concrete measures to enhance the effectiveness of the so-called "stock price normalization act," a proposed amendment to the Financial Investment Services and Capital Markets Act introduced by Kim for the second consecutive year to mandate value-enhancement disclosure for corporations with PBR below 1.
Kim Woo-jin, a professor in the business administration department at Seoul National University, and Kim Hyeong-gyun, head of division at Tcha Partners Asset Management, who presented as lead speakers, emphasized that COE and ROE should be specified to secure the effectiveness of value-enhancement disclosures. COE refers to the cost of raising capital, and ROE refers to profitability generated using shareholders' equity.
Professor Kim said, "In Korea, corporations have been evaluated mainly on traditional indicators such as sales, operating margin, and debt ratio, but there has been a lack of focus on profitability relative to capital invested," adding, "A lack of awareness of capital profitability relative to the cost of capital is a key reason for depressed PBRs."
Two main reasons were cited for persistently low PBRs: when an industry itself loses competitiveness or has weak capacity to generate future revenue, and when a corporation manages the capital it has earned inefficiently.
Industries that are structurally low in ROE—such as wireline and wireless communications, electricity and gas, utilities, minerals, paper, and aviation—fall into the former and can be seen as having structural limits, but cases where sufficient profit is earned yet fails to translate into shareholder returns or efficient investment, thereby raising the cost of capital, require improvement.
Citing Japan, Kim, the head of division, said, "It is important to present the current levels and targets for ROE and COE and to disclose concrete implementation measures and timelines." Since introducing value-up disclosures, Japan has seen the share of corporations with PBR below 1 on the Prime Market fall sharply from 50% in 2022 to 27% in 2026.
There was also an opinion that incentive design aligning the interests of controlling shareholders and general shareholders is needed to enhance effectiveness. Given the structure of domestic corporations, where controlling shareholders have substantial influence, it is important to design their incentives appropriately.
In the discussion, attorney Gu Hyeon-ju of law firm Hannuri proposed a decision-making structure to enhance the effectiveness of value-enhancement disclosures. He explained that if the board of directors is clearly set as the approving body for the disclosure plan, more effective disclosure is possible based on directors' duty of loyalty to shareholders. He also added that, considering the timing of overseas shareholders' exercise of voting rights, it is necessary to set the submission of disclosures to two weeks before the regular general shareholders meeting.
However, Lee Hyo-seop, head of the financial industry division at the Korea Capital Market Institute, agreed with the purpose of the bill but emphasized that a cautious approach is needed to mandatory implementation. He said, "KOSPI has many industry groups that are structurally bound to have low PBRs," adding, "If mandated by law, quantitative improvement may be possible, but the qualitative level could suffer; therefore, it is desirable to provide incentives to outstanding corporations."