Activism's blitz: a failure of strategy or a gap in value?
Recently in Korea's capital markets, activism is quickly becoming routine. Amendments to the Commercial Act and value-up policies are strengthening shareholder rights and board accountability, further heightening market oversight of corporate management. In practice, global activist funds continue to press domestically listed corporations for bigger dividends, share cancellations, and business restructuring, and at some corporations this has expanded to demands for board overhauls and management changes.
Behind this shift is a structural change in investor expectations. Boston Consulting Group (BCG)'s Investor Perspectives Series shows that investors are demanding both short-term performance and growth investment along with active capital allocation. Activism is less a strategy of specific investors than a result that reflects heightened market expectations.
Even so, many executives see it as external pressure. But the essence of activism lies not in strategy but in a gap in value. According to global activist campaigns analyzed by BCG's ValueScience® Center in Dec. last year, about 48% of all campaigns focus on the so-called "undervalued zone," where total shareholder return (TSR) and valuation are both low.
If this gap is left unattended, the risk becomes reality. The likelihood of a chief executive officer (CEO) change rises by about 24%, and many corporations experience a relative TSR decline within a year after activist intervention.
◇ Quiet value erosion, a trap leaders easily fall into
The problem is that value damage does not surface like a crisis. Corporate value weakens gradually through repeated executive decisions rather than collapsing abruptly.
Conservative guidance, for example, is stable in the short term but signals lower growth expectations in the long term. BCG's recently released The CEO's Value Test: Think Like an Activist, Deliver Like a Leader shows that investor expectations have already changed. More than half of investors demand both performance delivery and growth investment, and 36% put a higher priority on growth than on short-term results. By contrast, the share that focuses only on short-term performance remains in the 10% range.
If corporations fail to clearly explain their value-creation story, the market interprets it for them, and the perceptions formed in this process do not change easily. A structure in which strategy, finance, and investor communications are separated also widens this gap. What is needed in this environment is not defense but a shift in perspective. BCG stresses that CEOs should think like activist investors.
The key is to structurally understand the components of corporate value. One must be able to explain how revenue growth, profitability, valuation, and capital allocation connect to corporate value, and the entire management team needs to align under a single value-creation agenda.
Understanding investors is also important. Investors assess short-term returns and long-term growth by different standards, and accordingly a corporation's strategy message can differ. Performance management systems likewise need to be redesigned so that KPIs and incentives link directly to corporate value.
◇ Proactive proof of value, the K-discount, and the CEO's choice
The most effective way to block activism is not to build a separate defense strategy. Rather, it is important for management to prove corporate value before activist investors raise issues.
BCG's analysis finds that the fate of activist campaigns is set within the first 90 days. During this period, market reactions diverge sharply depending on whether a corporation shows clear strategy and execution. In the end, speed and clarity act as the key variables in an activist phase.
This trend offers important implications for Korean corporations. Although many corporations currently have strategies, they still show limits in explaining them in a form the market can understand. Investor communications are limited, and performance management systems often remain focused on internal efficiency. As a result, a gap arises between a corporation's intrinsic value and market evaluation, leading over time to a valuation discount. That is why many say a significant part of the "K-discount" stems from this structure.
Activism is no longer an event that can be avoided. As market structures change, it is becoming a management environment that corporations must continuously face. In the end, the choice left for management is clear: be pulled along by market demands, or get ahead by defining and proving value on their own.