Understanding the structural reasons Korean equities trade at a discount to global peers — and what the Value-Up program is doing about it.
The Korea Discount represents one of Asia's most persistent valuation anomalies, with Korean equities trading at a structural 30-40% discount to global peers on price-to-book metrics despite the country's advanced economy and world-class corporate champions. This discount has persisted for decades, frustrating both domestic and international investors who recognize the inherent quality of Korean businesses but struggle with their chronically depressed valuations.
At the heart of this discount lie several interconnected structural issues that have historically undermined investor confidence. The chaebol system, while creating industrial powerhouses like Samsung and Hyundai, has also fostered opaque corporate structures that prioritize founding family control over minority shareholder interests. These conglomerates often feature labyrinthine cross-shareholding arrangements that obscure true ownership and decision-making power, making it difficult for outside investors to assess governance quality and strategic direction.
Minority shareholder protections have historically been weak compared to other developed markets, with limited recourse for investors when controlling shareholders pursue strategies that benefit the group at the expense of individual company performance. This governance deficit has been compounded by traditionally poor capital return policies, with Korean companies maintaining some of the world's lowest dividend payout ratios and showing reluctance to engage in meaningful share buyback programs.
The complexity of cross-shareholdings within chaebols creates additional valuation challenges, as investors struggle to trace cash flows and assess the true economic value of their holdings. These circular ownership structures can dilute accountability and create conflicts of interest that further depress valuations. Combined with a corporate culture that has traditionally prioritized growth and market share over shareholder returns, these factors have created a persistent discount that has proven remarkably resistant to Korea's economic development and integration into global capital markets.
Recent data from Daljayo's comprehensive tracking of Korean equities reveals the scale of the challenge facing market reform efforts. Among the 840 companies listed on the KOSPI exchange, only 269 have filed Value-Up plans under the government's new corporate reform initiative, representing less than one-third of the market despite significant regulatory encouragement and the potential for preferential treatment from institutional investors.
The governance picture across our tracked universe of the 200 largest KOSPI companies shows considerable room for improvement, with an average governance score of just 59.4 out of 100. This relatively modest score reflects persistent weaknesses in areas such as board independence, disclosure quality, and minority shareholder protections that continue to weigh on investor sentiment.
These figures underscore the magnitude of the structural changes required to meaningfully address the Korea Discount. While nearly one-third participation in the Value-Up program represents a reasonable start, the governance scores suggest that many companies still have substantial work to do in rebuilding investor confidence through improved transparency and accountability measures.
Launched in 2024, the Financial Supervisory Commission's Corporate Value-Up Program represents the most ambitious attempt yet to address the Korea Discount, drawing explicit inspiration from the Tokyo Stock Exchange's successful governance reforms that helped revitalize Japanese equity markets. The program establishes a comprehensive framework designed to incentivize companies to improve their governance practices and capital allocation policies through a combination of regulatory guidance and market-based rewards.
The program centers on five key criteria for inclusion in a new value-focused index that will receive preferential attention from institutional investors, particularly the National Pension Service, Korea's largest domestic investor. Companies must demonstrate meaningful improvements in return on equity, showing they can generate sustainable profits relative to shareholder equity. They must also commit to enhanced shareholder return policies, including more generous dividend payments or systematic share buyback programs that return excess cash to investors rather than hoarding it on balance sheets.
Corporate governance improvements form another crucial pillar, with companies expected to strengthen board independence, improve disclosure practices, and implement more robust oversight mechanisms. The program also emphasizes strategic focus, encouraging companies to divest non-core assets and concentrate on their most profitable business segments. Finally, companies must provide clear, quantitative disclosure of their value enhancement strategies, moving beyond vague promises to specific, measurable commitments.
The disclosure requirements represent a particularly significant shift for Korean companies, which have traditionally provided limited visibility into their strategic thinking and capital allocation priorities. Under the Value-Up framework, participating companies must publish detailed plans explaining how they intend to improve shareholder returns, including specific targets for financial metrics and timelines for achieving their objectives. This enhanced transparency is designed to help investors better understand and value Korean companies, potentially reducing the information asymmetries that have contributed to persistent valuation discounts.
Despite the relatively recent launch of the Value-Up program, early indicators suggest that Korean companies are beginning to respond to reform pressures, with meaningful improvements visible across several key metrics tracked by Daljayo's platform. Among our universe of tracked companies, 102 now score 60 or higher on governance measures, indicating that roughly half of major KOSPI companies have achieved what could be considered acceptable governance standards by international benchmarks.
More encouraging still, 59 companies have achieved governance scores of 80 or above, demonstrating that a significant minority of Korean firms have embraced best practices in areas such as board composition, disclosure quality, and minority shareholder protections. These high-scoring companies often serve as bellwethers for broader market trends, suggesting that governance improvements may be gaining momentum across the Korean corporate sector.
Capital return policies, long a source of frustration for international investors, also show signs of improvement. A substantial 130 companies in our tracked universe have increased their dividend payments, representing a meaningful shift away from the cash-hoarding behavior that has historically characterized Korean corporates. Additionally, 67 companies have implemented active share buyback programs, providing alternative mechanisms for returning capital to shareholders and signaling management confidence in their business prospects. These developments suggest that Korean companies are beginning to internalize the message that improved capital allocation can drive higher valuations and attract international investment.
For global investors considering Korean equities, the evolution of the Value-Up program offers both opportunities and important monitoring points that will determine whether this reform effort succeeds where previous initiatives have fallen short. The most critical metric to track will be the expansion of participation beyond the current 269 companies, particularly whether second-tier firms begin to embrace reform principles or whether improvements remain concentrated among the largest, most internationally visible names.
Governance score progression represents another key indicator, with investors should watching for sustained improvement in the average 59.4 score across the broader market rather than just among early adopters. The 102 companies currently scoring above 60 need to expand meaningfully for the discount to narrow substantially, requiring cultural shifts that extend beyond cosmetic compliance measures to genuine changes in corporate behavior and accountability.
Capital return trends deserve particular attention, as the 130 companies that have increased dividends and 67 implementing buybacks represent encouraging but still incomplete progress. Investors should monitor whether these capital return improvements prove sustainable and spread to additional companies, or whether they represent temporary responses to regulatory pressure that may fade without continued oversight.
The ultimate test will be whether these reforms translate into measurable valuation improvements and increased international investor participation in Korean markets, potentially beginning to close the persistent discount that has long defined Korean equities in global portfolios.