Can South Korea’s Corporate Governance Reforms Unlock Lasting Value?

During their recent episode, Taylor, Carlisle, and Ryan Albert discussed Can South Korea’s Corporate Governance Reforms Unlock Lasting Value?. Here’s an excerpt from the episode:

[Ryan] I think the bear case is simply one of the things that I mentioned earlier, which is there’s no precedence. So it will take a while for precedence to happen and maybe foreign investors give up or get tired of all this before the precedence actually come into effect. You have 50 percent of the market plus in two companies and they’re pretty phenomenal businesses, but they are inherently cyclical.

Don’t tell the market that. And I also think a lot of these changes will happen in 2027. So in an increasingly short-term minded market, investors might just not be patient to wait for this and then stuff gets delayed.

It might be 2028 and then investors are just don’t have increasingly less patience. On the flip side, that’s great for investors that have patience. And I do think this change is credible.

So I think the bear case is simply what I mentioned. I do think it’s almost like going from horse carriage to cars. You don’t really go backwards very quickly on these governance reforms, although maybe our discussion of Western markets going backwards on governance, maybe you need decades to reach that point.

But I do think when you’re just starting out this early and you put so much political power into passing this and making it a pillar of kind of the Democratic Party in Korea, it’s hard to see how this goes backwards anytime soon. It’s just more when it’s enacted and if the biggest businesses in Korea will maybe not bring down the rest of the market with it. I would say those are the primary bear cases right now.

[Jake] So the bull case is Japan and the bear case is Japan.

[Ryan] It just depends on the timing. And we’ll see if it’s bull or bear as well. I’ve yet to crunch the numbers, but Korea is still technically an emerging market based on MSCI standards, and it’s actively trying to change that.

So it’s most likely going to be up for reelection or up for developed market status, if I’m not mistaken, middle of next year. So then it would come in effect 2028 or 2029. So if that happens, that could potentially be huge.

But then also if it’s trying to slot in with a bigger market, it actually might be negative short term. But I think longer term, it’s probably better. So those are some other factors that could provide a medium to longer term boost for the general market.

[Jake] Yeah, you might almost want to stay EM classification if there’s a rotation, and if developed markets sell off and then you get stuck in that bucket.

[Ryan] Exactly. And then there’s also such a huge concentration of EM flows alongside Taiwan and China that they might become a smaller portion of developed market flows. So
I’d say that’s the bear case.

The bear case is simply this gets delayed and there is no real precedence. Let’s just say the precedence that are established are not maybe as strong as investors would like. Maybe because there’s just like political influences.

But at the end of the day, it’s still a society that was built by many great families and created these big businesses. So it’s always a tension to kind of want them to change and force them to change. But hard to beat being a fundamental value investor in these markets when you can find amazing businesses at just ludicrously cheap prices and where their core operational business is good.

And they are making changes, right? They are making changes to make minorities more and more on level footing. So that’s why I’m still optimistic about it all and trying to play a role myself.