Dividend Boost From Korea by Michael Han, CFA – Matthews Asia
During this year’s earnings season, South Korea investors saw major businesses significantly raise dividends. Many companies increased dividends despite softer earnings for 2015. Overall, dividends from 2015 earnings grew 20%. While surprising, this was somewhat expected when President Park Geun-hye’s administration rolled out new legislation in 2014 to discourage Korean corporations from the practice of hoarding cash by increasing dividends or boosting domestic investment.
According to the law, shareholders of companies designated as dividend achievers—which had payouts that were above average or whose dividend grew more than 30%—will see their dividend tax rate meaningfully decline from 14% to 9% over the next three years.
The National Pension Service (NPS), the nation’s largest pension service provider—which has allocated nearly US$100 billion in the Korean stock market and owns more than 5% of outstanding shares across 125 companies—has also been demanding better shareholder returns, including dividends. The NPS will reportedly release a list of “dividend underdogs” to shame the underachievers.
Despite its stellar progress in economic development and democracy over the past few decades, South Korea maintains a somewhat tainted reputation when it comes to corporate governance. Its stock market is perceived to be undervalued mainly due to poor corporate governance practices, including tightfisted payouts. Previously, the families of large conglomerates, known as chaebol, had been largely blamed for misusing minority shareholder capital while the general public (which primarily held its wealth management via bank savings or real estate) neglected the issue.
But things in South Korea are changing, and investors should not ignore the larger context behind its recent dividend boost—Korean society seems to be much more engaged in reform over the chaebol issue and corporate governance in general.
The first sign of change has been an institutionalization of the shareholder base as seen from the emergence of its large pension system, which has grown significantly over the past decade. The more sophisticated and stronger voice means more effective oversight on corporate governance.
Another sign of change has come in the form of a public outcry for “economic democracy,” characterized as limiting the family influence, commonly seen in chaebol, against minority shareholders and small businesses in recent key elections. In the 2012 presidential election, President Park’s win was largely attributable to her embrace of chaebol reform. The same slogan remains as a key agenda for April’s general election as voters are not yet satisfied with reform results.
Minority shareholder engagement in recent cases of high-profile activism has also been encouraging, as many have mobilized online. Previously characterized as momentum traders, such shareholder are getting more serious about their rights and becoming increasingly vocal.
With traditional wealth products, such as bank savings, generating marginal income for retirement, investors in South Korea are increasingly turning to the stock market as a long-term investment vehicle and becoming more engaged in corporate governance issue.
All these changes make me optimistic about the future of Korea’s corporate governance. Korea continues to be one of the most educated countries in the world, with a high level of political participation. Just as citizens rallied for democracy against military dictatorship in the 1980’s, I believe that its highly educated population and well-functioning political system should eventually help address issues of corporate governance. The benefit will be shared by the Korean public as well as investors.
Michael Han, CFA
Portfolio Manager
Matthews Asia
