So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.
In this section
But the prime cause of the discount is more likely to be poor corporate governance at the family-run chaebol conglomerates that dominate the economy. Nefarious schemes to pass on control to sons, avoid taxes and exploit company assets for the benefit of family members are widely discussed in private. They are also lambasted abroad: a 2010 survey by CLSA, a broker, placed the country third-from-bottom in Asia on governance, ahead of only Indonesia and the Philippines. . .
Other allegations are even more serious. On February 3rd, 2012 Hanwha Group announced in a regulatory filing that its chairman, Kim Seung-yeon, was among several officials being investigated for alleged embezzlement. Chey Tae-won, the chairman of SK Group, was indicted in January over the disappearance of 99 billion won from company coffers, as part of a scheme allegedly planned by his brother to cover futures-trading losses. Mr Chey denies the charges. The Federation of Korean Industries, a chaebol pressure group, has urged prosecutors to go easy on Mr Chey. They say that punishing him would harm “entrepreneurial spirit”.What do you think?
Mr Chey has had previous scrapes, having been convicted of a billion-dollar accounting fraud in 2003. He eventually received a full pardon from the president and was also chosen to represent the nation during the 2010 G20 summit, leading a meeting of international chief executives. Lee Kun-hee, the chairman of Samsung, received a similar pardon in 2009, having been found guilty of tax evasion, and was picked to front South Korea’s bid for the 2018 Winter Olympics. Yujeon mujwai, mujeon yujwai—an old expression meaning “money = innocence, no money = guilt”—is enjoying a resurgence in popularity.
Sean Hayes may be contacted at: SeanHayes@ipglegal.com.
Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the only non-Korean to have worked as an attorney for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty.