In brief

• Corporate governance reforms in key Asian markets offer long-term investment opportunities.
• Japan and Korea have both made a major push towards reform programs aimed at improving governance and shareholder value, which have already seen some success and generated excitement.
• These corporate governance plans are a work in progress and will take time, but they are likely to enhance the earnings outlook and attract long-term investors.

There are several investment themes that could drive long-term return opportunities across Asia, such as a wealthier middle class, automation, shifting supply chains etc. However, a major theme is the drive for improving the value in equity markets through changing corporate governance, with Japan and South Korea being key examples of markets where this has been happening. 

Japan leads the way on corporate governance

The ongoing improvement in corporate governance as announced by the Tokyo Stock Exchange (TSE) last year has been a tailwind for Japanese equities, with the Japanese equity market seeing steady gains, even in the face of less-than-spectacular economic results. The overarching objective of the reforms is to encourage individual companies to disclose the status of their value enhancement measures and in turn drive greater profitability and value for shareholders. By revealing companies who aim to improve shareholder value, the TSE hopes to draw attention in the hopes that other companies may follow suit.

Japan is further advanced than other Asian markets, and the changes have resulted in concrete improvement across some metrics. There have been increased dividends, a pick-up in stock buybacks, reductions in cross shareholdings, and other factors that have helped improve notoriously low return-on-equity (ROE) and price-to-book ratios across benchmark indices. However, there is still some way to go to match the comparable measures of a higher quality market, such as ROE of other developed equity markets.

South Korea takes inspiration

Japan is not the only Asian country seeking to improve stock valuations through better management practices and structural reforms.

Elsewhere in the region, Korea is seeking to improve corporate governance and shareholder engagement to reduce the long-standing “Korean discount” through a “corporate value-up program” unveiled in February 2024. 

The “Korea discount” is a peculiarity where Korean companies trade at a discount compared to their similar counterparts in other markets. There are several possible reasons for this, however, the most common cited reason is the lack of strong corporate governance culture with less emphasis on the importance of minority shareholders. Removing this feature and further developing local capital markets would be an easy priority.

Similar to Japan, the “value-up” program plans to encourage companies to assess their relative low valuations and provide remedies. This may include enhancing shareholder disclosures, increasing shareholder returns through dividends, share buybacks and enhancing operating performance.

However, Korea does approach the issue in different ways. While there has been progress on some issues to improve governance, such as providing disclosures in English, it is still seen as lagging a bit behind Japan’s example. Japan’s reforms are seen as more developed, with a clear road map to raising shareholder value. Korea’s plans lean towards being far more voluntary and self-initiated. It encourages companies to disclose their plans and strategies to enhance value, but a criticism is that any reveals are voluntary. There are no penalties for failing to meet revealed goals and little regulatory enforceability through punishments or rewards.

As part of efforts, Korea also intends to launch a Value-Up Index with associated exchange traded funds around September. The index aims to include companies with “best practices”, and thereby hopefully shine a positive spotlight on better performers and drive inflows into a strong thematic product.

At the start of July, some more details as part of “Value-up” were revealed, with draft laws focusing on cutting several tax rates. The tax changes have been received positively by investors, but still need to be finalized by the government.

Source: FactSet, MSCI, J.P. Morgan Asset Management. Data are based on respective MSCI data. Data reflect most recently available as of 30/06/24.

The voluntary nature of the program has created some skepticism over its success. But changes such as this will take many years to fully mature and there is a long road to match developed markets. In Exhibits 1 and 2, we can see the improvement in some metrics compared to ten years ago. 

Investment implications

The positive prospects of reforms, solid earnings growth outlook and valuations currently sitting near the long-term average present opportunities for long-term investors who are seeking exposure to the Asian market.

These corporate governance plans will likely enhance the earnings outlook, thereby attracting long-term investors into the market, particularly as more investors pay attention to this space with Japan’s ongoing improvement on corporate governance and Korea’s recent corporate value-up program announcement. 

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