Executive Summary:
- Asia’s valuation gap is not just macro—it is also influenced by governance factors. Ongoing concerns about minority protections, disclosure quality, related-party risks, and idle surplus cash may continue to weigh on investor confidence and valuations versus global peers.
- A new phase may be underway. Parts of Asia—especially North Asia—are advancing corporate governance reform beyond compliance toward outcome-based expectations focused on return on equity (ROE), capital efficiency, and market value management, encouraging boards to make capital choices explicit, measurable, and defensible.
- Why it matters now: re-rating potential, but outcomes will vary. With cash still abundant and buybacks/dividends rising, companies that match stronger governance with credible capital allocation can earn a lower risk premium and higher sustainable returns on capital—creating a selective opportunity that requires active research and stewardship may help distinguish substantive change from box-ticking.
1. Introduction: From “Asia Discount” to Value Creation, and Future of Stewardship
Asian equities have long traded at a structural discount versus global peers, reflecting persistent investor concerns around capital allocation, minority protections, disclosure quality, and related-party risks among other macroeconomic and structural factors. Part of this “Asia Discount” is also a legacy of corporate history. After the late-1990s Asian Financial Crisis, many companies that survived shifted toward balance-sheet conservatism, prioritizing resilience and surplus cash over higher returns. In parallel, ownership and control structures in parts of Asia have often meant that management or controlling shareholders set objectives that can at times differ from those of minority investors.
The region has made meaningful progress on governance over the past decade, yet gaps remain. Governance matters because it underpins investor confidence, capital market development, liquidity, and sustainable growth. When governance improves—particularly around capital discipline and accountability—companies can earn a lower risk premium, support stronger returns on capital, and ultimately support higher valuations.
Since 2023, a notable shift has emerged in parts of North Asia: regulators are placing greater emphasis on outcome-oriented frameworks that prioritize ROE, capital efficiency, and valuation uplift. The opportunity is not “less conservatism at any cost,” but a more explicit and accountable balance between corporate resilience and shareholder returns.
Did you know?
- Surplus cash remains widespread across many Asian companies, creating scope for clearer capital frameworks and shareholder return policies where appropriate. In Japan, nearly 50% of listed Japanese companies (excluding financials) 1 currently hold net cash positions, far exceeding the mid-teen percentages in Europe and the U.S.
- Japan and Korea have seen increased buybacks and rising payouts, alongside steps to unwind crossholdings and strengthen boards. Japan’s buybacks have more than doubled since 2018, and payout ratios have risen from ~40% to over 70%.2
- In China, major Chinese companies are increasing buybacks and payouts, with some (e.g., the energy company Sinopec) raising payout ratios from ~50% to over 75% in five years3.
Austin Forey (EMAP Portfolio Manager): Why this matters now
“Asia’s conservatism is rooted in post-crisis resilience. The next phase involves making capital choices explicit and accountable. When boards can clearly justify allocation—and show it through disciplined reinvestment or shareholder returns — the market can reward them with a higher sustainable ROE and a lower governance discount.”
2. Catalysts and Latest Development: The Shift from Box-Ticking to Outcomes
Why governance may support returns
Strong governance strengthens shareholder rights, management accountability, and disclosure, helping attract long-term capital. Over time, empirical evidence generally suggests that better-governed companies may benefit from higher valuations, lower cost of capital, and greater resilience, while governance failures can be associated with abrupt and lasting value destruction and reputational damage.
How governance shows up in return
- Capital allocation discipline and balance-sheet efficiency: Stronger governance prompts clearer decisions on excess cash and non-core assets, potentially helping companies deploy capital more effectively—either into higher-return investment or dividends and buybacks. Over time, this can lift ROE/return on invested capital (ROIC), support higher valuations, and reduce the governance risk premium.
- Board accountability and minority protections: Stronger fiduciary expectations reduce the risk of value-destructive relatedparty transactions and empire building, potentially improving confidence in cash-flow allocation
- Market value management: Boards are increasingly expected to address valuation gaps with tangible actions—improving disclosures, setting capital policies, and demonstrating execution.
Example of Governance (G) factors performance
Improvements in the governance ecosystem—often enabled by policy support—may help support overall market quality and lower governance risk (beta), while stronger firm-level governance practices tend to improve shareholder outcomes, expanding the opportunity set for alpha through active selection; Asia’s wide dispersion underscores that governance remains a meaningful differentiator, particularly in less mature markets and in markets undergoing policy-led governance upgrades.
Common challenges today in Asia
While market structures differ, recurring governance frictions in Asia mostly include:
- Board independence: Many Asian companies continue to face challenges in establishing genuinely independent boards, often due to dominant founders or controlling shareholders. For instance, in Korea, despite the Value Up program's clear goals, its chaebol-dominated corporate structure (family-controlled groups with complex holding structures) and barriers like inheritance tax make change slow and uneven, as family-controlled groups may be slower to simplify holding structures or expand minority shareholder influence.
- Group complexity/related-party risks: Cross-shareholdings, listed subsidiaries, intra-group dealings can dilute minority rights. In Japan, cross-shareholdings and listed subsidiaries have been persistent issues, potentially contributing to poor corporate governance, inefficient capital allocation and management entrenchment.
- Disclosure quality: Inconsistency and opacity can hinder investor analysis and engagement.
- Objective mismatch: Shareholders often prioritize returns and efficiency, while management may also prioritize scale, optionality, or survivability — contributing to excessive holding of cash and overly cautious payout commitments, mainly where policy objectives also shape outcomes (e.g. certain China state-owned enterprises (SOEs)).
- China/Greater China implementation constraints: For some issuers, onshore/offshore cash mobility and competitive “game theory” incentives to hold larger cash buffers can limit capital return capacity. Re-rating can be more achievable where capital-return mechanisms are practical, and industry structure supports discipline.
Outcome-focused regulation and a growing domestic investor base are raising expectations for transparency and capital discipline. Where reforms are sustained and executed well, governance improvements can support re-rating via higher cashflow visibility and lower perceived agency risk.
3. Regional Deep Dive: Distinct Paths, Shared Destination
Institutional investors are increasingly using proxy voting and direct engagement to support governance improvements. Stewardship codes and collaborative initiatives also help set clearer expectations and reinforce market credibility.
Japan: Demonstrating the power of sustained reform
Japan illustrates how regulatory leadership, market incentives, and investor engagement may influence corporate behaviour. Starting with the introduction of the Corporate Governance Code in 2015 and subsequent stewardship initiatives, Japan has seen improvements in board independence, capital allocation, and shareholder engagement.
- The introduction and tightening of the Corporate Governance Code and Stewardship Code since 2014-2015 established clearer expectations around board effectiveness and capital efficiency, while investor engagement and activism intensified. Institutional investors and asset owners are demanding change through proxy voting and corporate engagement. The Tokyo Stock Exchange (TSE) has reinforced this with reforms aimed at improved transparency and accountability.
- The TSE’s push for companies trading below book value to publish capital-efficiency plans has helped accelerate buybacks, dividends, and cross-shareholding unwinds. The improvement in price-to-book (P/B) ratio is clear; however, ROE remains low by global standards, highlighting the need to further streamline excess cash, reform business portfolios, and accelerate investment for growth.
- Ongoing Code updates are sharpening board oversight of capital allocation, including clearer expectations on how cash and other business resources are deployed to support long-term value creation.
As a result, Japan has benefited from increased foreign investment, improved company performance, and a narrowing of the valuation gap with global peers.
Engagement case study: Sumitomo Electric Industries (illustrative)4
In 2024–2025, we engaged with the Japanese cable manufacturer Sumitomo Electric to address capital efficiency and minority shareholder concerns linked to cross-shareholdings, listed subsidiaries, and portfolio complexity. We encouraged a clearer plan to reduce cross-shareholdings, strengthen shareholder returns, improve transparency on the use of asset-sale proceeds, and enhance board independence and diversity. The company subsequently committed to halving cross-shareholdings, simplified parts of its listed-subsidiary structure (including acquiring Sumitomo Riko and divesting Sumitomo Densetsu), and began refreshing the board. Sumitomo Electric delivered strong earnings growth, re-rated and outperformed the market over the year 2025.
South Korea: Value Up—policy tools supporting better outcomes
Korea’s Corporate Value Up agenda aims to narrow the “Korea discount” by supporting shareholder returns and strengthening minority rights and board accountability. Measures include proposed Commercial Act changes (fiduciary duty/minority protections), tax incentives for payouts, and advocacy for treasury share cancellation to make buybacks more effective.
Early progress includes more Value Up disclosures, improving payout practices, stronger audit committee independence, and gradual moves to simplify chaebol structures. Some market leaders are setting explicit capital return policies (payout targets and consistent buyback execution), communicating capital allocation more clearly, and—especially for financials—defining operating capital ranges. Examples include certain Korean financial institutions that proactively manage capital rather than simply retaining excess capital. Engagement with regulators can be especially impactful where constraints are structural, while peer pressure and domestic activism are helping reinforce momentum.
ASEAN: Liquidity, disclosure, and stewardship momentum
Singapore: Reforms are accelerating, combining liquidity initiatives with a stronger focus on transparency and shareholder value. In 2025, Singapore Exchange (SGX) average daily turnover rose 20% year-over-year to SGD 1.5billion (the highest liquidity since 2010), and Singapore’s five-year total return outperformed APAC benchmarks. The central bank and financial regulator Monetary Authority of Singapore (MAS) has also launched the SGD 6.5billion Equity Market Development Program (EQDP)5 to deepen liquidity, broaden the investor base, improve research coverage (especially small-and mid-caps), and support quality listings. A parallel “Value Unlock” agenda is encouraging better guidance and disclosures, with potential for more explicit shareholder-value related disclosures (e.g., dividend and investor relations policies.
Thailand: Governance is improving steadily through stronger board practices, growing stewardship adoption, and enhancements in audit, independence, risk oversight, skills matrices, and remuneration transparency.
Across ASEAN and emerging markets overall, regulators are increasingly using market valuation and liquidity incentives (drawing lessons from Japan), alongside regional best practices such as digital disclosure upgrades and convergence in ESG reporting and board evaluation frameworks.
Greater China: Market value management and SOE incentives
China’s governance toolkit is evolving through SOE KPI reforms (greater focus on ROE and operating cash flow) and “market value management” expectations. The China Securities Regulatory Commission’s (CSRC) late 2024 guidance broadened the playbook—dividends, buybacks, employee stock ownership plans (ESOPs), and improved disclosure—and further facilitation of onshore/offshore cash mobility could support capital returns for offshore-listed structures.
More broadly, we are seeing higher SOE dividend propensity, more active buyback frameworks, and closer board alignment with market outcomes—though cash-return translation is typically strongest in more consolidated industries and can be accelerated by generational transitions toward more formalized capital policies (e.g. the Chinese home appliance group Midea6 is one example of a comparatively smooth transition). That said, implementation remains uneven, and the translation into sustained, market-wide capital returns still lags other Asian markets.
4. Investment Implications and What’s Next
The re-rating opportunity
If governance reforms persist and companies execute, stronger capital efficiency can support multiple expansion as discounts fade. Japan illustrates this direction of travel: improved board practices and shareholder engagement have coincided with record buybacks and stronger dividends, and reform leaders have seen ROE and valuations improve. Better capital allocation can also raise underlying returns on capital—not just near-term payouts—particularly where starting valuations are low. More recently, Japan’s return on assets (ROA) has caught up to global peers, total buyback amount is at historical high, and dividend growth has outpaced the U.S. and Europe. Companies that successfully reform (e.g. Sony and Hitachi6), have seen marked improvements in ROE and valuations.
Differentiation matters
We focus on separating true capital discipline from more procedural or compliance-led approaches (i.e. distinguish the leaders from the laggards). The objective is a sustainable balance between shareholder returns and corporate resilience: excessive leverage can destroy value, while structurally over-cautious balance sheets can depress returns for years. The right answer depends on industry cycle length, competitive intensity, and the company’s confidence in its competitive positioning. Key risks include uneven implementation and the challenge of translating policy into culture.
How we apply this in portfolios and stewardship
We integrate governance signals—cash levels, payout frameworks, board independence, related-party oversight, cross-shareholdings, and buyback quality—into research and engagement. Engagement is not about prescribing decisions; it is about securing clear, investable explanations and measurable commitments, including: definitions of excess cash and target ranges; capital allocation priorities and reinvestment hurdles; buyback follow-through (and cancellation where relevant); stance on dilution; timelines for group simplification; and board accountability for capital outcomes. Our role is to engage with management to articulate why their capital allocation choices are optimal versus credible alternatives—and how they will be different from peers if outcomes lag. We use voting and escalation where progress stalls.
What are we watching
- Regulatory follow-through and board-level KPIs tied to ROE and cash returns
- More decision-useful disclosures
- Rising stewardship/activism across Japan and Korea, ongoing SOE reforms in China, and ASEAN convergence toward stronger board and disclosure standards.
1 Source: FactSet, Data compiled by Goldman Sachs Global Investment Research. As of May 20 2025. Provided for information only to illustrate macro trends, not to be construed as offer, research or investment advice.
2 Source: Goldman Sachs, J.P. Morgan Asset Management. YTD data as of December 31 2025. Provided for information only to illustrate macro trends, not to be construed as offer, research or investment advice.
3 Source: Wind, FactSet, Goldman Sachs Global Investment Research, J.P. Morgan Asset Management. Data as of December 2025. The companies/securities included are shown for illustrative purposes only, the information stated should not be construed as offer, research, or recommendation to buy or sell.
4 Source: Stewardship report as of 31 December 2025. The case studies and examples are provided for illustrative purposes only and may not be updated in the future. While we view engagement as an important part of understanding the risks and opportunities facing companies held in our client portfolios, such engagement may not be effective in identifying such risks and opportunities and we do not guarantee any particular results or company performance as a result of such engagement.
5 Source: SGX, Bloomberg, as of March 2026. Past performance is not indicative of future performance.
6 The companies/securities included are shown for illustrative purposes only, the information stated should not be construed as offer, research, or recommendation to buy or sell
Conclusion
We believe active management and disciplined stewardship are key to capturing Asia’s governance-driven opportunity. Our approach is research-led and consistent: we identify companies making credible progress, and engage with clear priorities—capital return frameworks (including payout targets and buyback follow-through), cross-shareholding simplification, and board refresh timelines—backed by defined escalation where progress stalls. By combining fundamental analysis with a structured governance lens, we aim to unlock durable value creation for clients.