Commercial Act Reforms Boost Korean Stocks, But Governance Loopholes Persist

South Korea's KOSPI index has surged over 100% in the year since the first amendment to the Commercial Act took effect, marking a significant turnaround for a market long plagued by the "Korea Discount." The law, implemented on July 22 last year, expanded the fiduciary duty of company directors to encompass shareholders, aiming to curb entrenched controlling shareholder-centric management practices.

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The pressure that was holding it down has been released, and the balloon has sprung up from the water. The amendment to the Commercial Act has caused the Korean market, which was suppressed due to governance issues, to surface.

Capital market experts widely agree that the legal reforms have positively impacted stock prices. One legal expert likened the Korean stock market to a balloon pressed underwater, which "springs up" once the pressure is released. The amendments, along with subsequent revisions mandating the cumulative voting system and expanding the separate election of audit committee members, are seen as having lifted the market from its suppressed state.

Professor Kim Woo-jin of Seoul National University estimates that the Commercial Act amendments contributed between one-third and half of the KOSPI's rise. Data shows that before the semiconductor rally gained momentum in September last year, the overall KOSPI index outperformed even single semiconductor stocks, suggesting that the legal reforms were a primary driver of market growth in the preceding months.

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It is difficult to quantify, but we estimate that one-third to half of the KOSPI's rise can be attributed to the Commercial Act amendment.

However, the core objective of the amendments was not merely to inflate stock prices but to fundamentally reform corporate governance. On this front, opinions are divided. Lee Nam-woo, chairman of the Korea Corporate Governance Forum, notes that while companies recognize the necessity of the reforms, many listed firms with controlling shareholders are actively seeking ways to maintain their existing management styles. Lee Chang-min, a professor at Hanyang University, points to a trend in this year's general meetings of shareholders that runs counter to the law's intent, specifically regarding the entry of minority shareholder-nominated directors to boards.

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Companies have become more aware of the necessity of the Commercial Act amendment, but many listed companies with controlling shareholders are continuously seeking alternative methods to maintain their existing management practices.

Analysis by the Center for Economic Reform reveals that 32 out of 200 large listed companies have amended their articles of incorporation to introduce or reduce the maximum number of directors, while 27 have proposed extending director terms or allowing flexible terms. The center interprets these moves as attempts to weaken the impact of the cumulative voting system, set to be introduced in September. Notably, such maneuvers have been prominent within conglomerates like Hanwha and Hyosung. The Korea Economic Institute's 2026 Korea Economic Report also acknowledged the reforms' positive effect on investor sentiment and reducing the "Korea Discount" but cautioned that their ultimate impact depends on effective implementation by companies, as defensive practices could still be used to favor controlling shareholders.

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The reforms have supported investor sentiment and reduced the 'Korea Discount,' but their impact ultimately depends on whether companies effectively implement them. Defensive practices by some companies can still be utilized for the benefit of controlling shareholders.