South Korea's dormant stewardship code needs revival, experts say

South Korea's capital market is at a critical juncture, needing to awaken its decade-long dormant stewardship code to drive corporate governance reform. Experts believe the Financial Services Commission and the National Pension Service are pivotal in this endeavor, holding the keys to revitalizing the code and reshaping market practices.

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The key lies with the Financial Services Commission, which designed the code, and the National Pension Service, which will lead its implementation.

The stewardship code, introduced in late 2016, serves as a guideline for institutional investors to fulfill their fiduciary duties as custodians of client funds. However, it has remained largely inactive for the past ten years without revision. With the recent amendments to the Commercial Act establishing the framework for corporate governance reform, the focus now shifts to the "implementation enhancement" of the stewardship code, a soft regulation.

A private expert committee under the Korea ESG Standards Institute finalized a revised code on July 24, marking the first update in a decade. This revised code is slated for full implementation starting in 2027. Participants in a recent forum, including Democratic Party lawmaker Kim Nam-geun, Ryu Young-jae, CEO of ESG consulting firm Sustinvest, and Park Yu-kyung, former head of responsible investment for Asia-Pacific at APG Asset Management, acknowledged the significant shift in South Korea's corporate governance and capital market driven by the past year's reform efforts.

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The introduction of the duty of loyalty to shareholders for directors was an essential issue that I thought would take 30 years, but it was resolved head-on.

Despite these advancements, concerns linger about the complete resolution of the "Korea Discount." Ryu noted that the recent surge in the KOSPI index might be a temporary effect of the semiconductor supercycle, warning that underlying issues, such as the composition of boards of directors lacking independence and expertise, require substantial time to address. Park emphasized that while laws and regulations have changed, embedding these reforms into market practices is just beginning, highlighting the importance of preventing any regression.

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The distrust of foreign investors, who used to say it was difficult to recover profits through duplicate listings or mergers of affiliates even if they succeeded in their investments, is changing to trust as they see the institutional reforms.

Disagreements surfaced regarding the revised code's effectiveness. Ryu praised the expanded asset scope, inclusion of collaborative engagement, reflection of ESG factors, and the introduction of an implementation review system. However, he stressed that the "effectiveness" is a separate issue from the "institutional design" for implementation. Park expressed a starker view, stating, "If it continues like this, it will fail." She argued that the code's inactivity stemmed from a lack of governance, with the immense task of changing market practices being delegated to a private institution, the Korea ESG Standards Institute. Both the Financial Services Commission and the National Pension Service must collaborate to lead this initiative, she asserted. Lawmaker Kim acknowledged that the parliamentary-led revision, passively accepted by the government, has both positive aspects and limitations.

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There is an illusion that is intertwined with the semiconductor supercycle. When the water recedes, the naked body is revealed. Even if the Commercial Act changes, the board members remain the same. It takes a long time to change the practice of boards lacking independence and expertise.