Korea Corporate Governance Reform: How It Could Revalue Korean Stocks
Quick Take
South Korea’s corporate governance reform is moving beyond the government’s voluntary Corporate Value-up Program. Since 2025, changes to the Commercial Act, treasury-share rules, board governance, duplicate-listing standards and merger valuation rules have begun to address some of the structural issues behind the so-called Korea Discount.
For global investors, the important question is not whether Korean companies suddenly become more “shareholder friendly.” It is whether minority-shareholder risk falls, capital allocation improves, and investors become willing to apply a lower cost of equity to Korean corporate cash flows.
That distinction matters. Governance reform cannot turn a weak business into a high-quality company. But for profitable, cash-rich Korean companies that have historically traded at persistent discounts, even a modest improvement in ROE, capital allocation and investor confidence could materially change valuation.
Data as of August 22, 2026
What Has Actually Changed in Korea’s Corporate Governance System?
South Korea’s governance reform is best understood not as one law, but as a series of changes that have accumulated since the launch of the Corporate Value-up Program.
The first major shift came with the revised Commercial Act in 2025. Directors’ duties were expanded beyond the company itself to explicitly incorporate shareholders, while the framework also strengthened the role of independent directors and minority shareholders. A second Commercial Act amendment made cumulative voting mandatory for large listed companies with total assets of at least KRW 2 trillion when qualifying shareholders request it, and increased the number of audit committee members elected separately from the controlling shareholder’s influence.
A third reform, promulgated in 2026, went directly after one of the most controversial features of Korean corporate governance: treasury shares. Listed companies are now generally required to cancel treasury shares within one year, while shares held before the new law took effect have an 18-month transition period. Exceptions for purposes such as employee compensation require shareholder approval.
Other reforms have followed.
| Reform | What Changed | Why It Matters to Investors |
|---|---|---|
| Commercial Act reform | Directors’ duties broadened toward shareholders | Raises accountability for decisions that may benefit controlling shareholders at the expense of minorities |
| Cumulative voting | Mandatory for qualifying large listed companies when requested | Can strengthen minority-shareholder influence over board composition |
| Audit committee reform | More members elected separately | Reduces controlling-shareholder influence over oversight |
| Treasury shares | Cancellation generally required | Reduces the risk that treasury stock is later reused to dilute shareholders or reinforce control |
| Duplicate listings | Stronger parent-board review and shareholder consent | Targets value leakage when subsidiaries are separately listed |
| Merger valuation | Fair-value framework passed the National Assembly | Reduces reliance on potentially depressed market prices in group restructurings |
| English disclosure | Expanded across more KOSPI companies | Lowers information barriers for foreign investors |
This is a meaningful distinction from Korea’s earlier reform efforts. The Corporate Value-up Program remains largely disclosure- and incentive-driven, but parts of the new governance framework are now embedded in corporate and capital-markets law.
Why Can Corporate Governance Change a Stock’s Valuation?
A low price-to-book ratio does not automatically mean that a stock is undervalued.
A company with an 5% ROE that consistently earns less than its cost of equity may deserve to trade below book value. Governance reform matters only when it changes the underlying economics or the risk investors attach to those economics.
There are three main transmission channels.
Lower minority-shareholder risk can reduce the cost of equity
Suppose two companies generate identical cash flows. In one, investors believe management may use excess cash inefficiently, conduct a restructuring unfavorable to minority shareholders, or issue treasury shares in ways that dilute their interests.
Investors will generally demand a higher required return from that company.
If governance rules make such outcomes less likely, the risk premium can fall. A lower cost of equity increases the present value of the same future cash flows.
Better capital allocation can raise ROE
Many Korean companies hold large amounts of cash or investments that generate returns below their cost of capital.
Governance reform can pressure boards to ask more difficult questions:
- Should excess cash be reinvested?
- Should low-return businesses be sold?
- Should dividends increase?
- Should shares be repurchased and cancelled?
- Is an acquisition likely to earn more than the company’s cost of capital?
If the result is a more productive balance sheet, sustainable ROE can rise.
Investors may place more value on cash that actually reaches shareholders
A company can report strong earnings without creating equivalent value for minority shareholders.
If investors become more confident that free cash flow will eventually be distributed, reinvested productively or protected during group restructurings, those earnings become more valuable.
This is where governance can directly connect to valuation.
A simplified residual-income relationship illustrates the point:
P/B ≈ (ROE − long-term growth) / (cost of equity − long-term growth)
Consider a purely hypothetical company:
- ROE: 8%
- Cost of equity: 10%
- Long-term growth: 2%
The implied P/B under this simplified framework is approximately 0.75x.
If better governance and capital allocation raise ROE to 9% while a lower governance risk premium reduces the cost of equity to 9.5%, the same framework produces an implied P/B of roughly 0.93x.
That is about a 24% increase in implied valuation, even without assuming faster long-term growth.
This is not a target price model. It simply illustrates why governance reform can matter financially rather than symbolically.
Why Treasury-Share Reform Could Be One of the Most Important Changes
Treasury shares require special attention because the accounting can easily be misunderstood.
When a company buys back its own shares, those shares are already excluded from shares outstanding for EPS calculations. Therefore, later cancelling shares already held in treasury does not mechanically create another EPS increase.
The real significance of mandatory cancellation is different.
It makes the reduction in effective share supply more permanent.
Historically, treasury shares in Korea could potentially be disposed of later, used in transactions, exchanged through financing structures or transferred in ways that affected control and diluted the economic position of existing shareholders.
The revised Commercial Act generally requires listed companies to cancel treasury shares within one year. The FSC has also moved to expand treasury-share disclosure requirements to all listed companies and require greater transparency around retention, disposal and implementation.
For investors, the valuation channel is therefore:
Buyback → fewer shares outstanding → cancellation → lower future reissuance/dilution risk
rather than:
Cancellation → another immediate EPS increase.
That difference is important.
A company that buys back stock at an attractive valuation and permanently cancels it is effectively transferring a larger share of future cash flows to the remaining shareholders.
A company that buys back shares but later uses them primarily as a control mechanism offers a very different investment proposition.
Duplicate Listings Target a Korea-Specific Source of Shareholder Friction
One feature that often confuses foreign investors is Korea’s parent-subsidiary listing structure.
A Korean corporate group can have both a parent and multiple subsidiaries separately listed. This is not inherently problematic, but disputes arise when a valuable business is separated from a listed parent and the subsidiary is later taken public.
For a shareholder of the original parent, the concern is straightforward:
“I bought the parent partly because it owned this growing business. If that business is separately listed, how much of its future value will still accrue to me?”
This has been particularly controversial after physical spin-offs, where the parent retains ownership of the newly created subsidiary but minority shareholders in the parent do not automatically receive shares in the new entity.
New Korea Exchange rules effective August 3, 2026 impose much stronger scrutiny on duplicate listings. For subsidiaries created through physical spin-offs, shareholder consent is mandatory before a duplicate listing. The voting framework restricts shareholders holding more than 3% to a 3% voting limit for this purpose, with additional rules applying to controlling shareholders and related parties.
The parent company’s board process has also been strengthened, including more independent oversight in committees evaluating the transaction.
From a valuation perspective, this matters particularly for holding companies and listed parents whose market value depends heavily on valuable subsidiaries.
If investors believe that future growth assets can be separated or monetized on terms unfavorable to parent-company minority shareholders, they will rationally apply a larger holding-company or sum-of-the-parts discount.
Reducing that uncertainty could narrow the discount.
Merger Reform Goes Directly After the Risk of Value Transfer
One of the newest reforms may prove particularly important during corporate restructurings.
On August 20, 2026, South Korea’s National Assembly passed an amendment to the Financial Investment Services and Capital Markets Act changing how merger and related transaction values are determined.
The existing framework had been criticized because listed-company merger values could depend heavily on market prices during a specified period. Regulators acknowledged concerns that parties might choose periods when the share price was unusually depressed—or have incentives to keep the price low—to obtain favorable merger terms.
The amended framework requires broader consideration of market value, asset value and earnings value when determining fair value. It covers not only mergers but also certain split-mergers, major business or asset transfers and comprehensive share exchanges or transfers. Boards must provide opinions on the transaction’s purpose, expected benefits and fairness of consideration, while independent third-party evaluation will also be required.
This is highly relevant to Korea because corporate restructurings can occur within family-controlled conglomerates, commonly known as chaebol groups.
For minority shareholders, the critical issue is not whether restructuring itself is good or bad. It is whether the economic value transferred between entities is fair.
If investors become more confident that related-party restructurings will reflect economic value rather than only a temporarily depressed share price, one component of the Korea Discount could shrink.
However, the timing matters.
As of August 22, 2026, the amendment has passed the National Assembly but is not yet in force. The FSC says it will take effect three months after promulgation following the remaining government procedures.
Stronger Boards Matter Only If Capital Allocation Changes
Governance rules can change legal processes without changing corporate behavior.
The real test will be whether boards begin making different economic decisions.
Mandatory cumulative voting for large listed companies and greater separation in audit committee elections can potentially increase the influence of shareholders outside the controlling group.
But investors should not assume that adding independent directors automatically raises ROE.
The more relevant questions are:
- Are low-return businesses being restructured?
- Is excess cash being returned or invested at attractive returns?
- Are acquisitions evaluated using ROIC and cost-of-capital discipline?
- Are controlling-shareholder transactions subjected to genuine board scrutiny?
- Is executive compensation increasingly connected to shareholder returns and operating performance?
The disclosure framework is beginning to move in that direction. From May 2026, Korean rules require more detailed executive-compensation disclosure, including three-year total shareholder return and operating profit alongside compensation information. AGM voting results by agenda item have also become more transparent.
The distinction is crucial:
Governance reform creates the mechanism. Capital allocation creates the value.
Better Disclosure Could Lower the “Foreign Investor Information Premium”
The Korea Discount is not purely a corporate-governance problem.
Market accessibility also matters.
Many foreign investors rely on English-language information. Historically, material disclosures could appear in Korean first or only in Korean, increasing the research burden and creating information asymmetry.
From May 2026, mandatory English disclosures expanded to all KOSPI-listed companies with at least KRW 2 trillion in assets. The FSC estimated that the number of covered companies would increase from 111 to 265 based on end-2024 asset data. The government is also seeking to accelerate mandatory English disclosure for all KOSPI-listed companies to March 2027.
Separately, mandatory corporate-governance reporting is expanding to all KOSPI-listed companies in 2026 under Korea’s comply-or-explain framework.
This may sound less dramatic than treasury-share cancellation or merger reform, but it matters for valuation.
When information is expensive to obtain, difficult to interpret or arrives later than information available to domestic investors, foreign investors can demand an additional risk premium.
Better disclosure does not eliminate business risk.
It can, however, reduce information risk.
Dividend Policy Is Becoming Part of the Governance Framework
South Korea is also trying to connect governance reform with shareholder distributions.
The Corporate Value-up Program encourages companies to establish measurable targets for indicators such as ROE, ROIC, cost of equity, dividends, buybacks and capital allocation rather than simply announcing generic shareholder-return intentions.
Tax changes effective from 2026 introduced separate taxation treatment for dividend income from qualifying high-dividend companies, with the value-up disclosure framework playing a role in identifying eligible corporate policies.
The important point for equity valuation is not simply that “higher dividends are good.”
A company should not distribute cash that can earn attractive returns inside the business.
The stronger investment case exists when:
ROIC < cost of capital on excess assets → cash is returned → inefficient capital shrinks → ROE improves
or when:
ROIC > cost of capital → management reinvests → earnings compound
Governance reform works when it encourages boards to distinguish between those two situations.
Korea and Japan Are Taking Similar but Not Identical Paths
Japan is the obvious comparison.
In March 2023, the Tokyo Stock Exchange asked all Prime and Standard Market companies to pursue management that is conscious of both the cost of capital and stock price. Companies are expected to assess profitability and valuation at the board level, disclose improvement plans and continue updating investors through dialogue. The TSE explicitly says that buybacks and dividends should not become one-off substitutes for fundamental improvements in returns above the cost of capital.
South Korea borrowed some of the same philosophy when it introduced its Corporate Value-up Program.
But Korea’s reform path is increasingly different.
Japan’s push has relied heavily on exchange-led disclosure, engagement and pressure on corporate management. Korea now combines a voluntary value-up framework with statutory changes involving directors’ duties, treasury shares, board elections, duplicate listings and merger valuation.
That could make Korea’s reform more legally binding in some areas.
It also creates greater implementation complexity.
The OECD’s 2026 review of Asian value-up programs offers an important warning. It found strong equity-market performance in Japan and Korea after the programs were introduced, but valuation improvements were more limited and in some cases concentrated among a relatively narrow group of large-cap companies. The OECD argues that sustainable rerating requires better capital allocation, stronger governance, transparency and investor confidence—not simply short-term increases in share prices.
That may be the most useful lesson for investors.
A rising KOSPI is not the same thing as eliminating the Korea Discount.
Which Korean Stocks Have the Most Governance Rerating Potential?
Governance reform will not affect all Korean companies equally.
The greatest sensitivity is likely to exist where the gap between economic value and value received by minority shareholders has historically been the widest.
| Company Type | Why Governance Reform May Matter More |
| Cash-rich, low-ROE companies | Better capital allocation or distributions can improve ROE |
| Companies with significant treasury shares | Mandatory cancellation can make buybacks more permanent |
| Holding companies | Better treatment of subsidiaries and restructuring can narrow holding-company discounts |
| Parent companies with valuable subsidiaries | Stronger duplicate-listing protection may preserve parent-company value |
| Family-controlled groups undergoing restructuring | Fairer merger rules can reduce perceived value-transfer risk |
| Mature cash-generating businesses | Higher payout discipline may make cash flows more valuable to minorities |
| Companies seeking global capital | Better English disclosure can lower information barriers |
This framework also shows where investors should be cautious.
A highly profitable semiconductor, defense or biotechnology company whose valuation is dominated by earnings growth may experience little structural rerating from governance reform alone.
Likewise, a company trading below book because its business structurally earns a poor return on capital does not become undervalued simply because the regulatory environment improves.
The most interesting candidates are companies where three conditions overlap:
Low valuation + acceptable underlying business economics + identifiable governance or capital-allocation improvement.
Low P/B by itself is not enough.
Could Korea Really Move From a “Korea Discount” to a “Korea Premium”?
A complete elimination of the Korea Discount is unlikely to come from legislation alone.
Korean equity valuations reflect multiple factors:
- corporate governance,
- cyclical earnings exposure,
- high weightings in semiconductors and industrials,
- geopolitical risk,
- ownership concentration,
- capital-allocation history,
- foreign-exchange risk,
- shareholder payout policies,
- and differences in sector composition versus U.S. markets.
Governance reform can address only part of that equation.
There is also an implementation risk.
Directors’ expanded duties to shareholders may produce uncertainty over how courts interpret competing shareholder interests. New board requirements may increase compliance costs. Companies may technically satisfy disclosure requirements without making substantive changes. Strong controlling shareholders may also adapt to new rules in ways that preserve much of the existing governance structure.
And stronger minority-shareholder protection can involve trade-offs. More procedural requirements around mergers, spin-offs and listings may make some transactions slower or more complicated.
These are not arguments against reform.
They are reasons investors should distinguish legal reform from economic reform.
The strongest evidence of success will not be the number of new rules.
It will be observable changes in:
ROE, ROIC, cash balances, buybacks and cancellations, dividends, restructuring terms, board behavior and ultimately the cost of equity applied by the market.
A Practical Rerating Framework for Global Investors
Rather than asking whether “Korean stocks will rerate,” investors can break the thesis into measurable components.
Stage 1: Governance risk declines
Look for fewer transactions that disadvantage minority shareholders, more meaningful board oversight, permanent treasury-share cancellation and credible protection around restructurings.
Stage 2: Capital allocation changes
Look for rising payout ratios where companies lack attractive reinvestment opportunities, divestment of low-return assets, more disciplined M&A and clearer ROIC-versus-WACC targets.
Stage 3: Financial performance improves
Governance becomes economically meaningful when it produces higher ROE, stronger free cash flow per share or more efficient use of capital.
Stage 4: The market lowers the required return
If foreign and domestic investors become more confident that future cash flows will accrue fairly to minority shareholders, cost of equity can fall.
Stage 5: Valuation rerates
Only then does a higher P/B, P/E or sum-of-the-parts valuation become fundamentally easier to justify.
The full chain is:
Governance reform
→ lower agency risk
→ better capital allocation
→ higher ROE / better per-share cash flow
→ lower cost of equity
→ valuation rerating
That is a much stronger investment thesis than simply buying Korean stocks because they look statistically cheap.
What to Watch
The next phase of Korea’s governance reform should be judged through actual corporate behavior rather than policy announcements.
Treasury-share cancellations: Track how much existing treasury stock is actually cancelled and whether companies continue making economically sensible buybacks after the new rules.
September 2026 board reforms: Watch how cumulative voting and the expanded separate election of audit committee members affect board composition at large listed companies.
Merger law implementation: The August 20 capital-markets amendment still needs promulgation and implementing regulations. The details of fair-value assessments and independent evaluations will matter.
Duplicate-listing cases: The first major subsidiary IPOs reviewed under the new August 2026 framework will provide evidence of how aggressively the KRX protects parent-company shareholders.
ROE and capital allocation: The ultimate signal is whether Korean companies begin moving from balance-sheet accumulation toward higher-return reinvestment, restructuring or shareholder distributions.
For global investors, this is the central question:
Does corporate governance reform merely change Korean corporate procedure, or does it change who receives the economic value created by Korean companies?
If the answer increasingly becomes “all shareholders,” the Korea Discount has a stronger chance of narrowing on a structural rather than cyclical basis.
Sources & Data
- Ministry of Justice of Korea — Commercial Act amendment expanding shareholder protections and directors’ duties, July 2025.
- Ministry of Justice of Korea — Commercial Act amendment on mandatory cumulative voting and separate election of audit committee members, September 2, 2025.
- Financial Services Commission — Treasury-share cancellation and strengthened treasury-share disclosure framework, March 30, 2026.
- Financial Services Commission — Expansion of English disclosure and enhanced AGM/executive compensation transparency, January 28, 2026.
- Financial Services Commission / Korea Exchange — Final duplicate-listing reform rules effective August 3, 2026, July 31, 2026.
- Financial Services Commission — FSCMA merger valuation amendment passed by the National Assembly, August 20, 2026.
- Financial Services Commission / Korea Exchange — Expansion of mandatory corporate-governance reports to all KOSPI-listed companies, 2026 framework.
- Financial Services Commission — High-dividend company and Corporate Value-up disclosure framework, February 2026.
- OECD — Asia Capital Markets Report 2026, governance and value-up analysis, 2026.
- Tokyo Stock Exchange / Japan Exchange Group — Action to Implement Management that is Conscious of Cost of Capital and Stock Price, updated through 2026.
Data as of August 22, 2026
Investment Disclaimer
This article is for informational and educational purposes only and does not constitute investment advice. Investors should conduct their own research before making investment decisions.
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