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South Korea's Commercial Act Reforms: A Crossroads for Corporate Governance and Investment

Philip CarterSunday, Apr 20, 2025 9:57 pm ET

2min read

South Korea’s presidential election in 2025 has crystallized into a high-stakes battle over corporate governance, with Democratic Party candidate Lee Jae-myung spearheading sweeping revisions to the Commercial Act. These reforms, aimed at expanding directors’ fiduciary duties to prioritize shareholder interests and democratizing corporate decision-making, have sparked fierce debate. For investors, the outcome could redefine risk and opportunity in one of Asia’s most dynamic economies.

The Core of the Reforms

Lee’s proposed amendments target systemic imbalances rooted in South Korea’s chaebol-dominated economy, where conglomerate interests often overshadow minority shareholders. Key changes include:
1. Expanded Fiduciary Duty: Directors must balance corporate interests with proportional benefits for all shareholders, not just majority stakeholders.
2. Electronic Shareholder Meetings: Mandatory for listed companies to enhance minority investor participation.
3. Independent Director Mandates: Phasing out cozy boardroom alliances with major shareholders.

These measures align with Lee’s broader agenda to address the “Korea discount”—the chronic undervaluation of Korean stocks due to poor governance. By March 2025, the National Assembly narrowly passed the reforms, but business groups and the ruling People’s Power Party (PPP) remain staunchly opposed.

Investor Implications: Risks and Rewards

1. Corporate Governance Overhaul

The reforms could attract long-term foreign investors by aligning South Korea’s governance standards with global norms. BlackRock, the world’s largest asset manager, has cited weak shareholder rights as a key barrier to deeper penetration in Korean markets.

However, the Korea Chamber of Commerce warns of unintended consequences. The threat of litigation over routine decisions—such as mergers or long-term investments—could deter innovation. For instance, Hyundai Motor Group, already navigating U.S. tariffs, might face added scrutiny over strategic choices.

2. Sector-Specific Exposure

Tech & Auto Sectors: Companies like Samsung and Hyundai could face heightened accountability for capital allocation decisions.
Small-Mid Caps: Firms may struggle with compliance costs, potentially widening the gap between large and small enterprises.

3. Political Uncertainty

The PPP’s push to veto the reforms or dilute their scope adds volatility. If enacted, a grace period of one year before implementation offers firms time to adapt, but policy reversals under a conservative government remain a risk.

Market Reactions and Data Trends

Foreign Investor Sentiment: Net inflows into Korean equities have stagnated at $2.1 billion in Q1 2025, down 40% from 2023.
Litigation Risks: A 2024 study by Korea University Law School projected a 30% rise in shareholder lawsuits if the reforms pass.
Korea Discount: The MSCI Korea Index trades at a 15% discount to global peers, partly due to governance concerns.

Conclusion: A Double-Edged Sword

Lee’s reforms present a pivotal moment for South Korea’s economy. On one hand, stronger shareholder rights could unlock $100+ billion in market capitalization by attracting foreign institutional investors, per estimates by KB Securities. Improved governance might also reduce reliance on opaque chaebol alliances, fostering fairer competition.

However, the Supreme Court’s caution about “operational overreach” underscores execution risks. If litigation spikes or growth slows due to corporate hesitation, the reforms could backfire, exacerbating the Korea discount.

Investors should proceed with a nuanced approach:
- Overweight tech and auto stocks with strong governance (e.g., SK Hynix, LG Energy Solution) to benefit from potential foreign inflows.
- Underweight small-cap firms without robust compliance frameworks.
- Monitor political developments closely; a PPP victory could unravel progress.

South Korea’s governance reckoning is far from settled, but its resolution will shape the nation’s economic trajectory—and investor returns—for decades.

Data sources: Korea National Assembly, Supreme Court of Korea, Korea Chamber of Commerce, KB Securities, MSCI.

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