South Korea’s capital market has entered a new phase.
The National Assembly has passed a major revision to the Commercial Act requiring listed companies to cancel newly acquired treasury shares within one year. This reform addresses a long-standing governance issue that has weighed on valuations for decades.
The result is visible in the numbers.
The Kospi index has surged more than 40% since the beginning of the year, surpassing 6,000 for the first time. This follows a remarkable 76% rally last year, making it the world’s best-performing major stock index for the second consecutive year.
Why Treasury Shares Matter
Historically, many Korean conglomerates, or chaebol, repurchased shares but retained them rather than cancelling them. These treasury shares were often used for intra-group mergers or as a defensive tool against takeover attempts.
This practice limited the positive impact of buybacks on earnings per share and market valuation. In contrast, in markets such as the United States and Japan, cancelled treasury shares directly reduce outstanding share count and typically support price appreciation.
The new law fundamentally changes that mechanism. Mandatory cancellation within one year ensures that buybacks translate into tangible shareholder value.
Tackling the “Korea Discount”
For years, global investors have applied a valuation discount to Korean equities compared to peers in developed markets. The so-called “Korea discount” stems largely from governance concerns, opaque ownership structures, and perceived prioritisation of controlling families over minority shareholders.
Reforms in 2025 aim to change that perception.
Earlier measures introduced:
-
A legal duty for directors to consider the interests of all shareholders
-
Mandatory cumulative voting
-
Separate elections of auditors
These changes strengthen minority shareholder rights and improve board accountability.
President Lee Jae Myung, elected on a platform of market reform, has already met his campaign target of pushing the Kospi to 5,000. With the index now above 6,000, reform momentum is accelerating ahead of provincial elections.
Corporate Response: Early Compliance
Major corporations including Samsung, SK Hynix, and Hyundai Motor have already announced treasury share cancellation plans, even before the legislative change was finalised.
This signals alignment between policymakers and corporate leadership.
However, governance reform does not stop here. The ruling party is now pushing to strengthen the fiduciary duties of institutional investors, including the National Pension Service. A revised stewardship code could drive more active shareholder engagement and higher accountability standards.
What This Means for Investors and Businesses
South Korea is attempting a structural transition:
From control-centric governance
To performance-driven capital allocation
If sustained, the implications are significant:
-
Improved return on equity
-
Narrowing valuation gap versus global peers
-
Increased foreign capital inflows
-
Higher liquidity and market depth
Yet challenges remain. Compared with the US and Japan, governance frameworks still require refinement. Structural change takes time. Market optimism must be supported by consistent enforcement.
Strategic Implications for Asia-Focused Stakeholders
For investors, this reform reduces structural risk and enhances predictability.
For multinational partners, it signals a more transparent and shareholder-aligned corporate environment.
For regional competitors, it raises the bar in capital market standards.
South Korea’s transformation demonstrates a broader regional trend: governance reform is becoming a competitive advantage in Asia’s capital markets.
A market rally of 40% in a single year is impressive. Sustained governance reform could make it structural.
The question is no longer whether reform matters.
It is whether it can permanently eliminate the Korea discount.