"We Will Definitely Expel 'Zombie Companies' from the Stock Market…Cryptocurrency ETFs Should Be Listed"

Monday Interview - Jung Eun-bo, Chairman of Korea Exchange

Korean Companies Show Minimal Results in AI Field

Semiconductor and Battery Competitiveness in Doubt

Could Be Trapped in a '30-Year Box' Like Japan

Urgent Need for an Environment Where Entrepreneurs Can Thrive

One Year Since the Introduction of the Corporate Value-Up Program

Good Start…Why Did Financial Stocks Rise?

Interviewed by=Cho Jae-gil, Head of Securities Department

Jung Eun-bo, Chairman of Korea Exchange, explains strong measures for expelling zombie companies in his first interview of the year with Hankyung Newspaper at the Seoul office in Yeouido, Seoul. Photo by Lee Sol

The Korean stock market is said to be in crisis. This is because individual investors who have turned their backs are not returning. The KOSPI Index fell nearly 15% in the second half of last year alone. Complaints about unfair trading controversies using undisclosed information, continuous split listings, rights issues that appear just when you forget about them, and the abundance of 'zombie companies' cannot be ignored.

This is why the role of the Korea Exchange, as the market manager and supervisor, is crucial. We met with Jung Eun-bo, a former traditional economic bureaucrat who will mark his first year in office as Chairman of Korea Exchange on the 15th, to hear about his stock market operation plans. He emphasized, "In the past, companies considered it an honor to be listed on our stock market," and "My mission is to restore that honor by significantly strengthening market management and supervision."

▷Last year, the domestic stock market seemed to have faced unprecedented difficulties. What do you think was the biggest reason?

"What is clear is that the current value of future cash flows is the stock price. It's important to predict how much a company will earn. People are unsure whether Samsung Electronics' profitability will be maintained 10-20 years from now or whether our battery companies can compete with China. It's hard to deny that the weakening of industrial competitiveness is the fundamental background. We have been recognized for our 'fastest follower' strategy, but that's not the case these days. Look at how we are not achieving results in fields like artificial intelligence (AI). If this continues, there's no guarantee we won't experience stagnation for over 30 years like Japan."

▷There are many evaluations that Japanese companies' competitiveness has weakened, but hasn't the Nikkei Index risen quite a bit?

"If you look at just the last 10 years, yes, but it's different in the long run. The Nikkei Index, which exceeded 38,000 in the early 1990s, fell to 8,000 in the 2000s and only recovered its previous high last year. It's been stagnant for 35 years. The Dow Jones Index in the U.S. jumped more than 15 times from 2,700 to 45,000 in the same period. The difference in industrial competitiveness is that significant. If we don't rearm with entrepreneurial spirit, we could follow Japan's path. The KOSPI Index's previous high was 3,300 (June 2021), but imagine if it takes 30 years to see that number again. It's a frightening reality."

▷When comparing the price-to-earnings ratio (PER) of major countries' stock markets, the domestic stock market is particularly low.

"That's true. The intrinsic value of our companies is being traded at particularly low prices. When comparing similar companies overseas, it's only 70-80%. I think the main reason is the lack of shareholder-friendly management. It would be good if the position of minority shareholders is properly reflected when conflicts of interest arise among shareholders. Management information should also be more transparent. The value-up policy that the exchange has been focusing on since last year aims to ensure that corporate value is properly evaluated. This is through expanding shareholder returns."

▷It's been a year since the value-up program, benchmarked from Japan, was introduced. How would you evaluate it?

"It's progressing successfully. Last year, share buybacks and cancellations increased significantly, and dividends also rose. There are now 108 listed companies participating in the value-up disclosure. Look at how much the stock prices of financial stocks, which are purely domestic companies, rose last year. It's not because the intrinsic value of the financial industry has increased. If financial companies work hard on shareholder returns, their stock prices can be properly evaluated."

▷There are many duplicate listings (simultaneous listing of parent and subsidiary companies), and there are criticisms that the expulsion of marginal companies is delayed.

"When I took office last year, I raised the topic of 'reducing the number of listed companies.' The U.S. GDP is 15 times ours, but the number of listed companies is twice as many. This means there are seven times more listed companies in Korea than in the U.S. There seems to be a lot of illusions and misunderstandings about listing in Korea. Listing is a pathway for secondary corporate growth, but many people see it as a method of capital recovery (exit) through old stock sales. Individuals can suffer damage by accepting these companies' shares. At least regarding duplicate listings, we are looking for ways to strengthen the protection of minority shareholders. It's fortunate that there is a growing atmosphere among companies not to pursue physical division anymore. Marginal companies that undermine market trust must be quickly weeded out. Last month, we announced measures to speed up expulsion, and we will prepare stronger regulations in the future."

▷The atmosphere in the KOSDAQ Market is not good enough that there are quite a few companies wanting to move to the securities market.

"In the early days of the KOSDAQ Market, companies listed here thought it was honorable. Now it's different. It's because of zombie companies that maintain their listing status despite having many problems. The overall credibility of the KOSDAQ Market is falling to the ground because of some sham companies. We also need to address unfair trading using undisclosed information. There are not a few cases where stock prices fluctuate sharply before announcements are made, and unfair trading is originally subject to criminal punishment. If the company is responsible, it should be possible to expel it from the stock market."

▷Some voices are worried about the resumption of short selling next month.

"There seems to be a lot of misunderstandings. Naked short selling is illegal in most countries, including Korea. When placing a short sale order, it must be borrowed. Naked short selling has occurred because verification was not properly done. During the period when short selling was completely banned, we developed a central inspection system for short selling. We are in the final testing phase, and when short selling resumes at the end of March, all existing concerns will be dispelled. Foreign exchanges are even saying they want to adopt our system. Some individuals are opposed to short selling itself, but it is a necessary system. If a specific stock price is judged to be overheated, it should be sold even if borrowed to normalize the 'price discovery' function. This is aside from the issue of inclusion in the Morgan Stanley Capital International (MSCI) developed market index."

▷The financial authorities are reviewing a plan to lift the regulation on retirement pension management (70% limit on risky assets).

"It's an excessive regulation to limit the risky asset limit to 70% when managing retirement pension reserves. It's not in line with the trend of the times for the state to play an excessive guardian role. Related regulations should be fully relaxed so that investors can design their own retirement. There are no such management regulations in the U.S."

▷I'm curious about your thoughts on the listing of cryptocurrency exchange-traded funds (ETFs).

"Korea is the third-largest real cryptocurrency trading country in the world. Cryptocurrency is a field that can create new value in the financial industry. The U.S. has both futures and spot ETFs listed and actively traded. We need to allow cryptocurrency ETF trading without further delay."

"Opposition to the Amendment of the Commercial Act…It Should Be Applied Only to Listed Companies by Amending the Capital Market Act"

"Excessive Legislation Due to Political Circles' Lack of Understanding of Reality"

Jung Eun-bo, Chairman of Korea Exchange, also expressed a clear opposition to the amendment of the Commercial Act, which is sharply opposed by the ruling and opposition parties. Chairman Jung said, "I agree with the intention to strengthen shareholder protection measures and resolve the 'Korea discount,' but the amendment of the Capital Market Act, which has a clearer scope of application than the Commercial Act, is the right direction."

Regarding the amendment of the Commercial Act, he said, "There are about 1 million corporations in Korea, but only about 2,600 of them are listed companies," adding, "There are no minority shareholders in more than 990,000 other companies." He argued that it is excessive legislation to add related provisions (expanding the duty of loyalty of directors to shareholders) to the Commercial Act, which targets all companies, when conflicts of interest between major and minority shareholders do not occur in most companies.

Chairman Jung criticized, "If the duty of directors is expanded to the majority of corporations where family disputes are all that exist, it will be a representative case of excessive legislation."

The business community is also strongly opposed to the amendment of the Commercial Act. There are concerns that if the amendment is passed, excessive shareholder lawsuits and management distortions due to the shrinking of the board of directors will become severe.

Chairman Jung emphasized, "In the past, we had a world-class derivatives market, but now it has been greatly reduced due to regulations, etc. Considering that institutions these days are all linking spot and futures investments, we need to actively foster the derivatives market."

■ Profile

△1961 Cheongsong, Gyeongbuk

△Da-il High School, Seoul

△Business Administration, Seoul National University

△Ph.D. in Economics, Ohio State University, USA

△1984 Administrative Examination (28th)

△Director of Economic Analysis, Ministry of Finance and Economy

△2021 Financial Supervisory Service Governor

△2024 Korea Exchange Chairman

Organized by=Park Han-shin/Shim Sung-mi, Reporters phs@hankyung.com