Franklin Templeton praises Korea’s “value-up program” and points out obstacles in the tax system

On July 9, global asset management firm Franklin Templeton gave a positive assessment of the South Korean government’s “Corporate Value-Up Program,” but warned that it may take some time before tangible results emerge due to ongoing political debates over tax reforms, such as the tax on financial investment income.

In a report released the same day, Franklin Templeton noted: “The value-up program has the potential to be successful, but it will take some time for retail investors to benefit.” The firm stressed that the current tax system, including dividend and capital investment taxes, could pose significant obstacles to increasing shareholder value in Korea.

Under current law, dividend income under 20 million won (about $14,600) is subject to a dividend tax of 15.4%, while dividend income over 20 million won is subject to a tax rate of 49.5%. This high dividend tax rate has been criticized for not providing large shareholders with an incentive to increase their dividends and work toward shareholder returns. Instead, according to Franklin Templeton, “large shareholders can exploit corporate value in ways that can harm the interests of small shareholders.”

The report also describes the structure that allows founding families to retain control of conglomerate groups despite small ownership shares as problematic. This structure can favor majority shareholders who value market share more than the total profit of all shareholders. Franklin Templeton analyzed that the “value-up” policy is based on the authorities’ realization that the Korea discount could persist if corporate governance and the rights of small shareholders do not adequately meet global standards.

Franklin Templeton further noted that while incentives through tax reforms are necessary, the opposition party’s majority in the National Assembly following the last general election makes it more difficult to expect institutional change. In addition, the firm diagnosed that Korea’s value-up program, which is based on autonomy, differs from Japan’s corporate governance code, which is based on the “comply or explain” principle.

Meanwhile, Franklin Templeton gave a positive assessment to the Korean stock exchange’s plan to launch the “Korea Value-Up Index” by September and list related exchange-traded funds (ETFs) in the fourth quarter, saying it is a factor that could encourage companies to actively participate. However, the firm noted that the inclusion criteria for the index have not yet been announced and that the Value-Up program itself cannot be enforced, suggesting that further observation is needed.