annual review indst 2024 public - Flipbook - Side 38
38
EOS
Developed Asia
Regional
public policy
highlights
Throughout 2024 we have participated in
public consultations and meetings with
government officials, financial regulators,
stock exchanges, industry associations,
and other key parties to contribute to the
development of policy and best practice.
The aim is to protect and enhance value
for our clients by improving shareholder
rights. This is a selection of some of the
key market trends and highlights.
Continental Europe
We continued to express our desire for greater access to board
directors, including beyond the chair, in markets where this
remained low, such as Scandinavia, Italy and Spain. We also
outlined our growing expectation that companies should be clear
about how their Paris Agreement-aligned climate transition plans
are reflected in their audited accounts. Where it is material, we
want the company to confirm what is being included in the
audited accounts, how this is being assessed and the implications.
We provided informal feedback to the Finance Sector
Deforestation Action (FSDA) initiative and the Institutional
Investors Group on Climate Change (IIGCC) on the draft
deforestation investor guidelines for commercial banks.
Banks can be exposed to deforestation risks through the
financial services they provide to companies that produce
and/or use products contributing to deforestation within their
direct operations or value chains. Banks that fail to address
deforestation are exposed to financial risk through various
channels, including physical risk, transition risk and failure
to align with net zero.
We continued to express our desire
for greater access to board directors,
including beyond the chair, in markets
where this remained low.
We introduced a new policy in 2024, to identify and address
potential corporate governance concerns in companies where
the equity persistently trades at a price-to-book valuation of
below one. In the absence of any mitigating factors such as
highly regulated sectors, a protracted industry downturn or
long-term structural challenges, a price-to-book valuation of
below one signals that a company is being assessed by
investors as potentially worth more liquidated than if it
continues operating. It suggests that the directors, rather than
creating value, are destroying it – or are viewed as doing so.
In formulating a global voting policy to address cases where
the persistent undervaluation of companies may be the
result of corporate governance concerns, we assessed 29
major markets. It became clear that the prevalence of
companies with depressed price-to-book valuations was
much higher in Japan and South Korea than elsewhere,
suggesting there were systemic issues in these markets.
The Korean Stock Exchange
published its Value-Up Index in Q4
2024, one of the measures aimed at
incentivising companies to improve
their valuations.
In our engagements with the Tokyo Stock Exchange, Japan’s
Financial Services Agency, and several major Japanese
companies with depressed price-to-book valuations, we saw
evidence that Japan had begun to address this problem. The
Tokyo Stock Exchange, for example, has been vocal about
this issue and requires companies to explain how they will
address their undervaluation. In South Korea, on the other
hand, there was no parallel policy. In our engagements,
companies usually dismissed our concerns about hoarding
cash, arguing for the need to be conservative.
Given this context, our new price-to-book voting watchlist
included 30 South Korean companies and another 10
companies elsewhere. For South Korean companies
outside those sectors where a persistent low price-to-book
valuation might be explained by regulatory or other
factors, we considered recommending voting against the
re-election of directors.
In Q1 2024, South Korea’s Financial Services Commission,
the Korean Stock Exchange and other government entities
launched an initiative aimed at reforming the capital
markets and addressing the persistent undervaluation of
South Korean companies. The ‘Value-Up Programme’ was
based on voluntary disclosure and action by companies to
address their undervaluation.
A few South Korean companies have since published their
voluntary value-up plans, with different levels of quality and
credibility. The Korean Stock Exchange published its Value-Up
Index in Q4 2024, one of the measures aimed at incentivising
companies to improve their valuations. A hundred companies
were selected according to market capitalisation, profitability,
payout ratios, market valuation relative to book value and
capital efficiency.
