Fast reading
- The Democratic Party’s Lee Jae-myung becomes South Korea’s new president.
- His party’s pro-reform outlook could improve corporate governance.
- In other news, the European Central Bank cuts its headline rate.
South Korea’s voters headed to the polls this week to elect a new president. The result, which saw a victory for the Democratic Party’s Lee Jae-myung, marks a major turning point in the country after months of political chaos triggered by martial law and the impeachment of former President Yoon Suk-yeol.
Boosted by the news, the Korean Stock Exchange (Kospi) climbed 4.2% to close above 2,800 by week’s end.1
Kunjal Gala, Portfolio Manager, Global Emerging Markets, Federated Hermes Limited, notes that with the Democratic Party holding a strong parliamentary majority, Lee now has a clear path to push through sweeping reforms aimed at restoring stability, revitalizing the economy, and reasserting South Korea’s global standing. This could include bold corporate governance reforms, curbing the influence of family-run conglomerates, and improving labour protections.
“A cornerstone of this is the proposed revision to the Commercial Act, which would expand directors’ fiduciary duties to all shareholders, encourage cumulative voting, and mandate the cancellation of treasury shares,” says Gala. “These measures aim to strengthen minority shareholder rights, improve transparency, and address long-standing concerns about unfair corporate practices — all critical steps toward boosting market confidence.”
The KOSPI: A bumpy ride for equities
Jonathan Pines, Head of Asia ex-Japan, Federated Hermes Limited, agrees that the election result could help address the ‘Korea Discount’2 but notes that the market’s subsequent direction will depend on the specific reforms eventually put in place.
“The promised introduction of a fiduciary duty will remove that small part of the ‘Korea Discount’ associated with some of the most egregious conduct of the boards such as forcing minorities to sell shares to controlling shareholders cheaply in terms of ‘restructurings’ or allowing controlling shareholders to sell personal assets to companies they control at inflated prices,” he says. “In addition, a corporate culture shift (already underway) will continue to benefit minority shareholders of that small number of companies that are already predisposed to improving governance.”
A fiduciary duty law might prevent terrible governance but can only do so much to impose good governance.
Pines, who has repeatedly raised the question of corporate governance in South Korea (here, here, here and here), notes that even with the advent of a stronger fiduciary duty requirement, challenges will remain, most notably high levels of concentrated shareholdings.
“Ninety percent of Korean companies are controlled by [founder/owner] families,” he says. “A fiduciary duty law might prevent terrible governance but can only do so much to impose good governance.”
An ECB inflexion point?
In other news, the European Central Bank (ECB) signalled on Thursday that it was nearing the end of its rate-cutting cycle as it reduced its headline rate by a quarter point to 2%.
John Sidawi, Senior Portfolio Manager, Fixed Income, Federated Hermes, said he believes the language used by ECB President Christine Lagarde when discussing the cut makes for an inflexion point for bank policy.
“Until now, the ECB’s ‘meeting-to-meeting’ messaging implied they were looking for evidence to continue rate cuts. Now, that same ‘meeting-to-meeting’ language feels like they are looking for evidence to stop cuts.
“It’s also the first time that Lagarde has said rates are ‘in a good place’. It’s a fine nuance but rarely has the messaging been so celebratory about monetary policy – and we believe there’s potential for this to develop into something much more meaningful. We’re either at the end of – or coming very close to the end of – that cycle of eight consecutive rate cuts.”
Mitch Reznick, Group Head of Fixed Income – London, Federated Hermes Limited, notes that the ECB’s rate cut had been well flagged and that investors are now looking to July and beyond for the next chapter in the central bank’s monetary policy story.
“Without declaring ‘victory’, the declining trend in inflation rates portends a more neutral stance for the ECB in the coming months,” he says. “Key factors to inform a change in this view will likely be derived by shifts in energy prices, employment trends, and the outcomes following US-led tariff disturbance.”
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1 Source: Bloomberg as of 6 June 2025.
2 The ‘Korean discount’ refers to the fact that the KOSPI trades at a discount relative to regional peers, at around 9x forward price-to-earnings and 0.9x price-to-book (a significant discount to its 20Y long-term average of 1.25x). Source: Bloomberg as at 5 June 2025.
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