BLI: Improving corporate governance in Asia
By Guy Wagner, Chief Investment Officer of Banque de Luxembourg Investments (BLI)
Asia is undergoing a profound transformation in the way corporations are governed. Historically, Asian markets were shaped by control-driven capitalism, where founding families, conglomerates, financial affiliates, or state entities exercised dominant influence over corporate decision-making. Today, several markets are moving - at different speeds and in different ways - toward a more shareholder-aware model. This is a structural, multi-year evolution that remains in its early stages.
Driven by regulatory reform, rising domestic institutional ownership, the emergence of activist investors, and deeper integration with global capital markets, Asian companies are gradually adopting higher governance standards.
The economic rationale is powerful: better governance can improve capital allocation, lift returns on capital employed (ROCE), increase dividends and buybacks, simplify inefficient group structures, and reduce the valuation discounts that have long weighed on many Asian equities.
Why reform is needed: economic growth has hot translated into shareholder returns
A key reason this theme matters is that many Asian equity markets have delivered disappointing long-term shareholder returns, especially when compared with the region’s underlying economic dynamism.
High GDP growth has often coexisted with mediocre equity returns because growth has not always translated into disciplined capital allocation, fair treatment of minority shareholders, or efficient balance-sheet use. China is a prominent example of this disconnect.
Current reform efforts aim to address that gap. Their emphasis is on capital efficiency, investor protection, and tangible shareholder returns—not on size, expansion, or industrial reach in isolation. In practical terms, the reform agenda can be described as a shift from 'grow more' to 'grow better and distribute better'.
Why now: the reform cycle is deepening
The timing is important because the region is no longer at the stage of abstract governance aspiration. In several countries, reform has shifted from broad principles to implementation tools, disclosure expectations, and, in some cases, legal obligations.
In Japan, following the Tokyo Stock Exchange’s focus on cost of capital and stock price, attention has shifted toward execution and accountability. Companies are increasingly expected not only to disclose governance intentions but also to demonstrate tangible improvements in capital efficiency.
Recent initiatives include mandatory English disclosure, enhanced investor communication, greater protection for minority shareholders—particularly in parent-subsidiary structures—and closer follow-up on companies that fail to meet expectations.
In South Korea, reform has become notably more concrete. The long-standing 'Korea discount' has been linked to opaque group structures, weak minority shareholder protections, and capital management practices that favored control over value creation.
A key milestone was the introduction of mandatory treasury share cancellation at the beginning of March—a significant step in preventing the use of treasury shares to reinforce control structures.
This is complemented by the Corporate Value-up Program, which links corporate disclosures to ROE, payout ratios, and capital allocation metrics. Importantly, the scale of the opportunity remains large, given that a significant portion of Korean companies still trade below book value.
In China, the reform model is different, but the direction remains relevant. Under the new Five-Year Plan (2026–2030), policymakers are placing increasing emphasis on market quality, regulatory oversight, and investor protection—particularly for minority and retail investors. While the transmission to shareholder returns may be less direct, these measures are critical for improving the overall functioning and investability of the equity market.
The reform impulse is not confined to the three largest North Asian markets. In Thailand, the JUMP+ Program is explicitly built around disclosure of value-creation plans, regular updates and investor communication, and improved transparency.
Domestic capital reallocation: a hidden catalyst
An underappreciated but potentially powerful driver of reform—particularly in Korea and Japan—is the reallocation of domestic savings.
Historically, household wealth in several Asian markets has been heavily concentrated in real estate and fixed-income investments. In Korea, for example, this has contributed to elevated property prices and relatively low participation in the domestic equity market.
Policymakers are now actively attempting to redirect capital toward equities through fiscal incentives, changes to property taxation, tax benefits for reinvesting overseas assets into domestic markets, and the development of long-term investment products.
If successful, this shift could generate a meaningful structural demand tailwind for equities, reinforcing the impact of governance reform and supporting valuation re-rating.
What drives returns: more than just 'better governance'
The investment case for governance reform in Asia rests on three mutually reinforcing return drivers.
The first is improved earnings quality and capital productivity. Governance reform matters because it changes how companies allocate capital. Instead of hoarding balance-sheet liquidity, protecting low-return affiliates, or pursuing empire-building, companies are pushed toward clearer hurdle rates, more selective investment, divestment of non-core assets, and more rational buyback and dividend policies. This directly affects return on capital employed (ROCE) and free cash flow conversion.
The second is multiple expansion. Markets that have historically traded at discounts due to poor governance, low payout ratios, weak boards, or capital trapped in cross-holdings can re-rate as these risks decline. A company that credibly commits to improving ROE, reducing idle cash, simplifying control structures, and treating minority investors more fairly should be rewarded with a higher valuation multiple.
The third is the direct return of capital to shareholders through higher dividends and share buybacks.
Likely success factors
Not all reforms will translate into value creation. The most successful outcomes are likely when several conditions are met simultaneously.
First, capital management must be expressed in tangible financial metrics. Reforms should be tied to explicit, easily understood measures such as ROE, price-to-book ratio, and cost of capital. Investors are more likely to reward reforms that can be monitored quantitatively rather than those framed only as governance principles. Korea’s linkage of value-up disclosures to ROE, payout ratios, and CapEx targets is a strong example. Japan’s focus on cost of capital and stock price is also effective because it anchors governance in valuation rather than abstraction.
Second, multi-stakeholder alignment is critical. Reforms tend to work best when regulators, exchanges, policymakers, and investors collaborate to shift corporate mindsets. Japan is strong in this regard, with its stewardship framework and growing activist and institutional pressure creating a reinforcing ecosystem. Korea is improving rapidly but still faces resistance from controlling shareholders. China benefits from strong state coordination, though broader policy objectives can dilute pure minority-shareholder alignment.
Third, liquidity and scale matter. Reform is more investable in markets with sufficient depth, turnover, and index relevance for global capital to respond. Japan is the clear leader here. China also offers immense scale and liquidity, though market access and policy interpretation remain important. Korea has sufficient scale but is more concentrated and sensitive to shifts in foreign sentiment.
Fourth, accountability mechanisms—especially “name-and-shame” dynamics—can be powerful. Japan has arguably developed the strongest soft-enforcement model in the region, using public requests, disclosure lists, case studies, and ongoing follow-up to pressure underperforming companies.
Fifth, minority shareholder protection is a key differentiator. This may become one of the most important dividing lines between headline reform and actual investability. Japan has made this a clearer priority, particularly in parent-subsidiary listings and going-private transactions. Korea’s treasury share reforms also directly address practices that historically disadvantaged minority investors. China has strengthened investor protection rhetoric and supervision, especially for retail investors, but the balance between state objectives and shareholder primacy remains more complex.
Regional comparison: different paths, same direction
Japan currently offers the highest visibility and most mature reform ecosystem. It combines scale, liquidity, a strong institutional investor base, a growing presence of activist shareholders, explicit cost-of-capital discipline, visible accountability, and increasing focus on minority shareholder protection. Its key challenge is ensuring reforms translate into real operational and capital allocation changes rather than stopping at disclosure.
Korea presents the greatest potential upside. It combines deep structural inefficiencies with increasingly clear and enforceable reforms, along with emerging domestic capital support. The upside could be significant if reform penetrates entrenched control structures more deeply; the key risk is continued resistance from chaebol and controlling shareholders.
China remains the most complex case, with reforms focused more on system-level improvements and investor protection than on direct shareholder return maximization. The opportunity is substantial given the country’s scale, but the transmission from reform to minority shareholder value creation is less direct and less transparent.
Portfolio implementation: a bottom-up opportunity
For investors, implementing this theme requires a bottom-up approach. The most attractive opportunities are likely to be companies where governance reform is already translating into measurable financial improvements—or where a clear catalyst (such as the emergence of an activist shareholder) suggests that change is imminent—but where these developments are not yet reflected in the share price.
Distinguishing between superficial change and genuine transformation will be critical.
Conclusion
Corporate governance reform in Asia is evolving from a peripheral theme into a tangible driver of equity returns. As reforms become more measurable, enforceable, and aligned with financial outcomes, they have the potential to close the long-standing gap between economic growth and shareholder returns.
Among major markets, Japan currently offers the greatest visibility, Korea the strongest upside potential, and China the largest—but most complex—opportunity set. The common thread is clear: better governance is leading to better capital allocation and is increasingly becoming a structural driver of long-term Asian equity returns.
