Korea Inc. is in a generational transition.

From Lee Kun-hee to Lee Jae-yong at Samsung and from Chung Mong-koo to Chung Eui-sun over at Hyundai Motor, Korea’s top business groups are preparing for father-to-son transfers of ownership and managerial control.  

This, according to corporate-governance expert Kim Woo-chan, poses a greater risk to global investors considering Korean stocks. 

The “Korea Discount” -- lower equity valuations of Korean companies due partly to past corporate governance failures -- will likely increase, contrary to the hopes of local officials, he predicts.

“Chaebol’s controlling families are plotting maneuvers for filial succession, and those steps are unlikely to be shareholder-friendly,” said Kim, a professor at the Korea University Business School who runs the think tank Economic Reform Research Institute. “There are more reasons for discounts.”

A hint of what’s to come may be found at Samsung Group.

At the towering conglomerate controlled by the Lee family, the heir -- Samsung Electronics vice chairman Lee Jae-yong -- is accelerating restructuring of units in a thinly veiled attempt to take control from his ailing father Lee Kun-hee.

In the most controversial of such deals, Samsung Group last year merged Samsung C&T and Cheil Industries, whose businesses were as diverse as construction, fashion and theme park operations, after a rare proxy battle with U.S.-based hedge fund Elliott Associates. Elliott had claimed the deal would enrich the Lee family only, while Samsung said it would create business synergies for general shareholders.

The Samsung merger drama was an “eye-opening” experience, Kim said.

“It showed clearly where the National Pension Service stood on an issue that pitted the interest of Samsung’s controlling family against that of its subscribers.”

The NPS, the largest shareholder of Samsung C&T, backed the merger against the advice of proxy adviser Institutional Shareholder Services. Shares in Samsung C&T, the merged entity, are currently trading at 64 percent of their level on May 26 last year, when the merger was announced.

Local corporate-governance activists are campaigning for the introduction of a “Stewardship Code,” a set of guidelines for institutional investors to exercise voting rights in companies they invest in.

Kim said the Samsung-Elliott case has dampened his expectation on the role of institutional investors.

“The NPS’ own governance needs an overhaul,” he said.

The fundamental problem in Korea’s corporate governance culture is that controlling families have little incentive to improve governance and make their businesses more responsive to the markets.

“Big firms hold large cash stockpiles. They don’t plan large-sum investments. So there is no need for them to tap the market to raise funds,” the professor said.

While Korea stagnates, neighboring Japan has been making progress in corporate governance, he noted.

The country, which last year introduced the stewardship code, climbed a notch to No. 3. in 2014 corporate governance rankings by the Asian Corporate Governance Association. Korea stuck to its position of No. 8 out of 11 Asian countries.

By Lee Sun-young (milaya@heraldcorp.com)