In the spring of 1998, with the Korean economy in the grip of an IMF bailout and five of the thirty largest chaebols already bankrupt, President Kim Dae-jung announced what he called the "five plus three principles" of chaebol restructuring. Enhanced transparency. Elimination of mutual debt guarantees between subsidiaries. Improvement of capital structures. Streamlining of business portfolios. Strengthening of shareholder accountability. It was the most ambitious and credible reform programme Korea had attempted to that point, backed by the leverage of genuine national crisis and a $58 billion IMF facility whose conditions required structural change. Twenty-five years later, South Korea's top four chaebols — Samsung, Hyundai, SK, and LG — have not shrunk. They have grown. Their share of national economic output is larger than before the crisis. The circular cross-shareholding structures remain substantially intact. The founding families still control vast corporate empires from a small direct equity stake. If the 1997 crisis, with all its coercive force, could not break the chaebol model, the obvious question is what can.
The answer that Korea's current administration is testing is a different kind of pressure: not the emergency compulsion of a financial collapse, but the slower, harder force of legal redefinition. The Commercial Act amendments passed in July and August 2025 represent the most substantive change to the legal framework governing Korean corporate governance since the post-crisis reforms of 1998-2003. Understanding what they actually change — and what they deliberately leave untouched — is the essential analytical task for anyone trying to assess whether Korea's re-rating story has structural foundations or merely a very good marketing narrative.
The cycle that always ends the same way
The history of chaebol reform in Korea follows a pattern so consistent it has become almost predictable. A crisis — financial, political, or social — creates a window of popular legitimacy for structural change. A reformist administration arrives with a mandate and announces ambitious measures. The chaebols initially comply with the most visible requirements while lobbying intensively against the structural elements. Economic conditions stabilise, growth returns, and the political urgency evaporates. The chaebol lobbies — operating through industry federations, aligned think tanks, and a media environment where advertising relationships create structural dependencies — reassert themselves. The legislation either fails to pass, gets watered down in committee, or passes but is inconsistently enforced. The controlling families emerge with their positions essentially intact.1
The 1997 crisis produced genuine deleveraging — chaebol debt-to-equity ratios fell sharply from above 300% to below 200% — but the ownership structures that allowed family control with minimal equity stakes were barely touched. The Daewoo collapse in 1999, the largest corporate bankruptcy in Korean history at the time, removed one major chaebol from the landscape entirely, but Samsung, Hyundai, SK, and LG absorbed the economic space it vacated and grew larger. The 2002-2003 period saw renewed governance reform effort under the same Kim Dae-jung administration, but with economic recovery underway, the political economy had already shifted back toward accommodation.
The pattern repeated under subsequent administrations of both political stripes. Roh Moo-hyun brought reformist intent and produced some advances in securities regulation and audit committee requirements. Lee Myung-bak, a former Hyundai executive, was largely sympathetic to chaebol interests. Park Geun-hye's presidency ended in impeachment over a corruption scandal that implicated Samsung's de facto head Lee Jae-yong directly — he was convicted and sentenced to prison for bribery, and then released on parole in time to resume operational leadership of the group. Moon Jae-in campaigned on economic democratisation but ultimately pursued measures that were incremental at best, even as he won office on the back of the candlelight protests that had swept Park from power.2
The 'three-five rule' has governed Korean judicial treatment of chaebol executives for decades: a three-year sentence, suspended for five years, then effectively wiped clean. The message it sends to controlling families about the consequences of governance failures is unambiguous.
What the entire post-1997 reform period demonstrated is that the chaebol problem is not primarily a legislative problem. Laws that could constrain chaebol behaviour were proposed repeatedly. Many were enacted. The enforcement regime, the judicial culture, and the fundamental political economy of a country whose export competitiveness depends heavily on a small number of massive conglomerates all worked systematically against effective implementation. The judiciary's notorious leniency toward chaebol founding families — the informal "three-five rule" under which prison sentences were routinely suspended regardless of offence severity — was not a legal loophole. It was a reflection of deeply embedded institutional values about the relative importance of economic continuity and accountability.3
What the 2025 amendments actually changed
Against this backdrop, the Commercial Act amendments passed by the National Assembly in July and August 2025 deserve to be read carefully rather than either dismissed as more of the same or celebrated as a decisive break. There are three specific changes that are genuinely structural, and two areas where the reforms are notably silent.
The first and most consequential change is the expansion of directors' fiduciary duty. Under the amended Article 382-3, directors' duty of loyalty — previously owed only to the company as an abstract legal entity — now explicitly extends to shareholders. Directors are required to protect the interests of shareholders in general and treat all shareholders fairly and equally in performing their duties. This sounds like a modest clarification. It is not. Under the previous framework, a director who approved a related-party transaction that transferred value from a listed subsidiary to the controlling family's holding company was technically acting within their legal obligations as long as the transaction was not demonstrably harmful to the company as such. Under the amended framework, that same transaction can now be challenged as a breach of the duty owed to minority shareholders whose economic interests were directly damaged.4
The second change is cumulative voting for large listed companies. Companies with assets exceeding KRW 2 trillion must adopt a system under which shareholders can concentrate their votes on preferred director candidates, rather than having their votes spread proportionally across all contested seats. In a company where the founding family controls 30% of the votes and the remaining 70% is dispersed among institutional investors, portfolio managers, and retail holders, cumulative voting allows the non-family shareholders to coordinate their votes to secure at least some board representation. It does not eliminate family control. It punctures the practical unanimity that had made Korean boards, in the words of one governance analyst, "the most decorative in Asia."5
The third change expands the separate election requirement for audit committee members. Previously, one audit committee member had to be elected through a process that limited the controlling shareholder's voting influence. The August 2025 amendment raises this to at least two members. Combined with the electronic shareholder meeting requirement — which removes the practical barrier of physical attendance that had historically suppressed minority participation — this creates a genuine structural mechanism for minority influence over corporate oversight that did not previously exist at scale.6
What the amendments left untouched
The structural critique of the 2025 reforms is not that they are insignificant. It is that they address the symptoms of chaebol dominance without confronting its mechanism. The circular cross-shareholding structure — the web of intra-group equity stakes that allows founding families to control entire corporate empires from a small direct ownership position — is not directly targeted by any of the enacted legislation. A founding family that owns 4% of a holding company, which owns 20% of an operating subsidiary, which owns 15% of another subsidiary in the same group, exercises effective control over all three entities. Expanding fiduciary duties to minority shareholders improves the legal position of those shareholders when they bring claims. It does not dissolve the ownership architecture that put the founding family in control in the first place.7
Related-party transactions are also largely outside the scope of the reforms. The requirement for mandatory disclosure of material related-party transactions — the contracts, pricing arrangements, and capital transfers between chaebol subsidiaries that have historically been the primary mechanism for value extraction from minority shareholders — was discussed during the legislative process but was not included in the enacted amendments. This is the single most consequential omission. Without visibility into intra-group transaction pricing, the expanded fiduciary duty is a legal standard without an evidentiary foundation. Minority shareholders have a right of action they cannot exercise because the information necessary to bring a credible claim is not publicly available.
The inheritance and gift tax mechanism — the financial incentive that leads controlling shareholders to structurally suppress their own share prices to minimise estate tax liabilities — was addressed only at the edges. The proposed Stock Price Suppression Prevention Act, which would change the tax valuation methodology for companies with PBR below 0.8x to remove the artificial incentive for price suppression, was under active discussion as of late 2025 but had not yet been enacted. Until the inheritance tax calculus changes, controlling shareholders retain a financial interest in keeping valuations below potential — which means the foundational conflict between family wealth transfer and shareholder value remains unresolved at its source.8
Without mandatory disclosure of related-party transactions, the expanded fiduciary duty is a legal standard without an evidentiary foundation. Minority shareholders now have a right of action they often cannot practically exercise.
The corporate response and what it reveals
The most informative test of whether reform is genuine or theatrical is not the legislation itself but the corporate response to it. Here the evidence is mixed in ways that are analytically useful.
The measurable positive responses have been real. Treasury share cancellations — which eliminate the latent dilution from buybacks that are announced but never retired — increased by 33% among Korean listed companies between 2022 and 2023 even before the new legislation, driven by a combination of government signals and activist pressure.9 Dividend payout ratios have risen across the banking sector in particular, where the combination of Value-Up Programme requirements and institutional investor pressure has been most concentrated. Shinhan Financial Group raised its total shareholder return from 26% in 2021 to approximately 40% by 2024, restructured subsidiaries, and became the sector benchmark for governance improvement. These are not trivial achievements.
The less encouraging signals come from the boards of the largest chaebols. Samsung, Hyundai, and LG each had zero dissenting votes from their independent directors over the five years to 2024. More than 70% of outside directors at Korean companies come from academia, government, or legal backgrounds rather than from commercial management, limiting both their practical independence and their ability to challenge operating decisions on substantive grounds. In the 2024 proxy season, activist campaigns targeting chaebol governance won very little at annual general meetings, though they produced some measurable behavioural shifts through the threat of proxy contests. The business lobby's resistance to governance-related Commercial Act revisions was intense throughout the legislative process, and continued after enactment through lobbying for implementation delays and narrow interpretive guidance.10
The Japan parallel and where it breaks down
The most common framing of Korea's reform moment is the Japan parallel. The Tokyo Stock Exchange's March 2023 P/B directive is cited as the model — a regulatory intervention that fundamentally reordered incentive structures and produced a measurable re-rating. The Korea Value-Up Programme was explicitly modelled on Japan's corporate governance reform framework. The argument is that if Japan could exit decades of corporate stagnation through governance reform, Korea can too.
The parallel is real but imprecise in ways that matter for investors. Japan's governance reform problem was primarily one of incentives and norms — companies had never been asked to prioritise shareholder returns, and once they were asked in terms that carried institutional consequences, many responded. The ownership structure of Japanese companies, while featuring cross-shareholdings, was not primarily organised around founding family control. The mechanism of the Korean discount is more deeply entrenched because it is woven into the structure of family wealth transmission across generations, not simply into corporate culture. Reforming Japanese governance required changing what companies were asked to optimise for. Reforming Korean governance requires asking controlling families to accept a legal framework that, at full implementation, would constrain their ability to use listed subsidiaries as instruments of private wealth management.
That is a fundamentally different ask, and the political durability of an administration willing to make it is therefore the central variable in the Korea re-rating story. Lee's Democratic Party controls the National Assembly. The legislation has passed. The implementation timeline is in motion. But the chaebol lobby did not stop resisting after the votes were cast — it shifted its energy to enforcement guidance, implementation details, and the courts. The next phase of the reform story will be written not in the National Assembly chamber but in the Financial Services Commission's regulatory guidance documents and in the Seoul District Court's first rulings on fiduciary duty claims under the new framework.
The investment implication
For investors, the analytical conclusion from this history is neither pessimism nor the uncritical optimism that characterised the initial market response to the reform announcements. The structural case for Korea's re-rating is real and the legislative foundation is the most credible it has ever been. But the re-rating will be earned company by company, sector by sector, as the new legal framework produces observable enforcement actions, successful minority shareholder claims, and board compositions that begin to reflect the amended rules rather than the prior convention.
The sectors where the re-rating is most advanced — banking and financial services, where dividend requirements are most explicit and institutional investor pressure is most concentrated — are also the sectors where governance improvement has been most measurable. Korean banks trade at roughly half of book value in some cases despite profitable operations, improving shareholder return programmes, and a regulatory environment that now explicitly supports minority interests. The discount in these names reflects residual scepticism about governance that is, on the current trajectory, increasingly anachronistic.
The sectors where the reform story is least advanced — large-cap industrial chaebols with complex cross-holding structures and founding family succession dynamics actively in play — remain the harder investment case. The legal framework has changed. Corporate behaviour in these names is changing slowly and selectively. The gap between the potential valuation under full governance reform and current market pricing is large. The timeline to close it is uncertain, and that uncertainty is itself a valuation input. Patience, selectivity, and a clear-eyed assessment of where reform is producing real corporate behaviour change rather than compliance optics: that is the discipline the Korea governance trade requires.