The “ Korea Discount , ” the amount by which foreign investors undervalue Korean stocks , stems largely from structural problems with the governance of the country ’ s major conglomerates , a brokerage said in a recent report . In a paper titled “ 2012 Korean Corporate Governance , ” Tongyang Securities Inc . argued that governance problems had flared up in the last decade , during which the top five conglomerates saw their combined market capitalization jump from 28 . 4 percent to 44 . 9 percent . The report , based on the country ’ s top 80 companies and their earnings , auditing and governance - related data , argues that Korea ’ s governance system is now in “ chaos ” and there was no guiding model that companies can follow . “ The primary icon for Korean governance was ownership , ” the report says . But a major paradigm shift is afoot , the report adds , forcing the outmoded “ ownership ” structure to give up its decades - long control of the country ’ s industrial sectors . A growing number of Koreans are calling for tougher regulations and scrutiny against the business practices honed and implemented by the conglomerates , many of which have sparked public protest by profiting at the expense of smaller firms and social groups . This year , civic organizations and individual investors filed suit against such practices , which prompted well - known conglomerate leaders to pledge to donate their private wealth to charities . The crisis of chaebol governance has been in the offing , largely because of their own rule - bending practices , the report says . It highlights three practices that have been perfected by Korean conglomerates : tunneling , propping and expropriation . Tunneling refers to the act of artificially channeling new projects and business deals to key units whose stake are in large part owned by chaebol family members . Once such deals pile up , the benefits lead to huge , easy profits . Propping is sharing of risks among affiliates in a chaebol under the assumption that a financially nonviable unit will get support from other affiliates . Expropriation is a broader term that includes both tunneling and propping , while carrying a connotation of irregular transfer of wealth by higher and bigger conglomerate units . The three practices , or “ TPE , ” helped Korean conglomerates achieve faster growth , while also ensuring that Korean shares traded at a discount compared with other economies , a phenomenon known as the “ Korea Discount . ” The brokerage warns that major conglomerates are likely to engage in more irregular transfers of wealth to complete the inheritance process for the third - generation members of the chaebol families . By Yang Sung - jin ( insight @ heraldm . com )