Value Added in an Asian Context

Norman LYLEChairman,British Chamber of Commerce in Hong KongGroup Finance Director,The Jardine Matheson GroupHong Kong

Value Added in an Asian Context

Norman Lyle

20 November 2002

World Congress of Accountants

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Value Added in an Asian Context

Scary Times For Business People

Major Disruptive Changes- Terrorist attacks- Globalization- Internet

Training The Right Type Of People

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ECONOMIC PERFORMANCE MEASURES

Lack of depth of understanding as to the meaning of each particular measure

The identification of the appropriate metric to incorporate into internal shareholder value programs

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ECONOMIC PERFORMANCE MEASURES

Popularity Soared

Increased disclosure requirements

Corporate governance

Market performance of users

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THERE IS A BROAD RANGE OF POSSIBLE VALUE MANAGEMENT MEASURES

Value creation

Capital gainDividends

Growth Profitability

• Total shareholder return (TSR)• Internal shareholder return

related to equity (TSR) related to total capital (TBR)

• Market value added (MVA)

Value creation measures

• Multiples • EVA-Value• CVA-Value• DCF

Valuation models

• ROS • CFROGI• ROE • CFROI• ROI • EVA

• CVA

Profitability measures

• Asset turns• Sales margins• etc.

Value drivers

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Analysis of these measuresAnalysis of these measures

EVADCF/NPV

CFROI MVA

EPS ROCE ROS Cash flow per share

EPS Growth

Simple Complex

WellCorrelatedTo Share Price

PoorlyCorrelatedTo Share Price

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ECONOMIC PERFORMANCE MEASURES

Performance Measure -

ValueAdded

Definition -

VA is the residual income after subtracting the cost of capital employed to produce operating profit

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MULTIPLE FOCUS

A Typical Financial Management System

Setting Goals

Communicating

EvaluatingStrategies

Paying Bonuses

MeasuringPerformance

ValuingAcquisitions

Reviewing CapitalProjects

Inconsistent Standards,Goals and Terminology

Margins

Returns Earnings

Budgets

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A SINGLE FOCUS

A VA Financial Management System

Setting Goals

Communicating

EvaluatingStrategies

Paying Bonuses

MeasuringPerformance

ValuingAcquisitions

Reviewing CapitalProjects

Consistent Standards,Goals and Terminology

VA

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Value Added requires agreement of a cost of capital number

WACCs vary

- Hong Kong 8-12% Rates vary to reflect

- Country risk - Marginal tax rates- Local borrowing costs- Different gearing

HK 10%Thailand 15%USA 8%

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Advantages of VA Methodology Relatively simple and understandable metric for managers used to

P&Ls

Adds a focus to efficiency of capital use

Can be cut in many ways- total firm- by product- by geography- by customer- by supplier

Integrative tool across business processes

Strategic

Planning Budgeting MeasurementIncentives/

Rewards

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Exit businesses with negative PV of VA

Acquire businesses if PV of VA > price

Improve existing businesses- project task- integrate with business process• planning• budgeting• reporting• incentives

Reduce WACC

How to improve VA

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VA

Improve

NOPAT

Reduce capital

employed

Improve contribution

Reduce overhead

Reduce working capital

Reduce fixed assets

Business Unit Level

How to improve VA

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Measuring what you have done Measuring what you are planning to do

- Accurately- Align plans to maximise shareholder returns

Measures that test the appropriateness of your plan

Measures don’t replace judgement

What does this mean for Board of Directors?

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Some final views

A powerful “Ruler” not a “Decision Maker” (judgement on competitive advantage, skills, etc)

A useful prompter of issues External views are likely to vary Likely to understate the value of real options A tool enabling further devolution with enhanced

accountability

What VBM provides/does not provide

Taking the VBM approach one step further Operational decisions as well as strategic decisions have a

material impact on value

What is “Best”? Perfect foresight is best, but

unavailable!

VBM forces you to ask the question “How do we maximise value?”

And remember -

You get what you measure:Management should measure value creation, so should shareholders

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Some CEO’s were seen as the saviours of business and wealth creation.

They became likened to celebrities Not pragmatic, humble business leaders. They became the heroes of the “new economy” Analysts would point and preach: “Be like them.

They are the future leaders of these new business models we have created for you.”

Impact on Corporate Governance

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Question: Are high levels of character and integrity as important as high levels of Shareholder Value performance?

Answer: Yes

Impact on Corporate Governance

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On a marble block in the heart of Rockefeller Center in New York are engraved the words John D. Rockefeller wrote in the 1930’s:

“I believe in the sacredness of a promise, that a man’s word should be as good as his bond, that character, not wealth or power or position, is of supreme worth.”

Impact on Corporate Governance

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And in 1991, Anita Roddick of the Body Shop lamented:

“I am still looking for the modern-day equivalents of those Quakers who ran successful businesses, made money because they offered honest products and treated their people decently, worked hard, spent honestly, saved honestly, gave honest value for money, put back more than they took out, and told no lies.”

Impact on Corporate Governance

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In the 1990’s skills in the acquisition of companies, not their management were often sought. Add to this bad corporate governance and creative accounting.

Managers must constantly debate the parameters that will guide pursuit of wealth, seeking ethical ways which ensure the long-term survival and growth of their firms.

Creative solutions and decisions are always guided by a firm’s principles or values.

Impact on Corporate Governance

Value Added in an Asian Context

Norman Lyle

20 November 2002

World Congress of Accountants