Transcript The Role of Business Professionals in Education

Value Added in an Asian Context
Norman LYLE
Chairman,
British Chamber of Commerce in Hong Kong
Group Finance Director,
The Jardine Matheson Group
Hong Kong
World Congress of Accountants
Value Added in an Asian Context
Norman Lyle
20 November 2002
Value Added in an Asian Context
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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
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Lack of depth of understanding as to the
meaning of each particular measure
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The identification of the appropriate
metric to incorporate into internal
shareholder value programs
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ECONOMIC PERFORMANCE MEASURES
Popularity Soared
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Increased disclosure requirements
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Corporate governance
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Market performance of users
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THERE IS A BROAD RANGE OF POSSIBLE
VALUE MANAGEMENT MEASURES
Value creation measures
• Total shareholder return (TSR)
• Internal shareholder return
- related to equity (TSR)
- related to total capital (TBR)
• Market value added (MVA)
Value creation
Valuation models
Dividends
Capital gain
Growth
Profitability
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Multiples
EVA-Value
CVA-Value
DCF
Profitability measures
• ROS
• ROE
• ROI
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CFROGI
CFROI
EVA
CVA
Value drivers
• Asset turns
• Sales margins
• etc.
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Analysis of these measures
Simple
Well
Correlated
To Share
Price
EVA
Poorly
Correlated
To Share
Price
EPS
ROCE
ROS
Cash flow per share
Complex
DCF/NPV
CFROI
MVA
EPS Growth
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ECONOMIC PERFORMANCE MEASURES
Performance
Measure -
Definition -
Value
Added
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
Paying Bonuses
Communicating
Margins
Measuring
Performance
Returns
Earnings
Evaluating
Strategies
Budgets
Valuing
Acquisitions
Reviewing Capital
Projects
Inconsistent Standards,
Goals and Terminology
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A SINGLE FOCUS
A VA Financial Management System
Setting Goals
Paying Bonuses
Measuring
Performance
Communicating
VA
Valuing
Acquisitions
Evaluating
Strategies
Reviewing Capital
Projects
Consistent Standards,
Goals and Terminology
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Value Added requires agreement of a cost of capital number
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WACCs vary
- Hong Kong 8-12%
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Rates vary to reflect
- Country risk
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- Marginal tax rates
- Local borrowing costs
- Different gearing
HK 10%
Thailand 15%
USA 8%
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Advantages of VA Methodology
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Relatively simple and understandable metric for managers used
to P&Ls
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Adds a focus to efficiency of capital use
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Can be cut in many ways
- total firm
- by product
- by geography
- by customer
- by supplier
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Integrative tool across business processes
Strategic
Planning
Budgeting
Measurement
Incentives/
Rewards
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How to improve VA
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Exit businesses with negative PV of VA
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Acquire businesses if PV of VA > price
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Improve existing businesses
- project task
- integrate with business process
• planning
• budgeting
• reporting
• incentives
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Reduce WACC
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How to improve VA
Business Unit Level
Improve
contribution
Improve
NOPAT
Reduce
overhead
VA
Reduce
working capital
Reduce
capital
employed
Reduce fixed
assets
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What does this mean for Board of Directors?
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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
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Some final views
What VBM provides/does not provide
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A powerful “Ruler” not a “Decision Maker” (judgement on
competitive advantage, skills, etc)
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A useful prompter of issues
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External views are likely to vary
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Likely to understate the value of real options
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A tool enabling further devolution with enhanced
accountability
Taking the VBM approach one step further
 Operational decisions as well as strategic decisions have a
material impact on value
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What is “Best”?
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Perfect foresight is best, but unavailable!
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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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Impact on Corporate Governance
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Some CEO’s were seen as the saviours of
business and wealth creation.
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They became likened to celebrities
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Not pragmatic, humble business leaders.
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They became the heroes of the “new economy”
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Analysts would point and preach: “Be like them.
They are the future leaders of these new
business models we have created for you.”
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Impact on Corporate Governance
Question: Are high levels of
character and integrity as
important as high levels of
Shareholder Value performance?
Answer: Yes
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Impact on Corporate Governance
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.”
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Impact on Corporate Governance
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.”
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Impact on Corporate Governance
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 longterm survival and growth of their firms.
Creative solutions and decisions are always
guided by a firm’s principles or values.
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World Congress of Accountants
Value Added in an Asian Context
Norman Lyle
20 November 2002