Value Added in an Asian Context

1. 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

2. World Congress of Accountants Value Added in an Asian Context Norman Lyle 20 November 2002

4. Value Added in an Asian Context • Scary Times For Business People • Major Disruptive Changes - Terrorist attacks - Globalization - Internet • Training The Right Type Of People

5. 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

6. ECONOMIC PERFORMANCE MEASURES Popularity Soared • Increased disclosure requirements • Corporate governance • Market performance of users

7. 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 Value creation Dividends Capital gain Growth Profitability THERE IS A BROAD RANGE OF POSSIBLE VALUE MANAGEMENT MEASURES

8. Analysis of these measures Simple Complex Well Correlated To Share Price Poorly Correlated To Share Price

9. ECONOMIC PERFORMANCE MEASURES Definition - VA is the residual income after subtracting the cost of capital employed to produce operating profit Performance Measure - Value Added

10. MULTIPLE FOCUS A Typical Financial Management System Setting Goals Paying Bonuses Communicating Margins Returns Earnings Measuring Performance Evaluating Strategies Budgets Valuing Acquisitions Reviewing Capital Projects Inconsistent Standards, Goals and Terminology

11. A SINGLE FOCUS A VA Financial Management System Setting Goals Paying Bonuses Communicating VA Measuring Performance Evaluating Strategies Valuing Acquisitions Reviewing Capital Projects Consistent Standards, Goals and Terminology

12. 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%

13. 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 Measurement Incentives/ Rewards

14. How to improve VA • 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

15. How to improve VA Business Unit Level Improve contribution Improve NOPAT Reduce overhead VA Reduce working capital Reduce capital employed Reduce fixed assets

16. What does this mean for Board of Directors? • 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

17. Some final views What VBM provides/does not provide • 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 Taking the VBM approach one step further • Operational decisions as well as strategic decisions have a material impact on value

18. 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 18

19. Impact on Corporate Governance • 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.”

20. Impact on Corporate Governance Question: Are high levels of character and integrity as important as high levels of Shareholder Value performance? Answer: Yes

21. 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.”

22. 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.”

23. 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 long-term survival and growth of their firms. Creative solutions and decisions are always guided by a firm’s principles or values.

24. World Congress of Accountants Value Added in an Asian Context Norman Lyle 20 November 2002