1、CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei1Corporate Governance and the Value of Firms-Some Experiences of U.S and AsiaProfessor K.C.John Wei,PhDTel:(852)-2358-7676;Fax:(852)-2358-1749E-mail:johnweiust.hkDepartment of Finance,HKUST and Visiting Department of Finance,Peking UniversityPrepare
2、d for CCER,Peking University CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei2Profile of Prof.K.C.John WeiProf.K.C.John Wei received his PhD in Finance at the University of Illinois,Champaign-Urbana,in 1984.He served the University of Mississippi as an Assistant Professor from January 1984 to Jun
3、e 1988.After serving the University of Miami as an Assistant Professor for one year,he moved to Indiana University,where he served as an Associated Professor from July 1989 to June 1992.Since July 1992,Prof.John Wei has been serving the HKUST Business School initially as an Associate Professor and l
4、ater was promoted to full Professor.He served as Acting Head of the Department of Finance from January 2001 August 2002 and February June 2003.Prof.Wei has also been appointed the Director of the Centre for Asian Financial Markets since 1995.He was visiting University of Texas at Austin from Septemb
5、er to December 2002 and is currently visiting Guanghau School of Management,Peking University.With research focuses on empirical research in capital markets,derivatives and asset pricing of Asian and U.S.markets,Prof.Wei has produced a number of high quality papers on these areas.Many of these paper
6、s were published in top journals in finance and have made considerable contributions to the finance literature.He is an author of four books(in Chinese)on Hong Kong stock and warrants markets and Taiwanese stock market.In addition,Prof.Wei is a regular column writer for the Hong Kong Economic Journa
7、l,a local newspaper specialised in financial news.On the consultancy activities,Prof.Wei has helped Hang Seng Bank to develop a personal financial planning model called“SmartInvest,”and HSBC to develop a financial planning model,called“Rule-Based Investment Solutions.”He also conducted a consultancy
8、 project initiated by HKSAR for APEC and a few projects for Hong Kong Stock Exchange.Prof.Wei have been involved executive teaching for HKUST,Peking University,Hong Kong Stock Exchange,Chinese provincial government officials,general corporate executives,Xiean Jassen,Daimler/Chrysler,China Mobile,Asp
9、ire,and BenQ.CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei3Value creation and business strategiesValuationCreationQijiaCEOXiushenZhiguoPingtianxiaManagement teamAssets in placeGrowth opportunityCapitalPeopleManagement skillsVisionIntegrityCorporate governanceIncentivesRestructuringCompetitive
10、advantagesM&A(external)Investment(internal)(ROICWACC)R&DEquityDebtCentral bankCommercial banksInvestment banksMutual fundsInsurance companiesValuation methodsDCFComparative measureROAInvestorsTimingCost of capital(WACC)Financial engineeringCBCapital marketsObjective/StrategyInvestor behaviorGreed an
11、d fearCognitive or heuristic biasFocus vs Diversified (Cisco vs GE)OEM vs BrandLow vs high endCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei4Value creation via financial strategiesDividend policy:ReinvestmentShareholder valueInvestment decision:Growth optionsFinancing decision:WACCCorporate gov
12、ernance:Asymmetric informationApproaches tovaluationMergers&AcquisitionsValue creationROIC WACCDCF(NPV)valuationComparable valuationROARestructuring(Strategy)Why value value?Management disciplineTransparencyIndependenceAccountabilityResponsibilityFairnessSocial responsibilityStrategies to create val
13、ueInternal growth What is your dreamcompany?Focus vs diversifiedCore competence CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei5How to value a firm The value of a firm with a constant grow rate iswhere NOPLAT=net operating profit less adjusted taxesEBIT=earnings before interest and taxest=averag
14、e tax rateWACC=weighed average cost of capitalg=growth rate=reinvestment rate ROICROIC=return on new invested capital=NOPLAT/ICg/ROIC=reinvestment rate=rI)1()1()/1(111tEBITNOPLATgWACCrNOPLATgWACCROICgNOPLATgWACCFCFVICFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei6How to enhance the value of a fi
15、rm The MM formula How to enhance the value of a firm Increase operating efficiency(NOPLAT)Increase return on new invested capital(ROIC)Invest in new project only when ROIC WACC Increase the growth(g),rI=g/ROIC Prolong the period of competitive advantage(N)Reduce the cost of capital(WACC)1()1(111tEBI
16、TNOPLATWACCWACCWACCROICNNOPLATrWACCNOPLATgWACCFCFgrowthofValueplaceinassetsofValuebusinessofValueICFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei7Value Drivers Three value drivers:Abnormal profit(invest only when ROIC WACC):in the right industry Growth(g)or reinvestment:in the high growth indust
17、ry Risk(WACC):(1)economy-wide risk(business cycle),(2)operating risk(degree of capital intensity),and(3)financing risk(leverage)Common mistake:Managers often ignore the cost of“equity”capitalCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei8Sources of abnormal profit Monopoly(High profit margin):M
18、icrosoft or eBay(price or service differential;in the right industry)Low cost operator:Hon Hai Precision,Taiwan Semiconductor,Dell,BYD(make money from good management)Low financing cost:GE Barrier to entry:(1)capital,(2)technology(patents),(3)distribution channels,(4)government protection Example:Pr
19、ofit margin=20%;WACC=15%;Capital turnover=2 times For every$100 sales,profit=$20,required capital investment=$50,cost of capital=$50*15%=$7.50,abnormal profit=$20$7.5=$12.5.At what level of profit margin,will the firm become a mature company?CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei9Abnorm
20、al profit:Motorola,Ericsson and Nokia1993-19951994-961995-971996-98MotorolaROIC20.26%16.83%14.14%8.17%WACC8.21%13.00%14.01%14.11%Diff12.05%3.84%0.12%-5.94%EricssonROIC27.25%28.54%32.73%20.60%WACC5.07%8.10%11.80%11.69%Diff22.18%20.44%20.92%8.90%NokiaROIC11.94%15.42%18.71%27.60%WACC6.56%8.80%8.32%9.07
21、%Diff5.39%6.62%10.39%18.54%CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei10Earnings qualityAre your company future incomes easy to forecast?Are they sensitiveto business or industry cycle?(Microsoft vs Intel;GM vs Coca Cola)Economy-wide risk:Business cycle(GM vs Merck)Operating risk:Level of ca
22、pital intensity(TSMC vs Yu Yuan)Financing risk:Leverage(NWD vs SHK Properties)Accounting information risk:Disclosure and corporate governance(CAS vs IAS;TSMC vs UMC)Inventory Accounts receivables Gross margin S&A expenses Reserve for bad accounts receivables R&D ProductivityCFAII_SS18:OptionsHKUST B
23、usiness SchoolK.C.John Wei11Corporate GovernanceCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei12Recent corporate governance problems in the U.S.Manipulations of accounting earnings Enron,Global Crossing,Xerox,Adelphia Communications,World Com,Tyco International,ImClone Systems,Arthur Anderson,F
24、reddie Mac,MicrosoftOff-Balance Sheet borrowings Enron,ElanMotivation:Smooth earnings,jack up stock prices(stock options)Consequences Firms involved went to bankruptcy or were in trouble Whole market dropped due to investors loss of confidenceRemedies Strengthen the regulations by SEC and the U.S.Co
25、ngress Internal and external auditing More efficient boards of directorsCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei13Characteristics of Asian Companies Owned and controlled by family(pyramid or crossholding)Enhancement(interests of managers and shareholders can be more aligned)Entrenchment(s
26、tealing,tunneling,ignoring or destroying firm value)Lack of corporate governance(TSMC CEO:Integrity)Cannot trust outside professional managers Dont know how to delegate Pass CEO position to own son rather than capable manager Commit to more cognitive or heuristic biasCFAII_SS18:OptionsHKUST Business
27、 SchoolK.C.John Wei14Why is corporate governance important?A recent survey conducted by McKinsey&Co.shows investors pay a premium of more than 20%for good CG firms.The benefits of good corporate governance:reduce the cost of capital(WACC)increase the value of the firms benefit shareholders,employees
28、,and societyChen,Chen,and Wei(2003)find companies in East Asia:non-disclosure CG improves from bottom 25%to top 75%:the cost of equity capital is reduced 1.26%points Disclosure improves by the same magnitude,the cost of equity capital is reduced by 0.47%point Firms in better CG country can also redu
29、ce the cost of capitalSimons(HBR,September 2002)profitability is positively correlated with how workers perceive their managers behavioral integrity(hotel industry)CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei15What is corporate governance?The mechanisms of Pushing firms to operate more effici
30、ently and to create value,and Preventing potential exploitation of outside investors,particularly shareholders,by corporate insiders such as the management Shareholders have control rights Directors and managers are supposed to run the firms in the interests of the shareholders CFAII_SS18:OptionsHKU
31、ST Business SchoolK.C.John Wei16Why is it needed?Agency problem between shareholders and managers(problem for U.S.companies)Agency problem between majority shareholders and minority shareholders(problem for Asian companies)Expropriation(entrenchment,stealing,tunneling)CFAII_SS18:OptionsHKUST Busines
32、s SchoolK.C.John Wei17Good governance practiceWhat makes great boards great(Sonnenfeld HBR,September 2002)very simply,high-functioning work groups a climate of respect,trust,and candor among board members and between the board and management.Information is shared openly and on time feel free to chal
33、lenge one anothers assumptions and conclusions management encourages lively discussion of strategic issues.feel responsibility to contribute to performance.assess their own performance,both collectively and individually.Installing effectively independent board An independent board chairman(CEO not t
34、he chairman)Three most independent committees on any boardThe audit committeeThe compensation committeeThe nominating committeeCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei18Why Value Value?CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei19Japan in Mid-1980s:We are Number OneFrom Kim and Yo
35、ungCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei20Japan Now:We are in Prolong RecessionFinancial Times:February 2,2002CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei21Nikkei 225 vs.Dow:January 1984-June 2003 CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei22Not Every Thing is Equal:Sony
36、 is Different CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei23Toyota Motor is also Different CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei24But Nissan is the same until RecentlyCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei25Renaults 44.4%purchase in March 1999makes Nissan different
37、since CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei26Value-Based Management Makes the Differences The performance difference between U.S.firms and Japanese firms,and between Sony and other Japanese firms is Good performers adopt Value-Based Management(VBM),while losers do not.What is the probl
38、em for the U.S.market now?What is VBM?VBM focuses on value creation for their shareholders rather than stakeholdersCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei27What is the Decision Rule for VBM?VBM focuses on investments(old or new)that can generate a return on invested capital greater than
39、their cost of capital.That is,invest only whenROIC WACC CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei28What is the Value of a Firm?Firm value=Value of equity+Value of debt Firm Value=Assets in place+Growth opportunities=Book value+Growth options Growth option makes a major difference in value
40、among firms)1()1()/(111tEBITNOPLATWACCWACCWACCROICNNOPLATROICgWACCNOPLATgWACCFCFgrowthofValueplaceinassetsofValuebusinessofValueCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei29Shareholder-Oriented Economies Perform Better The U.S.corporate focus on shareholder value since the mid-1980.The benef
41、its are:GDP per capita in the U.S.has a lead of more than 20%over other countries and has been widening since early 1990s,due to Much higher factor productivity,especially capital productivity Invested in more productive(or value creating)projects,i.e.,higher financial returnsCFAII_SS18:OptionsHKUST
42、 Business SchoolK.C.John Wei30Shareholder-Oriented Firms Benefit All200 years ago,Adam Smith postulated that“the most productive and innovative companies would create the highest returns to shareholders and attract better workers,who would be more productive and increase returns further”a virtuous c
43、ycleOn the other hand,“Companies that destroy value would create a vicious cycle and eventually wither away”CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei31Shareholder-Oriented Firms Benefit All(cont)Companies with higher labor productivity are more likely to create more value Companies that ar
44、e able to create more value also create more jobs Happy workers,happy investors(Fortune,May 2002)Conclusion:A shareholder value focus not only is good for shareholders but also good for the economy and other stakeholdersCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei32Case studies(HBR)Leading fo
45、r value by Pitman(March 2003):British bank Lloyds TSB A CEO-led transformation of the companys culture by Sir Brian Pitman:value-based managementa single definition of success and a single means of measuring it.At Lloyds,he replaced the existing array of implicit objectives with a single governing o
46、bjective(generate greater value for shareholders)and established increasingly sophisticated internal metrics for achieving it.create value for everyone:Customer,employees,and communities.From 1983 to 2001,British bank Lloyds TSB increased its market capitalization 40-fold,in part by shedding assets
47、and narrowing its focus.CFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei33Case studies(HBR)When company values backfire by Edmondson and Cha(2002-11)May misinterpret and brand the CEO as a hypocriteMake your values mean something by Lencioni(2002-07)Enron 2000 annual report for corporate value:“C
48、ommunication.Respect.Integrity.Excellence.”Empty values statements create cynical and dispirited employees and undermine managerial credibility Values statements really to mean something should follow:understand the different types of values:core,aspirational,permission-to-play,and accidental.be agg
49、ressively authentic own the process weave core values into everythingCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei34Restructuring CompaniesGeneralCFAII_SS18:OptionsHKUST Business SchoolK.C.John Wei35The Value Manager A focus on long-run cash flow returns,not quarter-to-quarter changes in earni
50、ngs per share Value-oriented view:Invest only when return on invested capital cost of capital(ROIC WACC)Ability to take an outsiders view of the business Willingness to act on opportunities to create incremental value Finally,and the most important,the need to develop and institutionalize a managing
