Internal Corporate Governance

A health check on global best practices

Pavan Gandhok
Deputy MD South and South-East Asia
Jakarta: 5 March 2002

80 Raffles Place
#28-02 UOB Plaza 1
Singapore 048624
Copyright 2002. All rights reserved. No part of this presentation may be reproduced or transmitted in any form or by
any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system
without the express written consent of Stern Stewart & Co. EVA is a registered trademark of Stern Stewart & Co.

Size versus Value Added

Nearly a third of Pan-Asias 20 largest

companies by capital are amongst the 20
biggest wealth destroyers
Nearly half the top 20 Pan-Asian banks ranked
on Total Assets, are amongst the 20 biggest
wealth destroyers in the financial services sector

The case for improving

Corporate Governance in Pan-Asia
Positive MVA
Companies

Negative MVA
Companies

MVA/Cap %Capital MVA/Cap %Capital

USA
Europe

1.65
1.54

87%
82%

(0.18)
(0.18)

13%
18%

Pan-Asia

0. 81

56%

(0.30)

44%

Source: Stern Stewart research

The Bad News :

An incremental $139b has been invested in the wealth
destroying sectors over the past five years
Incremental Capital Investment (1996-2000)

Wealth destroyers
53%
US$139b

Source: Stern Stewart research

Wealth creators
47%
US$124

The system of internal corporate governance

defines a company's "constitution"
Governance should precede governing, just as a
constitution must precede legislation
The challenge for managers is to implement an
organisational strategy that makes their company more
effective in meeting the demands of financial, labour and
product markets
The potential for value creation from implementing
effective internal governance and control is large
but what changes in organisational strategy result in
sustainable value creation?

Study Sponsors

The worlds most

comprehensive ongoing best
practice studies in knowledge
worker functions
More than 1,600 global
participants, including 80% of
the Dow Jones Industrials, 2/3
of the Fortune 100, and 60% of
the Dow Jones Global Titans
Index
Part of Answerthink, a provider
of technology-enabled business
transformation solutions

International corporate finance

and governance advisory firm
Performance measurement
Management decision-making
Incentive compensation
Financial and business
training
Financial policy
Clients served from our offices
in 10 countries
Developer of the EVA
management framework
Publisher of the Journal of
Applied Corporate Finance

Participants span a representative range of

companies around the world
$500 MM
- $1 B

<$100 MM

Revenue size

$100MM -

$1 B
- $5 B

Europe

Over $5 B

Innovation

Customer focus

Retail

Business focus

Manufacturing Retail

Services

Public

Principal
businesses

2-3

>3

Finance

Utilities/ Telecom Oil / Gas

Ownership

Asia

One and several minor

Primarily Communicate financials

Basic Strategy

Latin
America

North America

Geography

Africa

Private

Number of
countries

2-5

6 - 10

11 - 40

> 40

< 1,000

Employees

> 50,000

1,000 - 5,000

5,000 - 9,999

10,000 - 49,999

State owned

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

100%

Value aligned companies significantly outperform

non aligned ones over time
5 years ending 31 Dec 2001

20%

16%

15%
10%
5%
0%
-5%

-4%
Average annual excess return vs. peers

Value aligned

Non aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Our survey uncovered a consistent pattern of best

practices for value-aligned companies

Leadership

Culture and organization

Decision-making

Management reporting

Incentives

Board focuses on long-term shareowner value and viability

Management makes value-adding decisions
Middle managers have high degree of business and economic literacy
Leaders communicate success consistently

Focus on a few key value-aligned metrics, seamlessly integrated across all

processes
Projects are funded solely on the basis of value
A consistent focus on value metrics
Earnings & asset information is tracked at many levels, and is widely
shared
Bonus pool is uncapped
Bonuses based on a few value aligned metrics

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

The best SAI score is 85 out of 100, the average

score is 66, and the worst score is 35
Shareowner Alignment Index score
Highest
Highest85
85
Average
Average66
66

85
72
66
62

Quartile 1
Quartile 2
Quartile 3

Quartile 4

Lowest
Lowest35
35

35

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

The litmus test for the state of your internal

corporate governance processes

Do your business leaders consistently celebrate your

firm's business successes?
Do your people focus on improving a few overarching
value metrics?
Are your bonus plans uncapped?

Celebrate success

Leaders of value-aligned companies consistently

communicate and celebrate business success
80%

67%

60%
40%

29%

20%
0%
Leaders communicate and celebrate
successes consistently

Value-aligned

Non-Aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value aligned companies have a clear definition of

success unambiguous goals, value-centric metrics
50%

9%

Focus on value based metrics

Value-aligned

Non-aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value aligned companies track revenues, expenses, and

assets at many levels better able to measure progress
Percent tracking revenues, expenses, assets

80%

73%

70%
60%

Value aligned
49%

47%

50%

33%

34%

40%

Unaligned

27%

30%

25%

20%
13%

20%

9%

10%
0%

Major
divisions

Revenues are tracked,

Expenses are tracked,
Assets are tracked

Geography
Revenues are tracked,
Expenses are tracked

Product lines
Revenues are tracked,
Expenses are tracked

Individual
products

As low as
possible

Revenues are tracked,

Expenses are tracked

Expenses are tracked

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value- aligned companies share data widely, empowering

people at all levels to make better decisions
How freely are the financial and operational results
of the company shared internally?
60%

Freely shared at all levels

(in summary or detail)

26%

0%

10%

20%

Unaligned

30%

40%

50%

60%

Value aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value aligned middle managers are more economically

literate and business savvy
Middle managers
53%
Take an economic view of
short and long term
operating/financial results

18%

33%
Understand business
model, value proposition,
and key strategy elements

0%

11%

10%

20%

Unaligned

30%

40%

50%

60%

Value aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value-aligned companies are more inclined to innovate,

take intelligent risks, grow from within, and view business
failures as a form of learning

93%

Value-aligned
Non-aligned

100%
80%

60%
47%

60%
40%

18%

20%
0%
We highly encourage internal
new business creation

Failure is viewed as a form of learning

Concentrate on a few metrics

Value-aligned companies fund projects more strictly on

value considerations alone

80%

72%

60%
40%
18%

20%
0%

All projects are funded on value

Value-aligned

Non-Aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Incentive Compensation

Value-aligned companies offer the unlimited upside

potential of an owner by not capping bonuses
73%

29%

Do not cap bonus

Value-aligned

Non-aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Aligned firms also make managers accountable through a

simple focus on one or two key value metrics for
determining bonuses, but most firms use three or more
Number of measures to drive compensation

Percent of companies using one or two

measures to drive compensation
49%

Senior corporate
managers

79%
45%

Senior business
unit managers

79%
47%

Middle managers /
front line managers

64%
50%

Non management-sales force

83%
61%

Non management-all other

91%

0%

20%
1

40%
3 to 4

60%
5 or more

80%

100%
Value-aligned

Non-aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

Value aligned companies break the link to budget by

setting performance targets by formula, not plan numbers
Percent using annual or strategic plans to set targets
20%

Senior corporate managers

20%

Senior business unit managers

56%

13%

Non management--sales force

0%

58%

13%

Middle managers / front line managers

Non management--all other

51%

7%

49%
31%

20%

Unaligned

40%

60%

80%

Value aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

100%

Value-aligned companies foster an ownership culture by

ensuring annual results are sustainable before bonuses
are paid
Is any part of the annual cash bonus dependent on cumulative performance
over a period of years?

45%
55%

Value
Valuealigned
aligned
73%
73%yes
yes
Non
Nonaligned
aligned
49%
49%yes
yes

Yes

No

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.

 and by giving employees tools to simulate long range

payoffs from current decisions
Percent able to simulate short and long term payouts
Senior corporate managers

18%

Senior business unit managers

Middle managers / front line managers
Non management--sales force
Non management--all other

0%

47%

9%

27%

4%
20%

2%
5%

47%

18%
20%

10% 15% 20% 25% 30% 35% 40% 45% 50%

Unaligned

Value aligned

Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.