PROVING IT
By Carla Rapaport

CFOs who increase shareholder value can reap even bigger rewards if they're willing to reveal how they did it. And here's proof.

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As a hot button for an investment strategy, palm oil is probably not at the top of any fund manager's list. Nor, for that matter, is Malaysia, a country where politics and economic policy remain locked in a sweaty embrace. Yet Yeo How, CFO of US$342 million-a-year IOI Corporation, a Malaysian plantation, property and manufacturing group, has shrugged off both these problems. Consider this - a rock-solid 40 percent of IOI's shares are held by foreign institutions, ranging from the State Teachers Retirement System of Ohio to Deutsche Asset Management. That's the highest foreign shareholding of any company in the country. And admit it, until this minute, you'd never heard of IOI.
It gets better. When the KLCI started to slide this spring, IOI's shares actually went up. You don't need to check a website to know this. The company's share price versus the index is printed on the inside front cover of IOI's principal piece of evidence that it consistently creates value for shareholders - IOI's annual report. One of the 28 winners of the Best Annual Reports in Asia ranking and Malaysia's top performer, IOI's 170-page report provides the reason for the outperformance. Says IOI's soft-spoken CFO: "To attract long-term investors, you need to provide more information than legally required. This we have done." Today, given the shaky economic outlook across the region, that effort is even more crucial. "In bad times, when the backdrop is negative, it's all the more important to give added comfort," he adds..

Its Worth It

A small but growing band of listed companies in Asia agree. Although CFOs of some of the largest companies in Asia consistently grump that a good annual report cannot be translated into any kind of real reward, CFO Asia's research shows the opposite.
We checked the share price and profit performance of the 28 companies that scored three stars or better on our ranking, which was devised by international reporting evaluation expert enterprise.com. More than 70 percent of these companies had share prices that outperformed their indices, sector or both over the past two years. And 86 percent of the top-ranked companies showed steady to strong profit growth over the past year - a remarkable achievement given the current downturn.
For more evidence, look at the bottom line. Of the nine companies with no stars at all, all underperformed their country's index over the past two years. Two-thirds showed profit drops. The lesson couldn't be clearer - good governance pays off and bad governance can be linked to poor performance.
True, an alarming number of well-respected companies, such as TSMC of Taiwan, Li & Fung of Hong Kong, and Singapore's SingTel scrape the bottom of our list. But would SingTel's offer for Optus have fared better with shareholders if SingTel had been more forthcoming about its own internal financials? It's a hard question to answer. But Mike Guillaume, investor communication specialist at enterprise.com, has a question of his own: "Which fund manager wouldn't trade SingTel (#113) for Telstra (#3)? Just put those two annual reports side by side and compare the way operations, risk analysis and market environment are addressed."
A comparison like that is money in the bank, say the CFOs that prepared the annual reports for the top 28 companies in the ranking. In interviews across the region, not one finance manager flicked an eyelash when informed of a definable link between a good annual report and share performance and profitability.
Bill Wavish, CFO of Woolworths (#8), Australia's largest retailer, puts it like this: "We strongly believe that the quality of our annual report and the detail of our disclosure creates an environment which, in turn, leads to a high rating for profit reliability and profit quality. That translates into a stronger share price and price - earnings multiple."
Even in Uttar Pradesh, the math is the same. Hindalco (#25), a US$535 million-a-year aluminum company, produces the company's report to US GAAP standards even though it does not have ADRs or any foreign listing. The reason is simple. "Full disclosure and the best accounts enable shareholders and fund managers to compare us to our US competitors, Alcan, Alcoa and several others," CFO Rajendra Kasliwal says. The reward? Consistent outperformance of the domestic index and a share price premium to other non-ferrous metal companies. Best of all, this virtuous circle brings down the cost of capital. For the past 18 months, according to Kasliwal, "Hindalco set a new corporate benchmark every time it raised money in India and sometimes the rates were lower than sovereign paper." Indeed, on September 17th last year, Kasliwal issued 500 million rupees (US$10.4 million) in seven-year non-convertible debentures at 9 percent, while five-year government paper yielded 9.1 percent.
Even when trouble hits, good corporate disclosure helps. Telstra's flotation in 1999 was structured so shareholders of the Australian group paid in two installments. A year later, when the second payment was due, the share price had sunk below the original exercise price. "But they still paid up," says Mark Dehring, manager of investor relations. He credits the company's exhaustive disclosure policy for the success. Michael Healy, COO and head of finance at Hong Kong-based First Pacific (#7) makes the same connection. "Absolutely, at the end of the day, a good annual report is aimed at lowering the cost of capital," says Healy. "It might seem odd - why spend money on an annual report when times are difficult? But we are trying to access capital markets that wouldn't be open to us any other way," he says.

Naked in Tokyo

And now, it may be that Asia's murkiest giant is letting in a little light. Japanese companies, renowned for elevating obfuscation to cult status, are starting to see the benefits of letting their corporate reserve slip. Take a look at Daiwa Securities (#14). In an interview at the opening of its annual report, the CEO, Yoshinari Hara, admits: "FY 2000 was not a great year - our internal assessment of our own performance is harsh." Daiwa's candid and thorough disclosure of its financial position has been matched by such Japanese heavyweights as Sony (#6), Tokyo Gas (#13), Mitsubishi (#16), Toyota (#18), Honda (#19) and Matsushita Electric (#21).
This marked improvement in corporate disclosure is spreading in Japan for a very practical reason. New accounting regulations are forcing the unwinding of the traditional cross-shareholding relationships between the biggest Japanese names. As a result, these companies need to find new, stable investors. As buying securities in Japan is about as popular as having Jell-O for desert, Japanese CFOs have been forced to look outside their shores for investors. Shigeharu Suzuki, director of corporate planning for Daiwa Securities, explains: "We have to find a home for our shares. So we've targeted foreign institutional investors, as well as domestic investors and Japanese pension funds." Suzuki adds: "Creating an easy-to-understand annual report is very important to this effort."
Coping with life as everyone else knows it still vexes the Japanese - take a look at any Japanese bank for proof. But Japan's disclosure pioneers are gaining a healthy respect for the benefits of transparency. Says Daiwa's Suzuki: "In three years, since we started to produce a world-class annual report, we've increased our foreign shareholding from 10 to 30 percent." And so far, he says, that shareholding has been very stable. Despite this achievement and those Japanese companies taking a starring role at the top of our rankings, Japan as a whole does no better than most Asian countries in terms of its volume of good annual reports. Indeed, some of Japan's largest companies rank at the very bottom of the list - notably Fanuc, the robotics giant, with a floppy pamphlet as its excuse for an annual report. (See "Naughty vs Nice," below)
CFOs who take the opposite view see a good annual report as a way to build stability in an unstable world. "I personally don't like volatility," says Telstra's CFO David Moffat. "Keeping the market informed and talking to our shareholders is all about reducing uncertainty and improved confidence in management," he says.
Telstra's independent research shows the theory is more than talk - 82 percent of its shares are held by long-term investors. Adds IOI's Yeo: "To attract long-term investors, you need to provide better information." Yeo believes the investment pays for itself - he says that most of the company's international shareholders have been with the group for five years. Kasliwal at Hindalco agrees - and he has an impressive 32 percent of his shares in stable foreign hands. For Jackson Tai, CFO of second-ranked DBS of Singapore, good governance means both solid foreign holdings and a lower cost of capital. "We like to believe our almost 60 percent international shareholding and the overwhelming global interest in our capital raising this year can be linked to our success in keeping our shareholders fully informed," he says.
Indeed, if an annual report can be fun to read, DBS hits the mark. The clever magazine-style lay-out tempts in the reader with lots of visual jokes and highlights that makes understanding the bank a snap. Woolworths, with a fruit or vegetable theme each year, is also a delight to read. And CLP Holdings, which features questions from security analysts up front, not only looks good but feels good with thick, glossy paper held together in a friendly school-book fashion with a navy blue ring-binder. It's clear that these companies realize what's at stake - without a song and dance, global capital will go elsewhere. "To us," says DBS's Tai, "good governance and transparency lie at the heart of being world class."

Welcome to the Party

This lesson is gaining pupils in unexpected quarters. Sinopec (#12), China's largest energy company and the largest employer in the country, has just under a quarter of its shares in private hands and 86 percent of those are in foreign pockets. After just one year as a public company, Sinopec's CFO, Zhang Jiaren, talks like a pro about corporate governance. In fact, while pleased with the company's standing among the Best Annual Reports in Asia, he points out that next year Sinopec will start quarterly reporting and will disclose more details about the board of directors, its auditing committee and more financial analysis of its numbers. "Further restructuring and strong disclosure will lead to growth in terms of our share price and profitability," says Zhang.
Not all of this, however, is purely for the good of the 500,000 people who work for Sinopec and its shareholders. On page 42 of the company's striking red, black and white annual report, small print informs the reader that 75 percent of compensation for senior managers is connected to performance-related bonuses and stock options. Through an interpreter, CFO Asia posed the question: "Does this give you a personal stake in good governance?" Zhang didn't waste his words: "Yes, to create an incentive for the senior management is to link the interest of senior management to our shareholders. The performance of the company is directly linked, as a result, to the shareholders' interest." In case you were wondering, the Sinopec finance team are all members of the Communist Party. Mark Mobius, meet Chairman Mao.
Sinopec, however, has a long way to go before it gets anywhere near the kind of almost frenetic level of corporate disclosure undertaken each year by Australia's Woolworths. Woolies, as it is affectionately known, hits the road with its annual report, visiting every major city in Australia. In each town, it invites as many investors as it can stuff into a hall and gives them exactly the same presentation it makes to institutional investors in Boston and New York. "And their questions are every bit as good," says CFO Wavish. The investment makes sense, according to Wavish. "If you convince your shareholders that they can understand the business then they rate you highly. We trade on a higher PE than our competitors on a worldwide basis, with very few exceptions," he says.

As Bad as It Gets

At the other end of our rankings are companies like Taiwan's US$1 billion-a-year chipset maker Via Technologies. VIA doesn't even produce an annual report, much less offer drinks and PowerPoint presentations to shareholders at annual get-togethers.
Not surprisingly, not many of the companies at the bottom of the list offered to comment on their ranking. (Not all those at the top were eager either - particularly those from Singapore.) Harvey Chang, CFO of TSMC (#98), Taiwan's well-respected chip giant, was the most forthcoming. In the past, he explained, the company viewed annual reports as a "compliance product", putting together their lackluster document in accordance with Taiwan's meager standards.
Today, Chang notes, that kind of attitude is looking frayed. "Investors are becoming more conscious about corporate governance. We realize that we need to re-examine what should go into our annual report," he says. TSMC has already set up a task force to handle this project. By next year, he says, the TSMC report should mirror the company's reputation. Others who give out their information in teaspoons privately cite the intense competition in Asia as their reason for sticking to statutory compliance. And, the fact is, all of the companies on our list conform to the legal standards of their government's regulatory bodies. Regulators are toughening up standards but not at any meaningful pace.
Meanwhile, CFOs who score well on our ranking say the competition argument is a lot of hogwash. Telstra's Dehring says: "Sure, you might be giving away some advantages from time to time, but keeping the lines of communication closed does affect share price. And you don't have to give everything away." IOI's Yeo adds that poor disclosure creates another lost opportunity - the ability to benchmark against the competition. "The culture in Malaysia is quite secretive on an industry-group basis," says Yeo. "I try to advocate sharing information so we can benchmark against each other but I never get a good response," he says.
Failings like these, however, are not particularly unique to Asia. Bad corporate governance gets good play all around the world. Enterprise.com's Guillaume has been publishing a global ranking of annual reports for six years. He points out that European banks like Deutsche Bank and UK-based Barclays Bank now underperform the best on our list, such as Singapore's DBS or United Overseas Bank. And although US companies still deliver the best standards of reporting in the world, even Americans can get it wrong, big time. He asks: "Put Hong Kong's CLP Holdings (#1) next to Enron's latest report. Had the Texan giant reported in such a clear way about its source and use of funds, might it still be in business today?"
If you're still skeptical that good governance pays real rewards, consider the recent academic research. A working paper by three professors at Harvard Business School, Harvard University and Wharton entitled "Corporate Governance and Equity Prices" studied these two variables at 1,500 US firms over the 1990s. In their conclusion, published last July, the authors found a "striking relationship between corporate governance and stock returns." Grouping companies with good reporting policies together, the authors found that their shares outperformed the top 10 percent of the rest of the companies by 8.5 percent per year.
On the buy side, a recent study by US consultant McKinsey of 200 institutional investors worldwide found that over 80 percent would pay a premium for the shares of a well-governed company, compared to a poorly governed company, given comparable financial performance. In Asia, investors said they would pay the highest premium - as much as 25 percent more for the shares of a well-governed Thai or Malaysian company, for example, as opposed to 18 percent for one in the US.

The Bottom Line

As TSMC's Chang will find out when he gets the results from his task force, a good annual report isn't cheap.Telstra, for example, spends A$50,000(US$26,000) on a customer survey before it even starts the process each year. Yeo's IOI says he spends about US$60,000 on the whole exercise, not counting staff time. Hindalco's report, which has very little color but is extremely thorough, costs about US$1.00 a copy. Kasliwal says he prints about 40,000 copies for Indian investors in English with a four-page US GAAP summary and 2,000 copies of the full US GAAP report. As for design, most CFOs choose to outsource, often to companies in the US and England. Sinopec, for example, uses a British group, Imagination.
The first step towards a good annual report, however, is not cash but simply communication. The CFOs who produce the best reports say they kick off the process by interviewing staff members, and not just in the finance department.
The next step in the process is to review the latest and most frequent questions from security analysts and institutional investors. First Pacific's Healy says: "There are always four or five key questions - we know because we regularly meet investors and analysts." By listening to his investors, Healy decided to add some improvements this year, particularly a reconciliation of local currencies through to US dollar accounts, giving users a "complete map from the local company through to the consolidated basis, saving them time," he says. This kind of give and take is unusual in the Asian context. Over the next few years it should become less unusual. As the winners of this contest know, even palm oil can be attractive if presented in the right way.

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Carla Rapoport is managing editor of CFO Asia. Additional research by Elizabeth Davies, Vero Escarmelle and Adam Lincoln.