VALUE CHAMPS
Behind every great company there's a CFO creating wealth for shareholders.
By Tom Leander

Bob Boldt is a man on a mission. As the head of international investing at the California public employees' retirement system (CalPERS), Boldt has been traveling across Asia of late, scouting out investment opportunities as local companies slowly return to profitability. Boldt, who manages over US$30 billion in cross-border equity investments for CalPERS, has come prepared. The portfolio manager carries a list of questions designed to rattle even the most assured CFO. Usually easy going and genial, Boldt has been known to turn bulldog when interrogating corporate managers. And he doesn't get sheepish just because he's in the land of face, either. "Asia may throw up big obstacles to a CFO seeking to manage for shareholder value, but I expect high performance anyway," says Boldt.

Indeed, given CalPERS well-earned reputation for shareholder activisim, some might wonder why Boldt even bothers showing up in Asia. Scores of companies in the region have turned trampling on shareholders into high art. This is particularly true for family-controlled companies with minority public equity stakes. Finding managers at these companies who concern themselves with shareholders is like finding ducks who concern themselves with opera. But Boldt remains undeterred. "I want real answers," he insists. "I'd love to find CFOs who can tell me how they translate my concerns about cost-of-capital, EVA, and returning wealth to shareholders into actions carried out by their subordinates."

BOB BOLDT, LOOK NO MORE

In the pages that follow, CFO Asia introduces the Performance 100 - the first ever ranking of the top corporate wealth-creators in Asia. In creating the P-100, we examined the 1998 financial records of all publicly traded, large capitalization companies in Hong Kong, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand (corporations in Indonesia and China have been left out because, quite frankly, we don't trust the quality of the financial reporting in those two countries). The 100 companies listed here, ranked by country and by region, have surpassed all other corporations in Asia in delivering economic profit to shareholders. Some of the companies on the Performance 100 are household names: Cable & Wireless HKT (#1), Singapore Telecom (#3), Ayala Corporation (#19). Some, like Berjaya Sports Toto (#57) and Datacraft Asia(#84) are less well known. But marquee names or not, all the companies on the P-100 are true cash-masters - worthy stewards of investor's hard-earned capital.

Admittedly, no method for assessing corporate performance is bullet-proof. But the yardstick we used for gauging corporate wealth creation, Market Value Added (MVA), is as close as it gets. Essentially, MVA is the future value of a company's EVA, or economic value added. Think of it this way: MVA represents the cash investors have put into a company and the cash those investors can take out at a given time (see box for a more detailed explanation of how MVA and EVA are calculated). Granted, many CFOs in Asia still rely on more traditional methods for measuring corporate performance - return on equity (ROE), earnings per share (EPS), and the like. But for our money, MVA does a better job of highlighting corporations that create wealth - and those that destroy it.

In assessing exactly who are the top wealth creators in Asia, we enlisted the aid of experts: Stern Stewart & Company, the New York-based consultancy which specializes in value-based management. Bennett Stewart, one of the founders of the company, has been a champion of shareholder value for nearly two decades. Indeed, Stewart coined the phrase market value added, as well as its financial cousin, economic value added. Under his direction, Stern Stewart's staff in Singapore collected the corporate data and did the calculations that formed the basis of the Performance 100.

While calculating MVA is fairly straightforward, there's no secret formula for actually generating it. Generally, it's an evolving process, and the companies on the P-100 are all at different stages in their approach to creating wealth for shareholders. Some have embraced value-based management systems that feature a charge for the cost of capital - radical thinking in Asia. Ironically, we discovered that a number of the companies on the list stockpile cash - supposedly death to value creation. Almost all the managers on the P-100, however, run their businesses as if they themselves were the owners, spending capital wisely, controlling costs, and adapting management techniques that put them out front in an evolving market.

No small chore. Not surprisingly, we also found that the great majority of companies on the P-100 employ world-class finance directors to help shoulder the load. While Cable & Wireless HKT, Taiwan Semiconductor (#4), PTT Exploration & Production (#25), and Jollibee Foods (#74) may not share markets, processes or goals, they do have one thing in common: CFOs who put their investors first. These value-conscious CFOs don't worry about the Bob Boldts of the world because they are the Bob Boldts of the world. They, too, do battle for shareholders - their own. Says David Prince, CFO at top performer Cable & Wireless: "This is the world we live in. It's a new, dynamic market. How we deliver value back to our shareholders informs every decision we make."

Instinct or Science?

Easy to say, but tough to do. Value-minded CFOs in Asia confront difficulties that would likely send their counterparts at US or European-based companies screaming into the night. For openers, Asian CFOs must generate returns that exceed a cost of capital pegged to the risk-free rate of their home markets. In the Philippines, for example, the risk-free rate as of press time was about 21 percent. That's a far higher hurdle for creating value than Jack Welch ever asked of his GE managers. Celebrated CFOs in the US and Europe often talk about how stretch targets help spur exceptional corporate performance. For finance manager in Asia, just meeting a company's cost of capital is a stretch target.

Other barriers hinder the quest for value. Technologies that help create economies of scale and produce capital-reducing efficiencies - like just-in-time manufacturing - are just now being embraced in the region. What's more, many CFOs are instructed by their bosses to cache cash. Given the liquidity crunch that nearly gutted scores of companies in the region, such hoarding is understandable. The problem is, holding too much cash - rather than returning it to shareholders in the form of share buybacks or other investments - destroys value.

Moreover, many CFOs in Asia operate in an environment where financial literacy and sensitivity to managing for shareholder value is still emerging. Convincing the top brass that value management is the truth, the way and the light can be tough when finance managers at your competitors are taking the short route. Says Chatchawal Eimsiri, senior manager, finance, at PTT Exploration & Production, (#1 in Thailand and #28 overall): "A lot of CFOs in Thailand may have thought finance was easy. That's why they obtained long-term funding at short-term rates." He adds, "I never thought capital was free."

That sort of capital discipline is typical of virtually all of the CFOs at the top of the P-100. Most use some sort of cost-of-capital measure to evaluate the relative merits of capital investments, including acquisitions. But many finance managers on the list also evince a fierce independence from a single metric, arguing that Asia's dynamic and volatile economic climate forces them to rely on gut instinct as well as science. Says Harvey Chang, CFO at Taiwan Semiconductor (#4): "I don't agree with the approach that we should only look at a few numbers, and base it on that to make decisions. This can hurt companies in the long run in the dynamic market that we see now. You have to use your instincts."

Chua Sock Koong does just that. Chua, CFO at Singapore Telecom (#3), uses a cost of capital formula to evaluate how an acquisition will affect her company's ability to deliver shareholder value. But she strongly stresses that reliance on a cost-of-capital metric is only a first step. "You use the capital asset pricing model, and it's very scientific," she explains. "But there's a whole lot of judgement required." Chua cites SingTel's recent decision to buy a 20 percent stake in Advanced Information Systems in Thailand in January. The acquisition price was 230 baht per share. "At the time we did the evaluation it looked like a very high price," she recalls. "You actually have to make a judgment call." Chua's judgment looks pretty good. As of press time, AIS stock was trading around 550 baht per share.

Commando Capital

Indeed, the use of cost-of capital metrics like EVA can get murky in high-tech fields. CFO David Prince of Cable & Wireless HKT argues that using EVA to evaluate an acquisition of a start-up Internet company is absolutely meaningless. Internet firms, he points out, may not have any significant cash flow to measure. Yet the survival of a de-monopolized company like Cable & Wireless HKT (formerly Hong Kong Telecom) depends on management's ability to enter into new markets by snatching up Internet providers. "Eventually, every business must answer to an EVA measure," Prince acknowledges. "But in acquisitions like this, there's no substitute for judgment."

Remarkably, Cable & Wireless HKT holds down the top spot on the P-100 at a time when its hold on the Hong Kong phone market is under threat. Company management gave up the carrier's monopoly on long distance telephone service in October 1998 in return for HK $6.7 billion (US$860 million) from the Hong Kong government. Competition commenced in earnest on January 1, 1999. Not surprisingly, some observers think the company has a bumpy road ahead. "Telephony accounts for 50 percent of its global revenues," says Pratik Gupta, an analyst at Salomon Smith Barney in Singapore. "That is a sector that competitors can come into rather quickly."

Nevertheless, investors still show tremendous confidence in the company's ability to produce economic profit. Part of this is because investors appear to agree with Cable & Wireless HKT's ongoing move into the Internet business. After forming a Interactive Multimedia Services unit several years ago, Cable & Wireless HKT's Netvigator is now the dominant Internet provider in Hong Kong. Some analysts praise the telco's ability to reinvent itself in a market that demands constant reinvention.

CFO Prince has played a pivotal part in that transformation. Given the 200 R.P.M. nature of the information business, Cable & Wireless HKT has created a sort of commando style of capital allocation and investment review. Historically, the company's executive board analyzed its investment strategy twice a year. These days, management engages in monthly reviews of strategy going out ninety days. That way, Prince says, he can evaluate whether to pull cash from a project that has reached peak market value and invest in a new company or new technology swiftly.

"You have to ask yourself constantly whether you are placing capital in those businesses that will deliver the most value," he explains. "We ask ourselves each month: do we cannibalize one business to support another? What will be the effect if we do?"

Cash Cows and Predators

You also have to ask if sitting on too much cash is good for shareholders. Cable & Wireless has come under intense criticism in the past for hording cash. Prince acknowledges that holding capital for too long destroys shareholder value. But he says a cash reserve enables him to make investments without seeking assistance from bankers or partners. That speeds things up. And in the ever-changing information business, speedy can be very good.

In December, for example, Cable & Wireless HKT purchased Hong Kong Star Internet for US$31 million. The acquisition, which was funded mostly by the company's cash surplus, instantly added 80,000 new Internet customers to Cable & Wireless HKT's subscriber base. "There's no simple answer to whether to hold cash or return it shareholders," Prince concedes. "So we review our cash position frequently. Right now we see more opportunity for holding so we can move quickly with a strategic acquisition." He adds, "You're not going to be a predator in today's market unless you have all the means at your disposal to move."

Some companies take a different approach. CLP Holdings, the parent company of China Light & Power (#7), decided to use its mounting cash reserves to buy back 15 percent of its issued share capital from China International Trust and Investment Company (Citic). That's a classic method for returning money to shareholders. And in fact, the deal proved very lucrative for Citic - CLP's second largest shareholder. The state-owned investment vehicle bought back the CLP shares at a discount of 3.6 percent to the sale price of HK$34.8 per share.

CFO Peter Tse doesn't mince words about the share buyback. "Our cost of funding is lower than other companies in the top of the ranking," he says, because his utility still holds a monopoly over the market. That makes life a little easier. "The availability of funding means that we can create more value returning cash now and seeking additional funding later."

"What About That Dollar Debt, Raffy?"

Raffy dela Rosa doesn't have that luxury. The vice president of finance at Philippine fast-food chain Jollibee (#74) acknowledges the company is currently sitting on 900 million pesos (US$23 million) in cash. The excess capital, he says, is mostly a legacy of the financial crisis. "We thought that if you have cash you can make a more rational decision about expanding than if you have debt," dela Rosa explains. Jollibee, which owns over 500 fast-food restaurants in the Philippines and overseas, sells more hamburgers in its home market than MacDonalds (the only other market where Big Mac gets outsold is Israel).

But despite the company's success, dela Rosa is not fully prepared to meet out Jollibee's excess cash to shareholders - not yet, anyway. Currently, dela Rosa says he has invested the surplus in government treasury bills. With the company's cost of capital running at 21 percent, dela Rosa concedes, "we're practically losing about 12 percent annually."

Not exactly an ideal situation. Then again, dela Rosa admits the financial crisis took him by surprise. The Jollibee CFO had borrowed $280 million pesos in US dollar-denominated obligations that were due in July 1997. At the time, he wasn't worried about the debt because the Philippine government repeatedly said the exchange rate would hold. "When things started to get rocky," he recalls, "my boss asked me, `What about that dollar debt, Raffy?'" Several days later, Raffy found out: Thailand devalued the baht, setting off a chain reaction in regional currencies. When the dust cleared, Jollibee's US-dollar obligations had wiped out one-third of the company's revenues for the year.

If dela Rosa was caught unaware in 1997, he has managed brilliantly since then. In March, a short window opened up for stock offerings from Philippine companies. Jollibee sprang into action, raising US$50 million - the only company in the Philippines to launch a successful equity offering before the window slammed shut. Dela Rosa used the proceeds to retire the company's pre-1997 US-dollar denominated debt.

To keep Jollibee focused on creating shareholder wealth, dela Rosa also championed the company's recent EVA rollout. He recalls that when he joined the fledgling company in 1983, Jollibee was forced to borrow from local banks at the onerous rate of 24 percent. "We concluded that if we had to pay this huge amount of money, and leave something for ourselves, and pay the banks, we should be earning at least 10 percent extra - for a total of 34 percent," he says. "We knew this without knowing the concept of EVA."

They know the concept now. Part of the compensation package for Jollibee's managers is tied to the metric. The company also sends field managers from its 500 restaurants to a seminar to learn best practices for controlling capital costs. One such practice: the company has set up supply depots in the Philippines to centralize its purchase and delivery of supplies. The company has also formed a kind of hamburger swat team - a group which oversees the management of a new franchise when it opens. Dela Rosa discovered from hard experience that new franchise owners were downright penny-pinchers the first week on the job - and ran up enormous expenses thereafter.

Ever cash conscious, Dela Rosa wants Jollibee to spend less and produce more - a formula likely to move the fast-food purveyor up the P-100 in the coming years. "As we measure ourselves via EVA, we'll be setting the optimum ratio of debt to equity," he explains. "At the end of the day we should have the lowest cash possible to operate most efficiently."

Numbers Game

That's the holy grail of any value-based management system. Singapore Food Industries, a subsidiary of Singapore Technologies (#18), has also gone the EVA route to help maximize shareholder value. The company briefly flirted with the idea of introducing EVA in the early 1990s, but initially concluded that the traditional EVA bonus mechanism, which produces a downside risk for managers, was too much of a shock to the system.

Before returning to the EVA program last year, Singapore Food introduced a number of activity-based management schemes, including Total Quality Management. Peter Tay, president of SFI, decided to return to EVA as a means to unify the various metrics that management had implemented at lower levels of the company. Tay felt these metrics had turned into something of a numbers game, with managers looking to achieve set targets but failing to see the bigger corporate picture.

"We found that all these measures worked fine in a stable environment," explains Tay. "But in a dynamic environment, marked by competition or a volatile market, these metrics can't solve the problems you encounter."

The company introduced the value-based management system all the way down to the rank and file in its manufacturing facility. Tay assigned David Poon, a long-time finance employee, to oversee the roll-out. Poon organized work groups throughout the company and posted monthly EVA reports in the company's business units.

Employees caught on quickly. The work groups soon began offering ideas that eventually cut operating costs and led to found money. Factory workers, for example, discovered a way to recycle the liquid nitrogen used to freeze chickens after cooking, thus delivering a significant savings. They also introduced a measure that showed how much water a piece of chicken lost in the process of cooking and packing. This gave the company more control over inventory, which is measured by weight. The company's accounting division also found new ways to reduce the number of faulty credit notes that cropped up.

Not surprisingly, the combined impact of each of these initiatives has added significantly to the company's ability to deliver shareholder value. In 1998, the company EVA was up 67 percent to US$6.32 million over the previous year.

Pros and Conglomerates

The success of the EVA pilot at Singapore Food has prompted Singapore Technologies (#18) to roll out a similar value-based management system at all its businesses, which include, aerospace, engineering and hotels. Along with Ayala Corp., Singapore Technologies is one of two Asian conglomerates to implement EVA so far.

That's a remarkable feat. By their very nature, conglomerates provide big obstacles to value-based management systems. In fact, some critics say the grouping together of disparate companies - common in Asia - reduces the worth of the individual businesses. "Too often conglomerates destroy wealth when they try to homogenize their treatment of very different businesses," argues Bennett Stewart. "In staying together, they create the premise for their own breakup." The organizational structure of conglomerates also tends to benefit bankers more than shareholders. "Bankers prefer conglomerates - they smooth the risk and secure the debt," Stewart argues. "Having a true market-based allocation of credit and capital will precipitate shareholder value."

Absent such a system, managing for shareholders can be tough. Even an EVA booster like Singapore Food's Tay concedes that sound capital managers are often at a disadvantage in the region. "All the preconditions of cronyism are still here," he says, "and the rule of law is not strong." Tay believes that many finance managers have simply waited the crisis out rather than implement true capital discipline. Moreover, ill-conceived government measures designed to protect faltering companies often hamper managers from maximizing shareholder value. In China, for instance, restrictions on corporate debt often force companies to seek equity capital, even though the cost of carrying equity is much higher than servicing debt. "How does one manage for shareholder value in this environment?" asks Tay.

Ask CalPERS's Bob Boldt the same question and he has no answer. But he and Stewart both emphasize that managing for shareholder value is not an option. It's a fact of life. CalPERS began introducing EVA as a performance measure to evaluate its investments two years ago. "I sympathize with the difficulties (in Asia)," says Boldt. "But I expect management to manage accordingly. After all, ignoring shareholder value is what got companies into trouble in the first place."

Tom Leander is contributing editor at CFO Asia. Additional reporting by Elizabeth Fry.