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1、Corporate 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 UniversityPrepared for CCER,Peking University November 8,2003CFAII_SS
2、18:Options1byJohnWei,2001Profile of Prof.K.C.John WeiProf.K.C.JohnWeireceivedhisPhDinFinanceattheUniversityofIllinois,Champaign-Urbana,in1984.HeservedtheUniversityofMississippiasanAssistantProfessorfromJanuary1984toJune1988.AfterservingtheUniversityofMiamiasanAssistantProfessorforoneyear,hemovedtoIn
3、dianaUniversity,whereheservedasanAssociatedProfessorfromJuly1989toJune1992.Since July 1992,Prof.John Wei has been serving the HKUST Business School initially as anAssociate Professor and later was promoted to full Professor.He served as Acting Head of theDepartmentofFinancefromJanuary2001August2002a
4、ndFebruaryJune2003.Prof.WeihasalsobeenappointedtheDirectoroftheCentreforAsianFinancialMarketssince1995.HewasvisitingUniversityofTexasatAustinfromSeptembertoDecember2002andiscurrentlyvisitingGuanghauSchoolofManagement,PekingUniversity.Withresearchfocusesonempiricalresearchincapitalmarkets,derivatives
5、andassetpricingofAsianandU.S.markets,Prof.Weihasproducedanumberofhighqualitypapersontheseareas.Manyofthesepaperswerepublishedintopjournalsinfinanceandhavemadeconsiderablecontributionstothefinanceliterature.Heisanauthoroffourbooks(inChinese)onHongKongstockandwarrantsmarketsandTaiwanesestockmarket.Ina
6、ddition,Prof.WeiisaregularcolumnwriterfortheHong Kong Economic Journal,alocalnewspaperspecialisedinfinancialnews.Ontheconsultancyactivities,Prof.WeihashelpedHangSengBanktodevelopapersonalfinancialplanning model called“SmartInvest,”and HSBC to develop a financial planning model,called“Rule-BasedInves
7、tmentSolutions.”HealsoconductedaconsultancyprojectinitiatedbyHKSARforAPECandafewprojectsforHongKongStockExchange.Prof.WeihavebeeninvolvedexecutiveteachingforHKUST,PekingUniversity,HongKongStockExchange,Chinese provincial government officials,general corporate executives,Xiean Jassen,Daimler/Chrysler
8、,ChinaMobile,Aspire,andBenQ.CFAII_SS18:Options2byJohnWei,2001Value creation and business strategiesValuationCreationQijiaCEOXiushenZhiguoPingtianxiaManagement teamAssets in placeGrowth opportunityCapitalPeopleManagement skillsVisionIntegrityCorporate governanceIncentivesRestructuringCompetitive adva
9、ntagesM&A(external)Investment(internal)(ROICWACC)R&DEquityDebtCentral bankCommercial banksInvestment banksMutual fundsInsurance companiesValuation methodsDCFComparative measureROAInvestorsTimingCost of capital(WACC)Financial engineeringCBCapital marketsObjective/StrategyInvestor behaviorGreed and fe
10、arCognitive or heuristic biasFocus vs Diversified (Cisco vs GE)OEM vs BrandLow vs high endCFAII_SS18:Options3byJohnWei,2001Value creation via financial strategiesDividend policy:ReinvestmentShareholder valueInvestment decision:Growth optionsFinancing decision:WACCCorporate governance:Asymmetric info
11、rmationApproaches tovaluationMergers&AcquisitionsValue creationROIC WACCDCF(NPV)valuationComparablevaluationROARestructuring(Strategy)Why value value?ManagementdisciplineTransparencyIndependenceAccountabilityResponsibilityFairnessSocialresponsibilityStrategiestocreatevalueInternalgrowthWhatisyourdre
12、amcompany?FocusvsdiversifiedCorecompetenceCFAII_SS18:Options4byJohnWei,2001How to value a firmThevalueofafirmwithaconstantgrowrateiswhereNOPLAT=netoperatingprofitlessadjustedtaxesEBIT=earningsbeforeinterestandtaxest=averagetaxrateWACC=weighedaveragecostofcapitalg=growthrate=reinvestmentrateROICROIC=
13、returnonnewinvestedcapital=NOPLAT/ICg/ROIC=reinvestmentrate=rICFAII_SS18:Options5byJohnWei,2001How to enhance the value of a firmTheMMformulaHowtoenhancethevalueofafirmIncreaseoperatingefficiency(NOPLAT)Increasereturnonnewinvestedcapital(ROIC)InvestinnewprojectonlywhenROICWACCIncreasethegrowth(g),rI
14、=g/ROICProlongtheperiodofcompetitiveadvantage(N)Reducethecostofcapital(WACC)CFAII_SS18:Options6byJohnWei,2001Value DriversThreevaluedrivers:Abnormalprofit(investonlywhenROICWACC):intherightindustryGrowth(g)orreinvestment:inthehighgrowthindustryRisk(WACC):(1)economy-widerisk(businesscycle),(2)operati
15、ngrisk(degreeofcapitalintensity),and(3)financingrisk(leverage)Commonmistake:Managersoftenignorethecostof“equity”capitalCFAII_SS18:Options7byJohnWei,2001Sources of abnormal profitMonopoly(Highprofitmargin):MicrosoftoreBay(priceorservicedifferential;intherightindustry)Lowcostoperator:HonHaiPrecision,T
16、aiwanSemiconductor,Dell,BYD(makemoneyfromgoodmanagement)Lowfinancingcost:GEBarriertoentry:(1)capital,(2)technology(patents),(3)distributionchannels,(4)governmentprotectionExample:Profitmargin=20%;WACC=15%;Capitalturnover=2timesForevery$100sales,profit=$20,requiredcapitalinvestment=$50,costofcapital=
17、$50*15%=$7.50,abnormalprofit=$20$7.5=$12.5.Atwhatlevelofprofitmargin,willthefirmbecomeamaturecompany?CFAII_SS18:Options8byJohnWei,2001Abnormal 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%Erics
18、sonROIC27.25%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%Diff5.39%6.62%10.39%18.54%CFAII_SS18:Options9byJohnWei,2001Earnings qualityAre your company future incomes easy to forecast?Are they sensitiveto business or in
19、dustry cycle?(Microsoft vs Intel;GM vs Coca Cola)Economy-widerisk:Businesscycle(GMvsMerck)Operatingrisk:Levelofcapitalintensity(TSMCvsYuYuan)Financingrisk:Leverage(NWDvsSHKProperties)Accountinginformationrisk:Disclosureandcorporategovernance(CASvsIAS;TSMCvsUMC)InventoryAccountsreceivablesGrossmargin
20、S&AexpensesReserveforbadaccountsreceivablesR&DProductivityCFAII_SS18:Options10byJohnWei,2001Corporate GovernanceCFAII_SS18:Options11byJohnWei,2001Recent corporate governance problems in the U.S.ManipulationsofaccountingearningsEnron,GlobalCrossing,Xerox,AdelphiaCommunications,WorldCom,TycoInternatio
21、nal,ImCloneSystems,ArthurAnderson,FreddieMac,MicrosoftOff-BalanceSheetborrowingsEnron,ElanMotivation:Smoothearnings,jackupstockprices(stockoptions)ConsequencesFirmsinvolvedwenttobankruptcyorwereintroubleWholemarketdroppedduetoinvestorslossofconfidenceRemediesStrengthentheregulationsbySECandtheU.S.Co
22、ngressInternalandexternalauditingMoreefficientboardsofdirectorsCFAII_SS18:Options12byJohnWei,2001Characteristics of Asian CompaniesOwnedandcontrolledbyfamily(pyramidorcrossholding)Enhancement(interestsofmanagersandshareholderscanbemorealigned)Entrenchment(stealing,tunneling,ignoringordestroyingfirmv
23、alue)Lackofcorporategovernance(TSMCCEO:Integrity)CannottrustoutsideprofessionalmanagersDontknowhowtodelegatePassCEOpositiontoownsonratherthancapablemanagerCommittomorecognitiveorheuristicbiasCFAII_SS18:Options13byJohnWei,2001Why is corporate governance important?ArecentsurveyconductedbyMcKinsey&Co.s
24、howsinvestorspaya premium of more than20%forgoodCGfirms.Thebenefitsofgoodcorporategovernance:reducethecost of capital(WACC)increasethevalue of the firmsbenefitshareholders,employees,andsocietyChen,Chen,andWei(2003)findcompaniesinEastAsia:non-disclosureCGimprovesfrombottom25%totop75%:thecostofequityc
25、apitalisreduced1.26%pointsDisclosureimprovesbythesamemagnitude,thecostofequitycapitalisreducedby0.47%pointFirmsinbetterCGcountrycanalsoreducethecostofcapitalSimons(HBR,September2002)profitabilityispositivelycorrelatedwithhowworkersperceivetheirmanagersbehavioralintegrity(hotelindustry)CFAII_SS18:Opt
26、ions14byJohnWei,2001What is corporate governance?ThemechanismsofPushingfirmstooperate more efficientlyandtocreate value,andPreventing potential exploitationofoutsideinvestors,particularlyshareholders,bycorporateinsiderssuchasthemanagementShareholdershavecontrol rights Directorsandmanagersaresupposed
27、torunthefirmsin the interests of the shareholdersCFAII_SS18:Options15byJohnWei,2001Why is it needed?Agency problembetweenshareholdersandmanagers(problemforU.S.companies)Agencyproblembetweenmajorityshareholdersandminorityshareholders(problemforAsiancompanies)Expropriation(entrenchment,stealing,tunnel
28、ing)CFAII_SS18:Options16byJohnWei,2001Good governance practiceWhatmakesgreatboardsgreat(SonnenfeldHBR,September2002)verysimply,high-functioningworkgroupsaclimateofrespect,trust,andcandoramongboardmembersandbetweentheboardandmanagement.Informationissharedopenlyandontimefeelfreetochallengeoneanothersa
29、ssumptionsandconclusionsmanagementencourageslivelydiscussionofstrategicissues.feelresponsibilitytocontributetoperformance.assesstheirownperformance,bothcollectivelyandindividually.InstallingeffectivelyindependentboardAnindependentboardchairman(CEOnotthechairman)Threemostindependentcommitteesonanyboa
30、rdTheauditcommitteeThecompensationcommitteeThenominatingcommitteeCFAII_SS18:Options17byJohnWei,2001Why Value Value?CFAII_SS18:Options18byJohnWei,2001Japan in Mid-1980s:We are Number OneFromKimandYoungCFAII_SS18:Options19byJohnWei,2001Japan Now:We are in Prolong RecessionFinancial Times:February2,200
31、2CFAII_SS18:Options20byJohnWei,2001Nikkei 225 vs.Dow:January 1984-June 2003CFAII_SS18:Options21byJohnWei,2001Not Every Thing is Equal:Sony is DifferentCFAII_SS18:Options22byJohnWei,2001Toyota Motor is also DifferentCFAII_SS18:Options23byJohnWei,2001But Nissan is the same until RecentlyCFAII_SS18:Opt
32、ions24byJohnWei,2001Renaults 44.4%purchase in March 1999makes Nissan different sinceCFAII_SS18:Options25byJohnWei,2001Value-Based Management Makes the DifferencesTheperformancedifferencebetweenU.S.firmsandJapanesefirms,andbetweenSonyandotherJapanesefirmsisGoodperformersadoptValue-BasedManagement(VBM
33、),whilelosersdonot.WhatistheproblemfortheU.S.marketnow?WhatisVBM?VBMfocusesonvalue creationfortheirshareholders ratherthanstakeholdersCFAII_SS18:Options26byJohnWei,2001What is the Decision Rule for VBM?VBMfocusesoninvestments(oldornew)thatcangenerateareturnoninvestedcapitalgreaterthantheircostofcapi
34、tal.Thatis,investonlywhenROIC WACCCFAII_SS18:Options27byJohnWei,2001What is the Value of a Firm?Firmvalue=Valueofequity+ValueofdebtFirmValue=Assetsinplace+Growthopportunities=Bookvalue+GrowthoptionsGrowthoptionmakesamajordifferenceinvalueamongfirmsCFAII_SS18:Options28byJohnWei,2001Shareholder-Orient
35、ed Economies Perform BetterTheU.S.corporatefocusonshareholdervaluesincethemid-1980.Thebenefitsare:GDPpercapitaintheU.S.hasaleadofmorethan20%overothercountriesandhasbeenwideningsinceearly1990s,duetoMuchhigherfactorproductivity,especiallycapitalproductivityInvestedinmoreproductive(orvaluecreating)proj
36、ects,i.e.,higherfinancialreturnsCFAII_SS18:Options29byJohnWei,2001Shareholder-Oriented Firms Benefit All200yearsago,AdamSmithpostulatedthat“the most productive and innovative companies would create the highest returns to shareholders and attract better workers,who would be more productive and increa
37、se returns further”avirtuous cycleOntheotherhand,“Companies that destroy value would create a vicious cycle and eventually wither away”CFAII_SS18:Options30byJohnWei,2001Shareholder-Oriented Firms Benefit All(cont)CompanieswithhigherlaborproductivityaremorelikelytocreatemorevalueCompaniesthatareablet
38、ocreatemorevaluealsocreatemorejobsHappyworkers,happyinvestors(Fortune,May2002)Conclusion:A shareholder value focus not only is good for shareholders but also good for the economy and other stakeholdersCFAII_SS18:Options31byJohnWei,2001Case studies(HBR)Leading for valuebyPitman(March2003):Britishbank
39、LloydsTSBACEO-ledtransformationofthecompanysculturebySirBrianPitman:value-based managementasingle definitionofsuccessandasingle meansofmeasuringit.AtLloyds,hereplacedtheexistingarrayofimplicitobjectiveswithasinglegoverningobjective(generategreater value for shareholders)andestablishedincreasinglysop
40、histicatedinternalmetricsforachievingit.createvalueforeveryone:Customer,employees,andcommunities.From1983to2001,BritishbankLloydsTSBincreaseditsmarketcapitalization40-fold,inpartbysheddingassetsandnarrowingitsfocus.CFAII_SS18:Options32byJohnWei,2001Case studies(HBR)When company values backfirebyEdmo
41、ndsonandCha(2002-11)MaymisinterpretandbrandtheCEOasahypocriteMake your values mean somethingbyLencioni(2002-07)Enron2000annualreportforcorporatevalue:“Communication.Respect.Integrity.Excellence.”Empty values statementscreatecynicalanddispiritedemployeesandunderminemanagerialcredibilityValuesstatemen
42、tsreallytomeansomethingshouldfollow:understandthedifferent types of values:core,aspirational,permission-to-play,andaccidental.beaggressively authenticown the processweave core values into everythingCFAII_SS18:Options33byJohnWei,2001Restructuring CompaniesGeneralCFAII_SS18:Options34byJohnWei,2001The
43、Value ManagerAfocusonlong-run cash flowreturns,notquarter-to-quarterchangesinearningspershareValue-oriented view:Investonlywhenreturnoninvestedcapitalcostofcapital(ROIC WACC)Abilitytotakeanoutsiders viewofthebusinessWillingnesstoactonopportunitiestocreateincrementalvalueFinally,andthemostimportant,t
44、he need to develop and institutionalize a managing value philosophy throughout the organization(itisanongoinginitiative)CFAII_SS18:Options35byJohnWei,2001The Process of Becoming Value-OrientedArestructuringthatunleashes valuetrappedwithinthecompany(highbenefit;butthecostcanbehigh)DivesturesLayoffsDe
45、velopingavalue-orientedapproachtoleadingandmanagingtheircompaniesafterrestructuringEstablishingprioritiesbasedonvaluecreationGearingplanning,performance measurement,and incentive compensation systemstowardshareholdervalueCommunicating with investorsintermsofvaluecreationCFAII_SS18:Options36byJohnWei
46、,2001When are Companies in Need of Restructuring?Scoreof6-24with24beingtheworst(basedonMonitor)Total return to shareholders(TRS)Sales growthrelativetoindustry(growth)Operating marginrelativetoindustry(operatingefficiency)Capital returnrelativetoindustry(ROIC)Numberofbusinessunits(focus?)Distancefrom
47、medianindustrycapital structure(WACC,optimalcapitalstructure)CFAII_SS18:Options37byJohnWei,2001Restructuring ProcessDiagnosticScan(Decisiontorestructure)Restructuring(Implementationplan)Value-basedManagement(VBM implemented)IncentiveDesign(New incentive system)CFAII_SS18:Options38byJohnWei,2001Restr
48、ucturing FrameworkCurrentmarketvalueTotalpotentialvalueDCFvalueusinganalystforecastsValuewithinternalandexternalimprovementsDCFvalueusingmanagementexpectationValuewithinternalimprovementsMarket InefficiencyTakeoverspeculationInternalimprovementsCorporategovernanceOptimalopportunityPublic held busine
49、ssGrowth opportunities+Financial EngineeringCapitalstructureDividendpolicyRiskmanagementDisposal/new ownersM&AJointventureSpin-offsIPOsLetterstockDivestureOperating improvementsRevenuegrowthCostreductionCapitalefficiencyPerception GapOvervaluedUndervaluedValue createdThroughRestructuringCFAII_SS18:O
50、ptions39byJohnWei,2001Restructuring Framework:ExampleThiscompanyhad10businessunitsanditsstockpricewasdecliningMarketValue$1,000MaximumValuePotential$1,800DCFvalueusinganalystforecasts$1,050Valuewithinternalandexternalimprovements$1,650DCFvalueusingmanagementexpectation$950Valuewithinternalimprovemen