stern stewart - internal corp gov
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Stern Stewart - corporate governanceTRANSCRIPT
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80 Raffles Place#28-02 UOB Plaza 1Singapore 048624
Pavan GandhokDeputy MD South and South-East Asia
Jakarta: 5 March 2002
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.
Internal Corporate GovernanceA health check on global best practices
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Size versus Value Added
Nearly a third of Pan-Asias 20 largest companies by capital are amongst the 20biggest 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
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The case for improvingCorporate Governance in Pan-Asia
MVA/Cap %Capital
USA 1.65 87% (0.18) 13%Europe 1.54 82% (0.18) 18%
Pan-Asia 0. 81 56% (0.30) 44%
Positive MVA Companies
Negative MVACompanies
MVA/Cap %Capital
Source: Stern Stewart research
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The Bad News :An incremental $139b has been invested in the wealth
destroying sectors over the past five years
Source: Stern Stewart research
Wealth creators47%
US$124Wealth destroyers53%
US$139b
Incremental Capital Investment (1996-2000)
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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?
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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
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0% 20% 40% 60% 80% 100%
Employees
Number ofcountries
Principalbusinesses
Geography
0% 20% 40% 60% 80% 100%
Ownership
Business focus
Basic Strategy
Revenue size
Participants span a representative range of companies around the world
Manufacturing Retail
Oil / Gas
Public
Finance
Customer focus
Primarily Communicate financials
3
1 2 - 5 6 - 10 11 - 40 > 40
< 1,000
1,000 - 5,000 5,000 - 9,999 10,000 - 49,999
> 50,000
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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Value aligned companies significantly outperform non aligned ones over time
16%
-4%-5%
0%
5%
10%
15%
20%
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.
5 years ending 31 Dec 2001
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Our survey uncovered a consistent pattern of best practices for value-aligned companies
Leadership Board focuses on long-term shareowner value and viability Management makes value-adding decisions
Culture and organization Middle managers have high degree of business and economic literacy Leaders communicate success consistently
Decision-making Focus on a few key value-aligned metrics, seamlessly integrated across all
processes Projects are funded solely on the basis of value
Management reporting A consistent focus on value metrics Earnings & asset information is tracked at many levels, and is widely
shared Incentives
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.
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Shareowner Alignment Index score
85
66
35
62
Quartile 4
Quartile 3Quartile 2Quartile 1
Average 66 Average 66 72
The best SAI score is 85 out of 100, the average score is 66, and the worst score is 35
Highest 85 Highest 85
Lowest 35 Lowest 35 Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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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?
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Celebrate success
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Leaders of value-aligned companies consistently communicate and celebrate business success
67%
29%
0%
20%
40%
60%
80%
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.
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Value aligned companies have a clear definition of success unambiguous goals, value-centric metrics
50%
9%
Focus on value based metrics
Value-aligned Non-alignedSource: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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Value aligned companies track revenues, expenses, and assets at many levels better able to measure progress
73%
49% 47%
34%27% 25%
33%
13%20%
9%
0%
10%20%
30%40%
50%60%
70%80%
Majordivisions
Geography Product lines Individualproducts
As low aspossible
Value aligned Unaligned
Percent tracking revenues, expenses, assets
Revenues are tracked, Expenses are tracked,
Assets are tracked
Revenues are tracked, Expenses are tracked
Revenues are tracked, Expenses are tracked
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.
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Value- aligned companies share data widely, empowering people at all levels to make better decisions
26%
60%
0% 10% 20% 30% 40% 50% 60%
Freely shared at all levels(in summary or detail)
Unaligned Value aligned
How freely are the financial and operational results of the company shared internally?
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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Value aligned middle managers are more economically literate and business savvy
11%
33%
18%
53%
0% 10% 20% 30% 40% 50% 60%
Understand businessmodel, value proposition,and key strategy elements
Take an economic view ofshort and long term
operating/financial results
Unaligned Value aligned
Middle managers
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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Value-aligned companies are more inclined to innovate, take intelligent risks, grow from within, and view business
failures as a form of learning
0%
20%
40%
60%
80%
100%93%
47%
Failure is viewed as a form of learning
Value-alignedNon-aligned
60%
18%
We highly encourage internal new business creation
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Concentrate on a few metrics
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Value-aligned companies fund projects more strictly on value considerations alone
0%
20%
40%
60%
80% 72%
18%
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.
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Incentive Compensation
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Value-aligned companies offer the unlimited upside potential of an owner by not capping bonuses
73%
29%
Do not cap bonus
Value-aligned Non-alignedSource: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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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
0% 20% 40% 60% 80% 100%
Non management--all other
Non management--sales force
Middle managers /front line managers
Senior businessunit managers
Senior corporatemanagers
1 2 3 to 4 5 or more
91%61%
83%50%
64%47%
79%45%
79%
49%
Value-aligned Non-aligned
Percent of companies using one or two measures to drive compensation
Number of measures to drive compensation
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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Value aligned companies break the link to budget by setting performance targets by formula, not plan numbers
31%7%
49%13%
56%13%
58%20%
51%20%
0% 20% 40% 60% 80% 100%
Non management--all other
Non management--sales force
Middle managers / front line managers
Senior business unit managers
Senior corporate managers
Unaligned Value aligned
Percent using annual or strategic plans to set targets
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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45%
55%
Yes No
Value aligned73% yes
Non aligned49% yes
Value aligned73% yes
Non aligned49% yes
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 performanceover a period of years?
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.
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and by giving employees tools to simulate long range payoffs from current decisions
2%20%
4%27%
9%20%
18%47%
18%47%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Non management--all other
Non management--sales force
Middle managers / front line managers
Senior business unit managers
Senior corporate managers
Unaligned Value aligned
Percent able to simulate short and long term payouts
Source: SAI Study conducted by Stern Stewart &Co in association with Hackett Benchmarking and Research, a Division of Answerthink.