公司治理结构与公司价值概述

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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)-2358-1749Department of Finance, HKUST and Visiting Department of Finance, Peking UniversityPrepared for CCER, Peking University November 8, 20212021/5/281by John W

2、ei, 2022Profile of Prof. K.C. John WeiProf. K.C. John Wei received his PhD in Finance at the University of Illinois, Champaign-Urbana, in 1984. He served the University of Mississippi as an Assistant Professor from January 1984 to June 1988. After serving the University of Miami as an Assistant Prof

3、essor for one year, he moved to Indiana University, where he served as an Associated Professor from July 1989 to June 1992. Since July 1992, Prof. John Wei has been serving the HKUST Business School initially as an Associate Professor and later was promoted to full Professor. He served as Acting Hea

4、d of the Department of Finance from January 2022 August 2021 and February June 2021. Prof. Wei has also been appointed the Director of the Centre for Asian Financial Markets since 1995. He was visiting University of Texas at Austin from September to December 2021 and is currently visiting Guanghau S

5、chool of Management, Peking University.With research focuses on empirical research in capital markets, derivatives and asset pricing of Asian and U.S. markets, Prof. Wei has produced a number of high quality papers on these areas. Many of these papers were published in top journals in finance and ha

6、ve made considerable contributions to the finance literature. He is an author of four books (in Chinese) on Hong Kong stock and warrants markets and Taiwanese stock market. In addition, Prof. Wei is a regular column writer for the Hong Kong Economic Journal, a local newspaper specialised in financia

7、l news.On the consultancy activities, Prof. Wei has helped Hang Seng Bank to develop a personal financial planning model called “SmartInvest,” and HSBC to develop a financial planning model, called “Rule-Based Investment Solutions.” He also conducted a consultancy project initiated by HKSAR for APEC

8、 and a few projects for Hong Kong Stock Exchange. Prof. Wei have been involved executive teaching for HKUST, Peking University, Hong Kong Stock Exchange, Chinese provincial government officials, general corporate executives, Xiean Jassen, Daimler/Chrysler, China Mobile, Aspire, and BenQ. 2021/5/282b

9、y John Wei, 2022Value creation and business strategiesValuationCreationQijiaCEOXiushenZhiguoPingtianxiaManagement teamAssets in placeGrowth opportunityCapitalPeopleManagement skillsVisionIntegrityCorporate governanceIncentivesRestructuringCompetitive advantagesM&A (external)Investment (internal) (RO

10、ICWACC)R&DEquityDebtCentral bankCommercial banksInvestment banksMutual fundsInsurance companiesValuation methodsDCFComparative measureROAInvestorsTimingCost of capital (WACC)Financial engineeringCBCapital marketsObjective/StrategyInvestor behaviorGreed and fearCognitive or heuristic biasFocus vs Div

11、ersified (Cisco vs GE)OEM vs BrandLow vs high end2021/5/283by John Wei, 2022Value creation via financial strategiesDividend policy:ReinvestmentShareholder valueInvestment decision:Growth optionsFinancing decision:WACCCorporate governance:Asymmetric informationApproaches tovaluationMergers &Acquisiti

12、onsValue creationROIC WACCDCF (NPV) valuationComparable valuationROARestructuring(Strategy)Why value value?Management disciplineTransparencyIndependenceAccountabilityResponsibilityFairnessSocial responsibilityStrategies to create valueInternal growth What is your dreamcompany?Focus vs diversifiedCor

13、e competence 2021/5/284by John Wei, 2022How to value a firm The value of a firm with a constant grow rate iswhere NOPLAT = net operating profit less adjusted taxesEBIT = earnings before interest and taxest = average tax rateWACC = weighed average cost of capitalg = growth rate = reinvestment rate RO

14、ICROIC = return on new invested capital = NOPLAT/ICg/ROIC = reinvestment rate = rI)1 ()1 ()/1 (111tEBITNOPLATgWACCrNOPLATgWACCROICgNOPLATgWACCFCFVI2021/5/285by John Wei, 2022How to enhance the value of a firm The MM formula How to enhance the value of a firm Increase operating efficiency (NOPLAT) In

15、crease return on new invested capital (ROIC) Invest in new project only when ROIC WACC Increase the growth (g), rI = g/ROIC Prolong the period of competitive advantage (N) Reduce the cost of capital (WACC)1 ()1 (111tEBITNOPLATWACCWACCWACCROICNNOPLATrWACCNOPLATgWACCFCFgrowthofValueplaceinassetsofValu

16、ebusinessofValueI2021/5/286by John Wei, 2022Value Drivers Three value drivers: Abnormal profit (invest only when ROIC WACC): in the right industry Growth (g) or reinvestment: in the high growth industry Risk (WACC): (1) economy-wide risk (business cycle), (2) operating risk (degree of capital intens

17、ity), and (3) financing risk (leverage) Common mistake: Managers often ignore the cost of “equity” capital2021/5/287by John Wei, 2022Sources of abnormal profit Monopoly (High profit margin): Microsoft or eBay (price or service differential; in the right industry) Low cost operator: Hon Hai Precision

18、, Taiwan Semiconductor, Dell, BYD (make money from good management) Low financing cost: GE Barrier to entry: (1) capital, (2) technology (patents), (3) distribution channels, (4) government protection Example: Profit margin = 20%; WACC = 15%; Capital turnover = 2 times For every $100 sales, profit =

19、 $20, required capital investment = $50, cost of capital = $50*15% = $7.50, abnormal profit = $20 $7.5 = $12.5. At what level of profit margin, will the firm become a mature company?2021/5/288by John Wei, 2022Abnormal profit: Motorola, Ericsson and Nokia1993-19951994-961995-971996-98MotorolaROIC20.2

20、6%16.83%14.14%8.17%WACC8.21%13.00%14.01%14.11%Diff12.05%3.84%0.12%-5.94%EricssonROIC27.25%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%2021/5/289by John Wei, 2022Earnings qualityAre your comp

21、any future incomes easy to forecast? Are they sensitiveto business or industry cycle? (Microsoft vs Intel; GM vs Coca Cola) Economy-wide risk: Business cycle (GM vs Merck)Operating risk: Level of capital intensity (TSMC vs Yu Yuan)Financing risk: Leverage (NWD vs SHK Properties)Accounting informatio

22、n risk: Disclosure and corporate governance(CAS vs IAS; TSMC vs UMC) Inventory Accounts receivables Gross margin S&A expenses Reserve for bad accounts receivables R&D Productivity2021/5/2810by John Wei, 20229、 人的价值，在招收诱惑的一瞬间被决定。21.8.1521.8.15Sunday, August 15, 202110、低头要有勇气，抬头要有低气。22:58:5822:58:5822

23、:588/15/2021 10:58:58 PM11、人总是珍惜为得到。21.8.1522:58:5822:58Aug-2115-Aug-2112、人乱于心，不宽余请。22:58:5822:58:5822:58Sunday, August 15, 202113、生气是拿别人做错的事来惩罚自己。21.8.1521.8.1522:58:5822:58:58August 15, 202114、抱最大的希望，作最大的努力。2021年8月15日星期日下午10时58分58秒22:58:5821.8.1515、一个人炫耀什么，说明他内心缺少什么。2021年8月下午10时58分21.8.1522:58Augu

24、st 15, 202116、业余生活要有意义，不要越轨。2021年8月15日星期日22时58分58秒22:58:5815 August 202117、一个人即使已登上顶峰，也仍要自强不息。下午10时58分58秒下午10时58分22:58:5821.8.159、 人的价值，在招收诱惑的一瞬间被决定。21.8.1521.8.15Sunday, August 15, 202110、低头要有勇气，抬头要有低气。22:58:5822:58:5822:588/15/2021 10:58:58 PM11、人总是珍惜为得到。21.8.1522:58:5822:58Aug-2115-Aug-2112、人乱于心，

25、不宽余请。22:58:5822:58:5822:58Sunday, August 15, 202113、生气是拿别人做错的事来惩罚自己。21.8.1521.8.1522:58:5822:58:58August 15, 202114、抱最大的希望，作最大的努力。2021年8月15日星期日下午10时58分58秒22:58:5821.8.1515、一个人炫耀什么，说明他内心缺少什么。2021年8月下午10时58分21.8.1522:58August 15, 202116、业余生活要有意义，不要越轨。2021年8月15日星期日22时58分58秒22:58:5815 August 202117、一个人即

26、使已登上顶峰，也仍要自强不息。下午10时58分58秒下午10时58分22:58:5821.8.15Corporate Governance2021/5/2813by John Wei, 2022Recent corporate governance problems in the U.S.Manipulations of accounting earnings Enron, Global Crossing, Xerox, Adelphia Communications, World Com, Tyco International, ImClone Systems, Arthur Anderso

27、n, Freddie Mac, MicrosoftOff-Balance Sheet borrowings Enron, ElanMotivation: Smooth earnings, jack up stock prices (stock options)Consequences Firms involved went to bankruptcy or were in trouble Whole market dropped due to investors loss of confidenceRemedies Strengthen the regulations by SEC and t

28、he U.S. Congress Internal and external auditing More efficient boards of directors2021/5/2814by John Wei, 2022Characteristics of Asian Companies Owned and controlled by family (pyramid or crossholding) Enhancement (interests of managers and shareholders can be more aligned) Entrenchment (stealing, t

29、unneling, ignoring or destroying firm value) Lack of corporate governance (TSMC CEO: Integrity) Cannot trust outside professional managers Dont know how to delegate Pass CEO position to own son rather than capable manager Commit to more cognitive or heuristic bias2021/5/2815by John Wei, 2022Why is c

30、orporate governance important?A recent survey conducted by McKinsey & Co. shows investors paya premium of more than 20% for good CG firms.The benefits of good corporate governance:reduce the cost of capital (WACC)increase the value of the firmsbenefit shareholders, employees, and societyChen, Chen,

31、and Wei (2021) find companies in East Asia:non-disclosure CG improves from bottom 25% to top 75%: the cost of equity capital is reduced 1.26% pointsDisclosure improves by the same magnitude, the cost of equity capital is reduced by 0.47% pointFirms in better CG country can also reduce the cost of ca

32、pitalSimons (HBR, September 2021)profitability is positively correlated with how workers perceive their managers behavioral integrity (hotel industry)2021/5/2816by John Wei, 2022What is corporate governance?The mechanisms of Pushing firms to operate more efficiently and to create value, and Preventi

33、ng potential exploitation of outside investors, particularly shareholders, by corporate insiders such as the management Shareholders have control rights Directors and managers are supposed to run the firms in the interests of the shareholders 2021/5/2817by John Wei, 2022Why is it needed? Agency prob

34、lem between shareholders and managers (problem for U.S. companies) Agency problem between majority shareholders and minority shareholders (problem for Asian companies) Expropriation (entrenchment, stealing, tunneling)2021/5/2818by John Wei, 2022Good governance practiceWhat makes great boards great (

35、Sonnenfeld HBR, September 2021)very simply, high-functioning work groupsa climate of respect, trust, and candor among board members and between the board and management. Information is shared openly and on timefeel free to challenge one anothers assumptions and conclusionsmanagement encourages livel

36、y discussion of strategic issues. feel responsibility to contribute to performance. assess their own performance, both collectively and individually. Installing effectively independent boardAn independent board chairman (CEO not the chairman)Three most independent committees on any boardThe audit co

37、mmitteeThe compensation committeeThe nominating committee2021/5/2819by John Wei, 2022Why Value Value?2021/5/2820by John Wei, 2022Japan in Mid-1980s: We are Number OneFrom Kim and Young2021/5/2821by John Wei, 2022Japan Now: We are in Prolong RecessionFinancial Times: February 2, 20212021/5/2822by Joh

38、n Wei, 2022Nikkei 225 vs. Dow: January 1984-June 2021 2021/5/2823by John Wei, 2022Not Every Thing is Equal: Sony is Different 2021/5/2824by John Wei, 2022Toyota Motor is also Different 2021/5/2825by John Wei, 2022But Nissan is the same until Recently2021/5/2826by John Wei, 2022Renaults 44.4% purchas

39、e in March 1999makes Nissan different since 2021/5/2827by John Wei, 2022Value-Based Management Makes the Differences The performance difference between U.S. firms and Japanese firms, and between Sony and other Japanese firms is Good performers adopt Value-Based Management (VBM), while losers do not.

40、 What is the problem for the U.S. market now? What is VBM? VBM focuses on value creation for their shareholders rather than stakeholders2021/5/2828by John Wei, 2022What is the Decision Rule for VBM? VBM focuses on investments (old or new) that can generate a return on invested capital greater than t

41、heir cost of capital. That is, invest only whenROIC WACC 2021/5/2829by John Wei, 2022What is the Value of a Firm? Firm value = Value of equity + Value of debt Firm Value = Assets in place + Growth opportunities= Book value + Growth options Growth option makes a major difference in value among firms)

42、1 ()1 ()/(111tEBITNOPLATWACCWACCWACCROICNNOPLATROICgWACCNOPLATgWACCFCFgrowthofValueplaceinassetsofValuebusinessofValue2021/5/2830by John Wei, 2022Shareholder-Oriented Economies Perform Better The U.S. corporate focus on shareholder value since the mid-1980. The benefits are: GDP per capita in the U.

43、S. has a lead of more than 20% over other countries and has been widening since early 1990s, due to Much higher factor productivity, especially capital productivity Invested in more productive (or value creating) projects, i.e., higher financial returns2021/5/2831by John Wei, 2022Shareholder-Oriente

44、d Firms Benefit All200 years ago, Adam Smith postulated that“the most productive and innovative companies would create the highest returns to shareholders and attract better workers, who would be more productive and increase returns further” a virtuous cycleOn the other hand, “Companies that destroy

45、 value would create a vicious cycle and eventually wither away”2021/5/2832by John Wei, 2022Shareholder-Oriented Firms Benefit All (cont) Companies with higher labor productivity are more likely to create more value Companies that are able to create more value also create more jobs Happy workers, hap

46、py investors (Fortune, May 2021) Conclusion:A shareholder value focus not only is good for shareholders but also good for the economy and other stakeholders2021/5/2833by John Wei, 2022Case studies (HBR)Leading for value by Pitman (March 2021): British bank Lloyds TSB A CEO-led transformation of the

47、companys culture by Sir Brian Pitman: value-based managementa single definition of success and a single means of measuring it. At Lloyds, he replaced the existing array of implicit objectives with a single governing objective (generate greater value for shareholders) and established increasingly sop

48、histicated internal metrics for achieving it.create value for everyone: Customer,employees, and communities.From 1983 to 2022, British bank Lloyds TSB increased its market capitalization 40-fold, in part by shedding assets and narrowing its focus.2021/5/2834by John Wei, 2022Case studies (HBR)When co

49、mpany values backfire by Edmondson and Cha (2021-11)May misinterpret and brand the CEO as a hypocriteMake your values mean something by Lencioni (2021-07)Enron 2000 annual report for corporate value: “Communication. Respect. Integrity. Excellence.”Empty values statements create cynical and dispirite

50、d employees and undermine managerial credibility Values statements really to mean something should follow:understand the different types of values: core, aspirational, permission-to-play, and accidental.be aggressively authenticown the processweave core values into everything2021/5/2835by John Wei,

51、2022Restructuring CompaniesGeneral2021/5/2836by John Wei, 2022The Value Manager A focus on long-run cash flow returns, not quarter-to-quarter changes in earnings per share Value-oriented view: Invest only when return on invested capital cost of capital (ROIC WACC) Ability to take an outsiders view o

52、f the business Willingness to act on opportunities to create incremental value Finally, and the most important, the need to develop and institutionalize a managing value philosophy throughout the organization (it is an ongoing initiative)2021/5/2837by John Wei, 2022The Process of Becoming Value-Orie

53、nted A restructuring that unleashes value trapped within the company (high benefit; but the cost can be high) Divestures Layoffs Developing a value-oriented approach to leading and managing their companies after restructuring Establishing priorities based on value creation Gearing planning, performa

54、nce measurement, and incentive compensation systems toward shareholder value Communicating with investors in terms of value creation2021/5/2838by John Wei, 2022When are Companies in Need of Restructuring?Score of 6-24 with 24 being the worst (based on Monitor) Total return to shareholders (TRS) Sale

55、s growth relative to industry (growth) Operating margin relative to industry (operating efficiency) Capital return relative to industry (ROIC) Number of business units (focus?) Distance from median industry capital structure (WACC, optimal capital structure)2021/5/2839by John Wei, 2022Restructuring

56、Process Diagnostic Scan (Decision to restructure) Restructuring (Implementation plan) Value-based Management (VBM implemented) Incentive Design (New incentive system)2021/5/2840by John Wei, 2022Restructuring FrameworkCurrentmarket valueTotal potentialvalueDCF value using analyst forecastsValue withi

57、nternal and externalimprovementsDCF value usingmanagement expectationValue with internal improvementsMarket InefficiencyTakeover speculationInternal improvementsCorporate governanceOptimalopportunityPublic held businessGrowth opportunities + Financial EngineeringCapital structureDividend policyRisk

58、managementDisposal / new ownersM&AJoint ventureSpin-offsIPOsLetter stockDivestureOperating improvementsRevenue growthCost reductionCapital efficiencyPerception GapOvervaluedUndervalued Value createdThroughRestructuring2021/5/2841by John Wei, 2022Restructuring Framework: ExampleThis company had 10 bu

59、siness units and its stock price was decliningMarket Value$1,000Maximum Value Potential$1,800DCF value using analyst forecasts$1,050Value withinternal and externalimprovements$1,650DCF value using management expectation$950Value with internal improvement$1,200Market Inefficiency$50Value created$800G

60、rowth opportunities + Financial Engineering$150Not enough debtInternal improvements$450Sold 3 losersInternal improvements$250 Exit unprofitable product lines Reduce inventoryPerception Gap-$100OvervaluedValue createdThroughRestructuring2021/5/2842by John Wei, 2022Improve Operations: Internal Improve

61、mentsChallenge every part of the business system Procurement Raw materials Manufacturing/Work-in-progress Finished goods (are they competitive?) Inventory Distribution channel and sales Accounts receivable2021/5/2843by John Wei, 2022Rethink your portfolio of businesses: External ImprovementsFocus on

62、 two dimensions to look for value improvement Value creation potential Competitive advantageDecision: High value creation + best in competitive advantage: should grow High value creation + weak in competitive advantage: should improve Low value creation businesses: should dispose2021/5/2844by John W

63、ei, 2022Ownership Alternatives: External ImprovementsSpin-offsAvoid cross subsidization (IBM/PC)Eliminate management constraints (ATT&Lucent)Tax free Announcement effect is positive (may exceed value of entity to be spun off)Initial Public OfferingsAllow direct investment in a subsidiaryTax free if

64、IPO keeps cash (which may be used to repay corporate debt)Allow consolidation (tax and accounting) if less than 20% of equity is soldDirect SalesTaxable (may provide tax shield)2021/5/2845by John Wei, 2022Financial Engineering Minimizing Weighted Average Cost of Capital Does Not Maximize Value of Fi

65、rm (Bankruptcy cost)Cost of equityWACCAfter-taxcost of debtMinimumWACCMaximize ValueDebt/EquityPercent2021/5/2846by John Wei, 2022Sources of Restructuring Value In the U.S., the average breakdown of sources of value creation from restructuring indicates that approximately 60% comes from strategic an

66、d operating improvementsInternal Improvements60%Divesture or Acquisition25%Financial Engineering15%2021/5/2847by John Wei, 2022Put the Value Creation Plan into Action Put Value into Planning Focus planning and business performance reviews around value creation Develop Value-Oriented Targets and Performance Measures Focus on a measure that incorporate both growth and return on invested capital (ROIC)EP (Economic profit ) = Invested capital (ROIC Opportunity cost of capital) Tie Compensation to Va