Published August 28, 2008
S'pore firms top wealth-creation chart
They occupy 33 of leading 100 positions in Asean in a Wealth-Added Index; SingTel heads the pack
By GENEVIEVE CUA

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(SINGAPORE) Singapore companies have done a stellar job of creating wealth for shareholders, despite market volatility and a higher cost of capital.

The first-ever ranking of the top 100 South-east Asian companies in terms of US-based consulting firm Stern Stewart & Co's 'Wealth Added Index' (WAI) finds a total of 33 Singapore companies on the list, the largest number among Asean markets.
In pole position is Singapore Telecommunications, as at June 30. Keppel Corp is ranked seventh, and CapitaLand ninth.
Stern Stewart has also come up with the top 100 WAI ranking for Singapore alone, as well as industry specific rankings. In the regional real estate sector, for example, Singapore companies accounted for eight of the top 10, led by CapitaLand and City Developments.
WAI is a metric developed by Stern Stewart in 2000, based on the idea that companies create value for shareholders only if their total returns - share price plus dividends - exceed an imputed 'cost of equity'. The latter is the minimum return investors should earn for taking on the risk of investing in shares.
The strongest testimonial to the use of the wealth added metric is Temasek Holdings, which on Monday released its latest annual report. Temasek uses wealth added as an internal benchmark, and that extends even to its staff compensation structure.
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Click here for the WAI rankings
Footnotes
Definitions
As Temasek explains: Wealth added (also called economic profit) factors in the capital employed to produce the returns and the risks associated with each investment. 'To achieve positive wealth added, we need to deliver more than the capital charge, which is the risk-adjusted hurdle applied to the capital employed.' In the year ended in March, the group's wealth added was minus $6.3 billion. The group's five-year cumulative wealth added was a 'healthy' $60 billion above its risk adjusted cost of capital hurdle.
Erik Stern, president international of Stern Stewart & Co, said the firm set up an office here in 1997 mainly to work with the Temasek group. The firm maintained its office here for about five years. It has since closed it, but is looking to re-establish itself in the region.
'To people who want to know more about economic value added (EVA) and the value mindset, I tell them to read the Temasek annual report. There is nothing better. So many companies want to look like they care about shareholder value. Read any annual report, then read Temasek's. There is a very big difference.
'(Temasek) acts and lives it. We're thrilled to be associated with them; they make us look good. They know what this is all about.'
Stern Stewart first developed two metrics in the 1980s, one of which is economic value added (EVA), focusing attention on the cost of capital. EVA is a performance metric, to indicate whether a company has produced value for investors. Its calculation takes after tax operating profit and subtracts an annual charge - a sort of rental charge - on debt and equity.
It is unclear how widely used EVA or wealth added is among Singapore companies. SingTel uses a different metric internally. CapitaLand, however, includes an EVA calculation in its annual report, and tots up the group EVA attributable to equity shareholders.
Mr Stern said the metrics were developed in an effort to overcome the limitations of other metrics, such as total shareholder return, which simply measures the change in a company's price plus dividends between two points in time.
Accounting measures like net profits and sales also do not provide any benchmark for performance, or help in investor decision making. 'The concept of EVA is like meritocracy; there is no cutting corners. The objective is to get employees to think and act like owners, so that they act like the money they're given is their own. That concept is very similar to the Singapore mindset.
'I believe there is no accident that Singapore companies' performance is good. People here are very modest. They say, let's see what happens in the future, and there will be a lot of competition..
'It pays to remember that capital has a cost and shareholders deserve to earn a return on that. If Singapore companies forget that they may find that the paradise they created will be owned by others. As great as they've done, what matters is going forward.'
One point of contention may be the calculation for the cost of equity, which is based on a market's government bond adjusted by a company and market risk premium. Some of Stern's input data are taken from Bloomberg.
Managers, he said, should focus on EVA as an internal measure, and not the share price. 'Companies that consistently make good decisions will see strong performance. The marketplace is showing some fear of the future. The question is what can companies do about it.
'Companies that are well managed usually do well in a downturn and take market share from those that are not well managed.'
There are four drivers of wealth added, which are quantified in the rankings. These are operations; strategy or growth expectations; external financing and governance. The proxy for the latter is a company's cost of equity.
'Our view of governance is that managers must earn the required rate of return as the minimum. But if they don't earn that, they have not been a good steward of capital.'