Stern Stewart - Internal Corp Gov

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

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

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

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)

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?

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

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.

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


5 years ending 31 Dec 2001

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


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.

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?

Celebrate success

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


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.

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



Expenses are tracked


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?


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


Middle managers


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

Concentrate on a few metrics

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


Incentive Compensation

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.

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


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%



Middle managers / front line managers

Senior business unit managers

Senior corporate managers


Percent using annual or strategic plans to set targets


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?


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%



Middle managers / front line managers

Senior business unit managers

Senior corporate managers


Percent able to simulate short and long term payouts


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