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Monday, March 27, 2006

JAPANESE PERSPECTIVES

Which management strategies raise corporate value?


Window-dressing and other fraudulent acts aimed at boosting share prices have led many Japanese to doubt whether it is really all that important to "maximize corporate value."

Needless to say, it is the foremost mission of a company to maximize its own value through persistent management efforts.

Of course, management must fully comply with corporate ethics and act with good sense as a responsible member of society.

While it is true that not much objective study has been conducted so far on how management strategies affect corporate value, the Keidanren has recently released a report featuring a statistical analysis of the financial data and stock prices of more than 1,600 major companies to find clues on which kind of management strategies increase corporate value.

The report tries to examine the relationship between the value of a company -- assessed by the aggregate market value of its shares -- and its current performance.

The survey showed that good performance in terms of profitability (higher profit margins), growth (higher sales), financial health (reduced interest payments), and return to shareholders (higher dividends) certainly raised value. In other words, these factors account for a major portion of corporate value.

Still, a close look at individual companies showed that some enjoy a so-called "premium value" that cannot be explained by short-term performance. Such a premium must come from medium- to longer-term strategies that do not necessarily cause an immediate increase in sales or profits.

Keidanren polled its member companies on the long-term strategies they use to get ahead of their competitors and tried to assess any links to market value.

The result shows that the premium value of a company derives from such long-term efforts as: investing in good human resources, establishing clear corporate ideals, complying thoroughly with corporate ethics, increasing information disclosure, and eliminating environmental damage.

The survey also confirmed that strategies that prioritize relations with a variety of stakeholders -- consumers, business partners, employees and society in general -- do not negatively affect shareholder value as gauged by the total value of the company's outstanding shares. In short, the interests of shareholders and others with a stake in the company's success do not conflict -- the two parties can coexist.

The introduction of U.S.-style corporate governance, as exemplified by the separation of a company's management and its operations, is often touted as measure that boosts shareholder value. But the Keidanren's survey shows that this is not necessarily true.

While these findings are based on a set of conditions, we hope that such an objective study will offer guidance to corporate executives as they devise future strategies.

Yoshio Nakamura is an acting director general of the Japan Business Federation (Nippon Keidanren).


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