Can Singapore shareholders expect happier returns?

Commentary: Can Singapore shareholders expect happier returns?
Andy Mukherjee Bloomberg News
Wednesday, September 01, 2004

The commercial success of Singapore's government-linked companies has always been something of an enigma, chiefly because experiments in state socialism have been glaring failures in China, India, and elsewhere in Asia.

To what do companies like Singapore Airlines, Asia's most profitable air carrier, owe their success, especially when International Monetary Fund researchers find no evidence that companies controlled by the state's investment arm have benefited from privileged access to cheaper bank credit, the telltale sign of political patronage?

Commercial success is just one of the many ways to judge Singapore's public sector. For companies that are now co-owned by individual and institutional shareholders, however, it certainly isn't the best measure.

A more critical question is: How do these companies fare in terms of shareholder returns?

To begin to answer that question, a CLSA researcher, Atul Goyal, looked at company annual reports and corporate Web sites.

Out of 15 companies he chose to study, as many as eight do not seem to communicate a strong commitment to shareholder returns.

For example, DBS Group Holdings, Singapore's largest bank by assets, says it is "well positioned to tap exciting growth opportunities." Is the bank as well positioned to deliver exciting shareholder returns? It most probably is, though it doesn't explicitly say so, according to CLSA.

Chartered Semiconductor Manufacturing, the world's third-biggest provider of made-to-order chips, has a mission to "provide world-class silicon wafer manufacturing." A noble goal that's of little consolation to investors who have seen the shares slump about 38 percent this year.

Or take Singapore Airlines, which thanked its management, staff, unions and the board for helping the company cope with the travel slump following the outbreak of severe acute respiratory syndrome. Shareholders who held on to their investments amid a slide in airline stocks didn't rank a mention.

"Interestingly, in the letter to shareholders for some companies," Goyal and his boss, Prabodh Agarwal, note in their study, "customers, employees and board members seem to take precedence over shareholders."

The commercial success of Singapore's public sector may have done little for minority shareholders. CLSA estimates that over the past 20 years, government-linked companies have given investors an annual return of just 6 percent. The return was minus 1.6 percent over the past 10 years, and minus 4 percent over the last five years.

By comparison, private companies in Singapore and state-owned enterprises in Malaysia have done a lot better.

Curiously, Temasek Holdings has earned 16 percent annually over the past 30 years on its investments in government-linked companies. Temasek is the Singapore government's investment arm, which controls seven of the island's 10 biggest publicly traded companies by sales.

Why did it fare better than other shareholders? Possibly because a large part of its investments was in the nature of riskier "private equity," for which it got a premium.

Now that Temasek itself is driving the companies in its stable to deliver shareholder value above all else, minority investors also can look forward to better returns.

Unlike in the past, business decisions are no longer to be made with only market share or sales growth in mind.

The new catchphrase at Temasek-linked companies is "Economic Value Added," or the profit they earn over and above the cost of capital. Some of the public sector companies have linked executive pay to EVA.

"The power of EVA," the Temasek chief executive, Ho Ching, explained in February, "is not simply the potential for staff to share the wealth creation with shareholders. It is more importantly a mind-set change toward ownership."

Returns have already started improving.

According to CLSA, Temasek-linked companies, as a group, have given an impressive 33 percent return to shareholders over the past year, and not just because the stock market has been favorable.

Will the momentum last over the next five years, or 20? Perhaps, at least for some of the companies.

Making shareholder returns a key objective is only the first, easy step. Aligning the interests of employees and shareholders is the harder part. As the following excerpt from the annual report of a U.S. company shows, it's quite possible for a management to say one thing and do another:

"We plan to leverage all competitive advantages to create significant value for our shareholders," the chairman and chief executive of the company wrote in 2000.

That was one of the last promises Kenneth Lay and Jeffrey Skilling ever made to Enron shareholders.

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