Asia may lead the world in economic growth and investment performance, but many companies in the region lag their counterparts in more-developed markets when it comes to corporate governance and financial disclosure. Regulations are relatively few and perceived to be fluid, and political connections often exert greater influence on business development than market forces or shareholder expectations.
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Attitudes are changing, however, as an increasing number of global investors scrutinize companies in the region’s emerging and even frontier markets and expect corporate leaders to be accessible and responsive, to answer questions frankly and honestly, and to hold themselves accountable for their decisions and for articulating their companies’ strategic visions. Absent regulatory requirements, many corporate leaders across Asia are imposing standards on themselves, their officers and their companies that rival — and even exceed — those of chief executive and chief financial officers in Europe and the U.S.
Last summer, Taiwan Semiconductor Manufacturing Co. became the first publicly listed company in that country to acquiesce to requests from global fund managers that all decisions at annual shareholder meetings be put to a vote, rather than approved or rejected by acclamation. Other Taiwanese companies have since followed suit — notably, China Steel Corp., the island’s largest steelmaker.
“Corporate governance and investor relations are an integral whole,” explains Morris Chang, chairman and CEO of Hsinchu-based TSMC. “We have four basic values — integrity, commitment, innovation and customer partnership. Corporate governance is very consistent with our core value of integrity. I want to be financially transparent, and I want a good balance among the interests of all of the stakeholders — shareholders, employees and the community. Good corporate governance means you have to take care of all of these stakeholders.”
That’s a task that TSMC performs very well, according to analysts and money managers who participated in Institutional Investor’s inaugural All-Asia Executive Team, our exclusive ranking of the Asia ex-Japan region’s best CEOs, CFOs, IR professionals and companies that excel at investor relations. TSMC is the top-ranked outfit in Technology/Semiconductors, capturing six of eight possible first-place positions — more than any other company in the survey, regardless of sector. Chang is top CEO in the estimation of analysts on both the buy and sell sides; Lora Ho is the buy-siders’ choice for No. 1 CFO, and Elizabeth Sun is their pick for Best IR Professional; and both camps say TSMC is the sector’s Best IR Company. (We asked each survey participant to name up to four companies in his or her coverage universe that excel at each of six executive team attributes, including the accessibility of senior management, industry knowledge, quality and depth of answers to inquiries, transparency of financial reporting and disclosure, among others. Votes for each company were weighted by place and tallied to create two distinct rankings — one for the buy side, the other for the sell side — of Best IR Company in each sector.)
The ability to create and implement strategies is a key characteristic of any successful CEO or CFO, says Chang, who turns 80 in July and has held senior management roles since the 1970s, when he was group vice president in charge of the global semiconductor business at Dallas-based Texas Instruments, where he spent 25 years, and the 1980s, as president and COO of General Instrument in Horsham, Pennsylvania. In 1987 he became founding chairman of TSMC and built the company into the world’s largest chipmaker in terms of annual revenue.
“Without strategy your executive may well be moving in the wrong direction — and without execution, your strategy is useless,” he says. “A good CEO needs to have both strategic-thinking ability and strategic-execution ability. Strategic ability is built from one’s youth, and further built upon the knowledge and experience one has obtained in the career.”
That includes an understanding of not only one’s company and industry but also global markets. “In our business a successful CEO needs to have a large base of knowledge in semiconductors and also world economics — geopolitical factors that will affect his business — and he needs to build knowledge in several disciplines. After that good judgment emerges. That is the next higher level, and then the highest level is insight and innovation.”
TSMC has a reputation for being on the cutting edge of new technology. In the immediate aftermath of the global financial crisis, while rivals were scaling back spending on research and development, TSMC increased its allocation to more than 7 percent of group revenues for 2009 and 2010, up from about 6 percent in previous years.
“I increased R&D in absolute dollars during that period and hired more R&D engineers,” Chang says. “Actually, I’ve been increasing R&D even after that, because I think technology — new technology — is what really made us successful in the past and is what will continue our success in the future.”
An executive team’s strategic vision alone is of little use if it doesn’t lead to financial success, and by virtually every metric, TSMC is delivering astounding results. In January the company reported that year-over-year revenues in 2010 surged 41.9 percent in new Taiwan dollars (48.1 percent in U.S. dollars), to NT$419.5 billion ($13.3 billion); gross margin gained 5.7 percentage points, to 49.4 percent; operating margin shot up 6.8 percentage points, to 37.9 percent; and earnings per share catapulted 81.1 percent, to NT$6.23. TSMC’s shares surged 34 percent in the year through May.
Performance in first-quarter 2011 appeared less promising, owing to “an unfavorable impact from a 3.6 percent change in the foreign exchange rate that led to a decline in NT dollar–denoted sales,” Ho told analysts in an April conference call. Added Chang: “Had the exchange rate stayed the same as last year, we would make NT$26 billion more profit this year.”
However, the executives maintain a positive outlook for the rest of 2011. “Regarding capital expenditure, to support the customer demand for advanced technologies, we spent $2.77 billion in the first quarter, representing 36 percent of our total 2010 budget. We expect 70 percent of the budget to be spent in the first half of 2011.”
The company is placing greater emphasis on new technology for smartphones and tablets, because “they are the fastest growth segments in communication and computer products,” Chang told analysts. “They need the most advanced technology for application processes because everybody wants a smartphone that’s fast and low-power. And the fact that they need the most advanced technology is a definite advantage for TSMC, because we do lead in technology.”
Analysts agree. “Our key takeaway coming out of the first-quarter analyst meeting is that TSMC is decoupling from the underlying foundry sector and semiconductor industry,” Morgan Stanley’s Chia Ao (William) Lu, co-leader (with Keon Han) of the No. 3 squad in the Technology/Semiconductors sector on the 2011 All-Asia Research Team, wrote in a report to clients after the call. “Our thesis for investors is to take a more cautious stance on the foundry sector overall, but to overweight TSMC on its significant exposure to smartphones and tablets.”
Surging demand for handheld technologies is also benefiting Baidu, the Beijing-based web-services provider that ties for second place overall on the 2011 All-Asia Executive Team, capturing five first-place positions in the Internet sector. Robin Li is the preferred CEO among analysts on both the buy and sell sides, who also single out Victor Tseng as the Best IR Professional, and money managers say Baidu is the sector’s Best IR Company.
In addition to offering social networking services and software, Baidu is the No. 1 search engine in China. “We’re naturally proud of our leading market position, and we remain confident, but hubris and complacency can be deadly to any business,” says the 42-year-old Li, who was named chairman and CEO in 2004. “If you understand users and meet their needs the best, you will emerge as market leader.”
He notes that Baidu was not the first search engine in China, and it certainly didn’t start at the top. “In our 11 years we’ve faced major international competitors and many domestic rivals, including in recent times some with direct government backing. And in this time period, we’ve gone from zero to over 80 percent market share. We’re not going to rest on our laurels or forget the basics that got us where we are: an obsessive focus on user needs.”
Not that anyone would blame Baidu executives for a bit of self-congratulation. The company reported in April that first-quarter revenues had vaulted 88.3 percent year-over-year, to 2.4 billion yuan ($372 million); net income had jumped 122.8 percent, to nearly 1.1 billion yuan; and operating profit had skyrocketed 125.1 percent, to almost 2 billion yuan. Baidu’s American depositary shares bolted 85.4 percent in the 12 months through May.
Li was already regarded as one of the world’s top search engine experts when he co-founded Baidu with Yong (Eric) Xu in January 2000; he had previously worked at IDD Information Services, from 1994 to 1997, developing a software program for the online edition of the Wall Street Journal. In 1996 he devised a site-scoring algorithm used in ranking search results and patented the formula, which he would later use at Baidu. In 1997 he moved to Infoseek; the following year, Walt Disney Co. bought that search engine and incorporated its technology into Disney’s proprietary offerings to create Go.com.
Li knows full well that many companies would love to take market share away from Baidu. Google continues to up the ante by enhancing its search capabilities, and it remains an attractive alternative despite Beijing’s efforts to minimize the Mountain View, California–based outfit’s market penetration in China. (Indeed, last year, Google reduced its exposure in China over concerns about censorship and hacking.) Also gaining momentum is Chinese rival Alibaba.com and its Taobao.com e-commerce platform, both of which are expanding into the search engine space.
All the more reason for Baidu to create new offerings and distance itself from would-be rivals. Last year, Baidu spent 718 million yuan, or 9.1 percent of group revenues, on R&D — a 69.9 percent increase over 2009 figures — and invested 239.3 million yuan in R&D in the first quarter of this year.
“We remain dedicated to our mission of providing the best way for people to find what they’re looking for online,” Li says. “In the last two years, we’ve focused on realizing our vision for the future of search: box computing. In the near future virtually all of our online needs — whether we’re looking for data, for content or for applications — will be met through a single, simple interface powered by a highly sophisticated back end.” He explains that the search box web users are accustomed to will become a command box that can interpret everyday language and deliver what they are looking for.
“Users will power on a device — whether a PC, a notebook, a tablet or a smartphone — and the only interface will be that command box,” Li says. “Box computing represents the kind of higher-value search that we intend to keep delivering.”
Delivering better value through improved technology is also a top priority at China Telecom Corp., which ties with Baidu and Infosys Technologies for second place overall on the All-Asia Executive Team, with five positions: Xiaochu Wang is the Best CEO in the Telecommunications sector, according to analysts on the sell side; and both sides agree that China Telecom is the sector’s Best IR Company and Shun Loy (Jacky) Yung is its Best IR Professional.
The state-owned company operates China’s largest fixed-line phone service network, with more than 173 million subscribers, and is one of its largest providers of mobile phone and code division multiple access, or CDMA, services. In May the Beijing-based outfit reported that the March addition of 3.8 million new CDMA subscribers pushed that user group over the 100 million mark for the first time.
Third-generation mobile phone services is an important part of China Telecom’s future growth. As of December, China had 860 million mobile phone subscribers, although 3-G subscribers accounted for only about 5.8 percent, or roughly 50 million, of that user base. China Telecom has more than 16 million subscribers to its 3-G network and hopes to accelerate growth by offering more 3-G mobile services.
“We shall continue to aggressively expand the scale of mobile, broadband and industry application services,” says Wang. “We aim to position ourselves as a leader of intelligent pipelines, a provider of integrated platforms and a participant in content and application development. We shall persist in our business strategy of high-value data traffic management and transform our company to adapt to the mobile Internet operation mode, with a view to creating more value for customers and shareholders.”
To that end the company incurred capital expenditures of 41.6 billion yuan in 2010 — much of that spent on network upgrades and broadband infrastructure — and plans to dedicate 50 billion yuan this year, Wang says. China Telecom had 63.5 million broadband subscribers at the end of last year and hopes to boost that figure to 75 million by December. The company reported in April that year-over-year net profit rose 8.6 percent, from 14.6 billion yuan to 15.9 billion yuan, in 2010. In the first quarter of this year, net profit rose 8.1 percent, to 4.6 billion yuan, and operating income grew 11.3 percent, to 58.7 billion yuan. China Telecom’s stock shot up 32 percent in the 12 months through May.
Wang, 53, served as director general of the Tianjin Posts and Telecommunications Administration before becoming chairman and CEO of China Mobile (Hong Kong); he joined China Telecom as president in 2006. How much longer he will remain in the top job is something of a mystery. Rumors abound that Wang, a member of China’s ruling Communist Party, will soon be appointed governor of the southern province of Yunnan, which borders Laos, Myanmar and Vietnam. Neither Wang nor the company would comment on the rumors.
Another firm with ties to the state that earns high marks from analysts and money managers is CNOOC, a subsidiary of China National Offshore Oil Corp. Buy-side analysts cite Hua Yang as the Best CEO in Oil & Gas, and both sides agree that CNOOC is the sector’s Best IR Company. The executive team wins plaudits not for technological innovations, but rather for strategic acquisitions that boost the bottom line.
“Since our listing in 2001, we have been sticking to our company strategy — namely, to develop and expand the natural-gas business, to focus on production and reserves growth and to maintain financial discipline,” says Yang, 50, who in September was promoted from president and CFO to CEO and vice president of CNOOC’s board of directors. “Thanks to our effective and disciplined merger and acquisition strategy, our overseas development made noticeable progress in the past decade,” he says. “From 2002 to 2006 we succeeded in putting our footprint across the Asia-Pacific and West Africa. By 2010 our business spanned South America and the Middle East, as well as making the debut in the shale oil and gas business in North America.”
In January, CNOOC agreed to pay nearly $1.3 billion in its second shale deal with Oklahoma City–based Chesapeake Energy Corp., which followed an October agreement whereby the company will pay Chesapeake $1.1 billion for a 33.3 percent stake in an oil and natural-gas project in South Texas. These deals are a resounding victory for CNOOC, marking the first time the Hong Kong–headquartered oil and gas producer has been allowed land rights in the U.S. In 2005 its parent company pulled the plug on its $18.5 billion bid to take over El Segundo, California–based Unocal Oil Co. after members of the U.S. Congress demanded a review of the proposed acquisition based on national security grounds. (Unocal subsequently merged with fellow California oil producer Chevron Corp.)
CNOOC’s oil and gas sales in 2010 soared 77.7 percent, to 149.1 billion yuan, and net profit jumped 84.5 percent, to 54.4 billion yuan. Its stock leapt 59 percent in the year ended March 31, and the following month the company reported that first-quarter revenues had shot up 59.1 percent year-over-year, to 48.5 billion yuan.
Yang says he will continue to focus his energy on making CNOOC more profitable by cutting costs, improving existing risk-control measures and intensifying efforts to boost environmental conservation and sustainability, while maintaining the drive to discover more energy reserves.
Analysts are impressed. “We rate CNOOC as a ‘buy/low risk,’” Graham Cunningham, leader of Citi’s third-place crew on the 2011 All-Asia Research Team, told clients in a recent report. “We are positive on CNOOC’s longer-term growth prospects and believe its good cost-control measures will continue going forward.”
For most executives and their teams, keeping analysts and investors abreast of developments is usually limited to company business. Sometimes, however, they have to address issues that venture far beyond the dry numbers found in financial statements and annual reports. Robert McBain finds himself facing just such a challenge.
McBain, an American who spent more than 25 years in investment banking in Hong Kong, Macau, New York and Tokyo, joined Hong Kong–based SJM Holdings as finance chief in 2006 and is the Best CFO in Gaming & Lodging according to both buy- and sell-side analysts; SJM also tops the list of Best IR Companies in the sector. Nowadays he has to keep investors informed of developments in a long and highly visible battle between family members of SJM chairman Hung Sun (Stanley) Ho. Earlier this year the 89-year-old tycoon, who is recovering from a stroke, suffered embarrassment when children from his second wife, led by daughter Chiu King (Pansy) Ho, battled against his fourth wife, On Kei (Angela) Leong, for control of the gambling empire. The scandal, which has become something of a YouTube sensation, apparently hasn’t hurt SJM’s business. The company operates 20 of the 33 casinos in Macau and last year saw revenues surge 67.8 percent year-over-year, to HK$57.7 billion ($7.4 billion), with net profits up an astounding 292.4 percent, to nearly HK$3.6 billion. SJM’s share price advanced a jaw-dropping 242.3 percent in the 12 months through May.
“We have communicated to our shareholders the view of our board of directors that the matter is not expected to affect the management or strategic direction of the company,” says McBain, 60. “Our communications have been clear and consistent and available to all shareholders. SJM has a unique status as the only locally rooted competitor in Macau’s gaming industry,” he adds. “We have a strong combination of management skill, capital resources and network that enables us to compete effectively.”
Many analysts share that view. “Among the three companies that applied to the Macau government for new projects, we believe SJM is likely to be the first one to commence operations in 2015 to 2016, thanks to its strong balance sheet,” Gabriel Chan of Credit Suisse published in a recent report to clients. “SJM is also interested in developing sites seven and eight in the Cotai Strip. If the company receives government approval to operate those sites, we believe it will likely impact rivals Wynn Macau and MGM China Holdings negatively, as their sites will become off-strip.”
Full disclosure — no matter how unusual the circumstances — is an attribute that analysts value highly, although it’s not one often associated with corporate leaders in emerging markets. The members of the 2011 All-Asia Executive Team seem determined to change that perception as they guide their companies to higher levels of success — and set an example for others to follow.
