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Comparative Study on Financial Strategy of U.S and Korean Conglomerates Jai Woong Lee Sogang University & Asia Pacific Institute e-mail: Abstract As financial and conglomerates restructuring have been proceeding, writer would like to introduce U.S conglomerates historical financial strategy shifts as well as their long term vision in order to point out Korean conglomerates in the right direction to launch into the 21st century. After World War II, U.S conglomerates went through 4 stages in their financial strategies The first stage was the diversification of enterprises to attain a high growth rate from 1945 to 1965, the year, before outbreak of Vietnam War. The second stage was the conglomerates boom era from 1966 to early 1980, the period of competitive nuclear armament race between the U.S and the Soviet Union In this stage, it started with financial deregulation of 1980s and continued until the collapse of the eastern block after the fall of the

Berlin Wall in 1989. Most of conglomerates returned to their original core businesses selling out the non-related enterprises. Of course, in this stage, the merger and acquisition (M&A), even including hostile take-over, was prevailing phenomenon in financial circles. The fourth stage is the prime era of institutional investor, from 1991 to present. In this stage, the conglomerates concentrated their capital, labor and other production factors into the original core business, in preparation for globalization. Some of the most noteworthy precedent cases are Du Pont, Texas Instruments, 3M, Texaco, Colgate Palmolive, etc. Korean Conglomerates are a decade or more behind the U.S in financial strategy building Domestically, the first stage was a high growth period from 1965 to 1988. The second stage was the prime era of Korean conglomerates from 1989 to 1996, the year before Korea entered into the IMF system. The third stage began in 1997 when Korea entered IMF system, and continued up

to now Korea is now in transition period, since Korean conglomerates have been returning to their core business any way. Thus, the merger and acquisition (M&A) is the prevailing mode of realignment st for the 21 century. The Korean Conglomerates should learn from what U.S counterparts have already experienced by making use of financial indices, which are namely EVA (Economic Value Added), EP (Economic Profit), TSR (Total Shareholder Return), and TBR (Total Business Return). Through the recent restructuring, especially Daewoo and Hyundai, Korean conglomerates need to scrutinize: 1. How to invest correctly (decision-making system)? 2. How to evaluate precisely (evaluation system)? 3. How to divide resources fairly (compensation system)? These three elements must be combined together into one system to work efficiently. In the by-gone days, Korean conglomerates, by and large, followed Japanese financial 1 management style. First of all, the decision-making system was based

on long-term market share approach. Second, the evaluation system was absolutely rooted in pursuing profit, based on market share ratio. Third, the compensation system was built on seniority base with life long employment However, after Korea entered into IMF system, the Japanese-style system began to dwindle and we clearly observed even one of the big five conglomerates could be sunken. The rule of Wall Street is now becoming a predominant doctrine. In conclusion, the financial management strategy based on the shareholder value approach will become the key financial strategy in the 21st century. Owners of conglomerates, from now on, should be committed to making full use of financial management devices such as EVA, EP, etc. and set up their own decision-making, evaluation and compensation system. This is the only way to survive in severe global competition. Starting from the collapse of Daewoo and restructuring of Hyundai, we should bear in our mind that not only Korea but also the

whole world is watching Korean conglomerates owners sincerity, honesty, and courage to attain genuine restructuring in the 21st century. 2 I. Financial Strategy Shift of US Conglomerates 1. Significance of Shareholder Value and its Historical Shift Taking into consideration of such elements as the significance of shareholder value, the importance of financial management, the economic environmental changes after World War II, federal regulations policy towards business, and corporate governance, the financial strategy of the United States conglomerates might be classified as following 4 stages (see Table 1). 1) High Growth Rate Stage (1945∼1965) United States of America was the sole unique military and economic giant as Pax Americana. U.S conglomerate expanded their business area and positively diversified their related business From the management point of view, the furnishing enough funds for expanding business and supporting absolute growth, was necessitated. So far as the

shareholder value was concerned, the most noteworthy indicator was the earnings per share (EPS). The expansion of the scale of economy was necessary for the enhancement of EPS. The composition of shareholder was amazing, because there were large portion of individual shareholder like developing country in these days. Therefore, the voice of shareholder was not too much organized and weak. The management treated the shareholder almost similar to the weight and rank of consumers, urban developers and moneylenders. In another explanation, the management operated the conglomerates on the basis of stakeholder-oriented approach in order to harmonize the interest of shareholder, consumers, urban developers and moneylenders. During this stage, the Dow Jones Industrial average skyrocketed and went up 5 times from 1949 to 1965, mainly due to Korean War boom. The majority of management of US conglomerates needed not to stress the shareholder value sharply, but consequently, the shareholder value

went up within a good environmental atmosphere. Some categorical analyses in comparison with Korean situation are shown as follows (see Table 2). 2. Conglomerate Boom Stage (1965∼1980) Starting from 1965 to 1970s the business environment surround- ing U.S conglomerate had been dramatically changed. European Union and Japan had grown so rapidly that the competitive edge of U.S conglomerate became more difficult than 1st stage The growth opportunity was so 3 limited that U.S conglomerate began to diversify their business line even to the non-related enterprises as well. Thus, the most of US conglomerate expanded to non-related subsidiaries in the number of two digits like Korean conglomerate these days. They intended to maximize the group profit embracing a number of different business cycle subsidiaries and, and at the same time, aimed to raise earnings per share (EPS) through expansion of scale of economy. However, the financial strategies of U.S conglomerates could not

achieve their original objectives as a whole. From 1965 to 1980, the Dow Jones Industrial Average 30 went down more than 10% although their earnings per share (ESP) increased 2.5 times Financial management scholars such as Professor M. Jensen evaluated the downward trends of stocks prices aroused due to the misuse and mal-administration of allocating fund within a non-related subsidiary through irrational decisionmaking. The comparison of US and Korean conglomerate in the 2nd stage are shown as follows (see Table 3). 3. M&A and Shareholder Value Oriented Stage (1965∼Present) Entering into 1980s, one of the most noteworthy phenomenon was the correction movement between shareholder and the management conflict of interest. To attain this objective, the leverage buy out (LBO) method was prevailing through even hostile take-over. Particularly, those listed companies, the stock price of which had shown a long-term slump, were the target of hostile take-over or replacement of

management through leverage buy-out (LBO) method. In this way, the way of thinking of management has been changing. The most of management began to realize the importance of shareholder value, instead of earning per share (EPS). They have gradually been paying more attention and weight on shareholder value than stake-holders approach. Thus, stock price went up more than 34 times during 1980s, after 15 year long slump Entering into latter part of 1980s, U.S conglomerates took a more effective defense position by introducing poison pills, etc. The hostile take over phenomenon was dwindled down due to low profile of junk bond market, large increase of buying price, and regulation of the state government on hostile takeover activities. Also, a remarkable change was observed within the US conglomerates These were share price related compensation system by stock option and increase of portfolio investment of pension fund. Through these measures, the harmony of conflict of interest between

shareholder and employee was realized. Through such an internal and external atmosphere changes, the shareholder value-oriented approach has been developing in this stage. Even prestigious enterprises with long history, launched into spin-off, split-off, split-up, etc. in case when it was productive to 4 increase the shareholder value as a whole group of conglomerates, like GM, 3M, etc. The management began to realize selfimposed restructuring was the best policy before a hostile take-over penetrated into their enterprises. From the point of view of financial management theory, such a concept as Economic Value Added (EVA) were supposed to be understood not only by treasury department but also by other departments. Such approach has been rooted strongly among US conglomerates in latter part of 1990s As a consequence, the Dow Jones Industrial average went up 3.4 times during 1990s 4. Some Suggestion to Korea The historical analysis of U.S conglomerate financial strategy change

has a similarity to Korean counterpart, even though there existed 10 to 20 years lead and lag. Particularly noteworthy fact was that Korea Stock Price Index (KOSPI) has almost leveled or downward movement since 1990. It was almost same phenomenon that US experienced a leveled stock price from 1965 to 1985, that was U.S conglomerates boom era Dow went up after restructuring made by M & A and spin-off, etc. after 1990s Of course, the U.S experience and historical trends could hardly apply to Korea as it was However, Korea, entering into IMF system at the end of 1989, should observe shareholder value oriented philosophy through conglomerates transparency, disclosure, consolidated balance sheets, the observance of BIS capital adequacy ratio of banking industry and lowering debt/equity ratio to the international standards, etc. In this sense, the U.S conglomerate experiences and the historical analysis by stage will be greatly helpful for Korean conglomerates financial strategy planning

and implementation in 21st century. The last comparison is shown as follows (see Table 4) 5. DEBATE OF THE SHAREHOLDER VALUE IN UNITED STATES The main point of opinion difference between stake-holder- oriented and shareholder oriented approach are shown as follows (see Table 5). Professor M. Jensen stressed the importance of capital efficiency directly correlated to the shareholder value. Professor Jensen insisted the introduction of shareholder value-oriented approach due to the seriousness of over investment and over equipment problems. He further pointed out these problem caused by following 4 reasons: 5 1) Serious competition through system changing eastern block enterprises. 2) Quick appreciation of equipment by the acceleration of technological innovation speed. 3) Input volume decrease by the technological innovation. 4) Capital substitute elasticity through the world market entry of the third world. Professor Jensen also pointed out the advanced courtiers like U.S and

EU had been faced the side effects that delayed the restructuring by adhering to the stakeholders interest for a long period of time. This is the exact same phenomenon Korea has been confronted after IMF system entry in 1998 Korea should pay keen interest and concern upon the fact that the U.S conglomerates had been reinforced the shareholder value-oriented way of thinking by their own will, not by external enforcement through government. II. Recent Indicators of Share Holder Value 1. EVATM and MVATM The typical shareholder value indicators in the U.S are EVATM (Economic Value Added) of Stern Stuart Company, TSRTM (Total Shareholder Return), MVATM (Market Value Added), and TBR (Total Business Return) of Boston Consulting Group. EVATM = Excess Profit = Corporate Profit - Expected Rate of Return of Capital. = Net Operating Profit after Tax (NOPAT) - Capital Cost = NOPAT - WACC (Weighted Average Capital Cost) ×Invested Capital = ROI (Return on Investment) - (WACC) ×Invested

Capital where ROI = NOPAT/Invested Capital If the management would like to implement EVA in operation, they are supposed to earn more than shareholder expected rate of return by investing more profitable business under following conditions. First, the management increases the investment capital by positively investing into business, which exceeds the working average capital cost (WACC). Second the management should abandon such business, which is below the level of WACC. In the latter case, they are obligated to buy back their own shares or return the capital by distributing 6 dividend. If the head office set up the target by EVA, the different division under the head office will seek same objectives and instruments. In the United States, EVA Instruments were utilized in Coca-Cola, Eastman Kodak, Monsanto, Quaker Oats, and CSX. Companies like merger and acquisition also use EVA method In Japan, Kao Soap Company introduced EVA method and showed successful result. Besides, Market

Value Added (MVA) is used as a shareholder value indicator denominated by market value. Stern Stuart Co thinks that the future share price will be created by the future expectation, Economic Value Added (EVA). Therefore, theoretically, the market capitalization of share price and liability should be equal to invested amount up to present plus present value of the future expected EVA. In another words, MVA should be equal to market capitalization of share price and liability minus invested amount up to now. 2. TBR and TSR Boston consulting group developed total shareholder return (TSR) by taking into consideration of capital gains and dividends, and further created total business return (TBR) as a internal management indicator. In United States, such indications as TSR and TBR are used by PepsiCola and Procter & Gamble Simple equations of TSR and TBR are shown hereunder. TSR = Capital gains per share = dividend per share, basic share price TBR = Changes of EBITDA multiple = free

cash flow EBITDA of previous term × EBITDA multiplier where EBITDA is Earning Before Interest Tax and Depreciation. Boston Consulting Group insists that TBR is not only indicating profit level but also future growth potentiality. At any rate, then what would be the difference between MVA of Stern Stuart Company and TSR of Boston Consulting Group? These equations of above two indicators can summarized as follows. MVA = Market Value of Enterprise (Market Capitalization + Liability + Reserves) − Book Value of Capital Invested. 7 TSR = Capital Gain = Dividend Yield. 3. Evaluation of Indicators The shareholder value can evaluated by four such items as: 1. Efficiency of capital, 2. Growth potentiality, 3. Capital cost, 4. Free cash flow EVA is dependant on from 1 to 3, i.e efficiency of capital, growth potentiality, and capital cost while TBR is including even item 4 free cash flow. The common feature of two indicator are a manageable indicators transformed from accounting

variables derived from discounted cash (DCF) method. EVA has a merit of easily understandable everyone, while TBR is including four items of evaluation. In another words, two indicators are in a position of trade-off between easy understanding and inclusiveness of all four elements. Classical accounting indicator stresses only capital efficiency and growth potentially. If management over-evaluates the capital efficiency, there would arise a possibility of under-investment problems. On the contrary if the management over-evaluates the absolute indicators, there would arise a possibility of over-investment problem (see Table 6). In this respect, Korean conglomerate should pay much attention relying one indicator to great extent. In applying these indicators in reality, they are recommended to understand the characteristics of each indicator and to utilize after combining a several indicator together by weight. III. Case Studies 1. TEXACO 1) Consensus Formation. EVA, ROI, and other

capital efficiency indicator have used for internal management purposes and report to executives, who are well informed so that they can do for consensus building in decision-making at board of directories meeting. 8 2) Minimum 1.5% of WACC In applying discounted cash flow (DCF) method, risk premium is different from each business division calculated by weighted average capital cost (WACC). For an example, risk premium of oil refinery project is low while oil depletion is high. Texaco in general imposes at least 115% of WACC, which is determined annually reflecting debt/equity ratio and share price. The 115% of WACC seems to be a little higher, but Texaco insists there would be a chance of investment over 11.5% of WACC 3) Importance of Capital Efficiency Indication. The importance of capital efficiency indicators was stressed by Texaco right after it filed chapter 11 in 1980s. Since then, the expansion of the Texaco business was prime target but Return on capital employed (ROCE)

became one of the important indicators, the details of which are not released to public. As a matter of fact, the discounted cash flow (DCF) method had been applied more than 20 years, but the evaluation of this method, was not effective even “ex post facto” basis. Therefore, Texaco uses DCF method “ex ante”, and evaluate the capital efficiency by ROCE (Return on capital employed) “ex post facto” basis since latter part of 1980s. Texaco is also paying keen attention not to fall into less investment or balanced shrinkage by stressing too much capital efficiency, and seems to invest a certain limited strategic investment. 4) Consideration of including new indicator On the desk, EVA and new indicator are considered to introduce, but in the field, they are not much paying attention these days. However, if introduced, the comparison with competitive enterprise becomes easier and, sooner or latter, new indication will be introduced in any way. 5) Recognition of shareholders

value. Texaco adopted training calculus of DCF method, but future task is how to level up this training programs. Close relationship between treasury and business department is one of the tasks to overcome. Texaco is making problem pooling attitude to get closer each department so that treasury people can quickly encounter the problem which field business people are facing and can rapidly implement counter measure. 9 2. CHEVRON 1) Consensus Formation CHEVRON is creating a new indicator, linked with total shareholder return (TSR), by utilizing book value share price with the strong support of management. This financial management restructuring has been developing under the formidable support of CEO and CFO. Therefore, the close communication among core elementary staff has been made for building up new financial indicators. 2) Importance of Capital Efficiency Indicators CHEVRON made a policy shift for shareholder value-oriented approach during declining oil price era in 1980s,

similar period of Texaco’s policy change. However, Chevron regarded that an over- evaluation of capital efficiency might bring about another side effect. Those business projects which was concluded to be wasted capital projects after comparative capital cost benefit analysis, had been squeezed since in 1990s after such a kind of restructuring, Chevron reached to think over the future growth potential, and from the point of view of shareholder, Chevron is establishing a new financial strategy including potentiality of growth. 3) Introduction of new Indicator The objective of CHEVRON was the development strategy of new indicator, which could complied together both growth and profitability, limited to TRS on book value basis. In another main task was how to catch up the elements correlating with shareholder value. Book value indicator was necessary because all the internal and external reports were made on book value basis, in addition to that, it was also important that the new

indicator could extend the possibility of comparability with competitive companies correlation with share price expectation of investor in the stock market, and easy understanding the mechanism of indicator. CHEVRON has almost come to conclusion to the concept of a new indicator but still studying how to utilize that indicator for investment relation (IR) in future. 3. COLGATE PALMOLIVE 1) Consensus Formation Inter-department consensus has been forming by evaluating buying effect through present value cash flow analysis. Colgate-Palmolive company has been expecting an over-all consensus by clarifying the 10 effect of M&A, if the company utilize well of cash flow movements by discount cash flow (DCF) method and net present value (NPV) analysis. 2) Establishing 10% WACC rule Without any discrimination, 11% of weighted average capital cost rule has been being applied since early 1990s. However, overseas business projects have been applied a different level of cost calculation

in accordance with such a various risk such as inflationary tendency varying country to country. 3) Importance of Capital Efficiency Indicator The main objective of Colgate-Palmolive financial strategies is presenting excess assets by efficient management of operating funds. For this purpose the compensation system is established to be created with discipline of operating funds. It was so simple that every low echelon employee could understand the mechanism well. Colgate-Palmolive held somewhat less positive way of thinking to adopt EVA, since it regarded that management of operating fund in line with its own system was effective so far. 4. 3M 1) Consensus Formation 3M stressed the concept of “Economic Profit” (EP), which is similar to EVA. 3M has formed consensus building through free discussion on discounted cash flow (DCF) method, not only in the treasury but also planning and budget and all other departments as well. Especially, the company has paid a keen attention upon the

process of consensus building. 2) Establishing Weight Average Capital Cost (WACC) Concept Establishing WACC of 3M is somewhat text bookish. Risk premium and shareholders capital cost are calculated by Treasury bill yields and beta analysis. Capital cost is driven by weight average liability cost. Overseas capital cost is also calculated in same manner The future problem will be how to solve the problem overseas capital cost calculation. 3) Importance of Capital Cost Indicator 3M’s decision making is rather highly dependent on the investment strategy itself than EVA method. In case when the company invests beyond a certain level, the management makes its 11 judgment depending upon expected long term cash flow through discounted cash flow (DCF) method. The management makes it a rule not to invest the strategic project, which has shown negative net present value (NPV). 4) Introduction of New Management Indication Economic profit indicator of 3M has been appeared in its annual

report for a usual year. EP is similar to EVA but more simple to be understood and more correlated with its stock price. EP, first, started from business department in United States. 3M has 3 business headquarters, 30 divisions and 130 units entities, these 3 hierarchical organizations all have made good use of EP analysis. 3M’s present task in financial management strategy is how to indoctrinate the concept of EP in close relation with the employees compensation. For the executives, EP method is the core of their incentive system. 3M is pursing profit through cost cutting and layouts while refraining from growth. Operation of business is managed division by division under their own responsibility, and financial management is undertaken by calculating capital cost through optimal capital composition with international financial management sphere. 3M’s EP mechanism is shown in Figure 1 5. Du Pont 1) Consensus Formation Du Pont decision-making has been based on the result of

discounted cash flow (DCF) method approach above the limited ceiling of investment amount since 1980. From 1992, net present value (NPV), dividend growth scenario method and mean variables approach should be appreciated to the large scale investment. 2) Establishment Of 12% WACC Rule WACC is applied 12% rule. Every business division are using same 12% rule of WACC, and it is under study whether or not every division uses same 12% rule in the years to come. 3) Introduction of New Management Indication Du Pont was well known by the Du Pont method, a strict financial management based on capital efficiency accounting. But Du Pont is considering to introduce shareholder value added (SVA) 12 method of financial management system, similar to EVA. The merits of SVA are the checking possibility whether or not creating shareholder value, the simplicity of calculation, and easiness of communicating sale profits ratio, operating capital, and fixed capital affects to the shareholder value

added (SVA). Du Pont has about 60 business division, each of which set up independent business strategy. The most important management indicators of the company are the shareholder value added (SVA) and net present value (NPV), calculated by DCF method every 8 to 10 years. The calculation of SVA is made using computer all over the world. SVA of business sector is implemented every year 5-year plan is rollovered every 5 year. Every division reflects the level of profit and cash flow in the business plan and decides the level of SVA automatically. 4) Importance of Financial Management Key Staff It will take 2 to 3 years to be rooted the concept of SVA. First of all, the educating financial management key staff in every divisions was made for the first priority to be accepted . The driving elements of SVA are said sales growth rate, sales profits ratio, turn-over rates of operating capital and invested capital, which are worthy to be paid attention. In order to build up new financial

management system, one of the most important tasks to attain was the development of core training staff for shareholder value-oriented study. Through these key financial management staff, Du Pont has a competitive edge through training process. 5) Role of Top Management Role of top management was quite important for new concept of management indicator to be penetrated into employees in general. Top management has kept asking to them about shareholder value added (SVA) concept, so that every employee was encouraged to study SVA. Ⅳ. Some Suggestions to Corporate Restructuring in Korea 1. Necessity of Perceptive Approach to International Environment Change Look back upon the history of U.S conglomerate, it can be easily understood that their financial strategies have been changed in accordance with politico-economic environments, federal regulatory policy toward conglomerates, and finally corporate governance. Entering into 1993, Clinton administration set up National information

Infrastructure (NII) and revealed a grand vision by 13 name of Government Information Technology Services Board (GITSB) in 1997. In 1998, US Department of Commerce published ‘Emerging Digital Economy’ which prescribed how e-commerce and IT industry were playing a great role in U.S and world economy In this process of digital economy, U.S enjoyed more than 110 months long upward business cycle, but from later part of year 2000, U.S has entered into soft landing showing sharp downward of NASDAQ and Dow Jones Industrial Average as well. At the brink of changing into new Bush administration, the world as well as U.S is watching whether the soft-landing of digital economy driven by IT industry, will keep going or not in new administration. Looking back upon the precedent administration change, it will take at least half a year or so to gear up new administration’s economic policy direction. In the midst of this transition of power, Federal Open Market Committee (FOMC) suddenly

slashed Federal fund rate 50 basis points from 6.5% to 6% at between the regular meetings, first time since Russian default crisis in 1998 Despite of this dramatic measure, Dow and NASDAQ rebounded once a day and left the market consensus that stock market will not so perform as well as former upward trend of business cycle. Reflecting the synchronizing effect of U.S business cycle and stock market movements, Korean Stock Price Index (KOSPI) went down at 500 points level, half of one-time peaks 1,000 points plateau. Especially, one of noteworthy fact foreigner’s buying and selling of Korean shares have proved to be one of leading factor affecting KOSPI and KOSDAQ (Korean version of NASDAQ). In complying with international standards, eg, generally accepted accounting principles (GAAP), consolidated balance sheets statements, weighted average capital cost (WACC) and discounted cash flow (DCF) methods, Korea started restructuring through merger and acquisition (M&A) after entering

into IMF system 1998. But, recently, it became a serious life and death matter for survival of not only conglomerates but also all ‘Work-Out’ target enterprises as well as problem banks, because of Daewoo’s collapse and on going Hyundai’s restructuring. In this aspect, owners and top-management of Korean conglomerates should reconcile the importance of shareholder value approach, which U.S conglomerates has already successfully experienced and adopted epoch-making financial strategic shift more than a decade or so. 2. Needs of Triangle Restructuring Approach: Decision-making, Evaluation and Compensation System. In order to implement the restructuring from shareholder side, there are necessitated the triangle restructuring approach: 1) How to invest ex ante (decision-making system), 14 2) How to evaluate ex post (Evaluation system), 3) How to distribute the results (Compensation system). As seen in the case of Texaco, it could not prevent the over- investment by adopting

discounted cash flow (DCF) methods as a decision making system, without effective evaluation system ex post. Another case was the unsuccessful restructuring through only cutting employees salaries and consequently only degrading their morale due to the lack of adopting new management financial indicators. Before entering into IMF system in 1998, Korean conglomerates have followed the Japanese conglomerates pattern of triangle management system: 1) Long term growth realization (Decision making system), 2) Adoption of such economy of scale indicators as market share (M/S) and absolute profit realization (Evaluation system), 3) Lifetime employment and seniority system, a prerequisite of long-term development (Compensation system). But, after entering into IMF system in 1998, the principle of ‘great horse never die’ was demolished and so called IMF style of America’s ‘Wall Street Rule’ has become a predominant paradigm. Naturally, ‘Wall Street Rule’ stressed the shareholder

value and a realignment of shareholder or production factors have been taken place (see Figure 2). 3. Importance of Consensus Formation One of the important lessons of U.S conglomerates’ case studies is the consensus forming process within the organization. Key point is positive participation of top management for the financial management to lead the financial strategic restructuring. The shareholder value-oriented restructuring can not be achieved only by financial management division alone without a positive support from other business, marketing and production division, etc. Time and chance have come for Korean conglomerates to overcome the old paradigm of Confucian Korean way of management style and to build up new shareholder value-oriented financial strategy. 15 4. Importance of Restructuring Scheduling As seen in U.S conglomerates cases, the most of organization set up restructuring schedule on very pragmatic way. They started it a limited certain division for a pilot

case, and then spread it to broad area by looking upon merit and demerit of the pilot restructuring case. Important case is what kind of division or goal the conglomerate is seeking to and what kind of schedule or steps it will take in reality for this new shareholder value-oriented indicator well received as consensus among all shareholders. Once if consensus building was successful the restructuring difficulties could be fairly shared among them. V. Conclusions In short, shareholder value-oriented management could summarized as system, self imposing such a strict standard as cash flow, capital cost, and capital efficiency upon its own organization. Overseas investor such as U.S institutional investors, will surely invest their own precious fund to Korean conglomerates listed companies, which are well qualified to the above-mentioned standards. If disqualified, they will immediately pull back their invested money according Wall Street Rule. This does not necessarily mean that all of

the Korean style management whether it merits or demerits, should be all thrown away at once. The only thing the owners and top management of Korean conglomerates should do, is to set up a shareholder value-oriented indicator, which is the most suitable to attain on epoch-making restructuring, by taking an initiative with sincerity and boldness. In conclusion, it is not far to say that the shareholder value-oriented approach is not only a means of survival strategy but also global management strategy in 21st century for Korea conglomerates (see Table 7). References 1. Bicidore, JM and Boquist, JA , EVA and Total quality Management, Journal of Corporate Finance, Cambridge University press, 1997. 2. Boston Consulting Group, Shareholder Value Matrices, 1996 16 3. Boston Consulting Group, Meeting the value challenge, 1996 4. Chew, DH and stern, JM , The revolution in Corporate Finance, 1998 5. Jensen, M and Wruck, KH, Science, Specific Knowledge and Total Quality Management, Journal

of Applied Corporate Finance, Summer, 1997. 6. Dennis, DJ and Denis, DK, Managerial Incentive and corporate Diversification Strategies, Journal of Applied Corporate Finance, Summer, 1997. 7. Erbar, A, EVA, The Real Key to Crating Wealth, John Wiley & Son, 1998 8. Grossman, DM, Contracting, for value EVA and the Economics of Organization, Journal of Applied Corporate Finance, Summer, 1997. 9. Smith, CW Jr and Zimmerman, Management Facts and Organizational Architecture, Journal of Applied Corporate Finance, Summer, 1997. 10. Stewart, III, GB, The Quest for Value, Harper business, 1991 11. Jai Woong Lee, Modern Business Law, Corporate Restructuring cases inclusive, Pummunsa, 1998 12. Jai Woong Lee, International Financial Market Under IMF Era, Pummunsa, 1998 13. Jai Woong Lee, International Finance and Foreign Exchange Policy-Financial Strategy and Corporate Governance inclusive, Dasarang, 2000. 17 Figure Captions Figure 1. 3M’s financial management mechanism, EP. Figure

2. Restructuring process before and after IMF. 18 List of Tables Table 1. Four Stages of U.S Conglomerates Financial Strategy Changes Table 2. Comparison of High Growth Stage Between U.S and Korean Conglomerates (First Stage) Table 3. Comparison of Conglomerate Boom Stage (1965∼1980) Table 4. Comparison of Shareholder Value-Oriented Stage (1980∼) Table 5. Comparison of Stake-holder- and Share-holder-oriented Approach Table 6. Four Elements of Shareholder Value and Merits of Indicator Table 7. Concluding Process of Shareholder Value-Oriented Approach 19 Wage Growth Profit Cost-Cutting BUSINESS ACTIVITIES • Fixed assets • Intangibles assets • Bond or note sold • Bond or note bought Efficiency Asset Squeeze ECONOMIC PROFIT Effective Tax Rate FINANCIAL ACTIVITIES International Tax Management Optimal Capital Composition Capital Cost Corporate Bond Rating Figure 1. 3M’s financial management mechanism, EP. 20 BEFORE IMF AFTER IMF Decision

Making System Decision Making System • Shareholder Value-Oriented • NPV by DCF Method • Shareholder Value Indicator • Cash Flow • Stability of Scale, Growth, and Profit • Long Term Growth • Diversification Evaluation System Compensation System Evaluation System • Stability of Scale, Growth, and Profit • Scale Value • Market Share • Absolute Profit-making • Stability of Scale, Growth and Profit • Life Time Employment • Seniority System • Shareholder Value-Oriented • Cash Flow • Shareholder Value Indicator • Capital Efficiency Indicator Figure 2. Restructuring process before and after IMF 21 Compensation System • Shareholder Value-Oriented • Stock Option • Linkage to Shareholder Value • Actual Performance-Oriented Table 1. Four Stages of US Conglomerates Financial Strategy Changes PERIOD 1945 ∼ 1965 1965 ∼ 1980 1980 ∼ 1990 1990 ∼ Present STAGES High Growth Rate Conglomerate Boom Hostile Takeover M&A

Institutional Investors CORE BUSINESS Diversification of related business Diversification of non-related business Demolition(Write-off) of non-related business Concentration of core business 22 Table 2. Comparison of High Growth Stage Between US and Korean Conglomerates (First Stage) COUNTRIES Categories Economy U.S KOREA Stage High Growth Rate 1945∼1965 High Growth Rate 1965∼1988 Saving After W.WII Getting Better After Korean war Getting Better From military industry Technology complex to private commercial use Creative imitation through low technology transfer from U.S, Japan and W/Germany Growth Sole U.S opportunity for Opportunity world marketing Overseas marketing through low-cost labor up until fall of Berlin Wall, 1989 Regulatory Environment Shareholder Management Strategy FRBs Regulation on interest rate and selective control.  Regulation on commission. Rent control, etc.  Regulation on money supply and domestic credit rationing. 

Foreign exchange control act.  External trade control law.  Competitive edge lost entering into IMF article 8th country and GATT article 11th country in 1987∼1988. Weight of institutional investor increasing.  Foreign portfolio investor increase (KOREA fund in 1984, opening up overseas convertible bond, B/W, D/R). EPS-Oriented Stake holder-oriented approach Diversification of not only related business but also non-related business of conglomerates. Market share(M/S) and sales volume oriented approach. (New Village) Movement drive over factory, conglomerates and government office as well until 1979 23 Table 3. Comparison of Conglomerate Boom Stage (1965∼1980) COUNTRIES Categories Economy U.S KOREA Stage Conglomerate Boom Stage 1965∼1980 Conglomerate Boom Stage 1989∼1996 Saving Saving not active due to Vietnam War. Saving increasing due to middleincome class wealth formation drive. Military industry technology decline in Technology

post-Vietnam War years. KAIST developed Koreas own viable technology. Foreign technology imported through royalty payment basis Growth opportunity Growth affected by the trade Opportunity friction with Japan and EU. Export opportunity declined due to K/won currency appreciation. Severe competition with China and system-changing countries. Regulatory Environment Liberalization of brokerage commission. Interest rate liberalization and deregulations. Foreign exchange deregulation Interest rate liberalization 140 more Deregulations made by the entry of OECD, BIS, ILO, etc. Shareholder Institutional investors weight up due to expansion of pension fund. Individual investors weight down. Foreigners direct investment liberalization made hot money inflow in and after 1992. Foreign and minority shareholders voice increase by the Korea commercial code amendment, 1998. Management Strategy Diversification even to the non-related enterprises. Earnings per share (ESP) orientedapproach.

Stakeholder-oriented approach. Diversification even to the nonrelated enterprises within Jaebol group (Korean Conglomerates) Entry into security business of Korean conglomerates. M/S, sales, profit maximization oriented approach began. 24 Table 4. Comparison of Shareholder Value-Oriented Stage (1980∼Present) COUNTRIES U.S KOREA Shareholder Value-oriented stage 1980∼Present IMF system Stage 1997∼Present Saving Saving Ratio declined Consumer spending sharply declined first half of 1998. Savings increase bit 1999 Technology Worlds leading high technology developed, especially IT in 1990s Middle-technology in general. High technology in IT & Digital following U.S Growth Opportunity Digital economy in 1990s Growth Rate-oriented Sharp decline of equipment investment in 1998. Growth rate up in 1999 and 2000 slowing down in 2001 and forward. Regulatory Environment Brokerage commission liberalization. Interest rate liberalization Interest rate liberalization.

Banking and corporation restructuring done 1st and 2nd stage on going. Hostile take-over and outsider pressure on industrial investor pressure increase. Foreign investor, security analyst, investment consultant, certified public accountant influence Investment fund set up. KOSDAQ boom in 1999 to first half or 2000 and later plunge due to IT service stock, NASDAQ influence. Core business concentration spin-off, split-off non-related business Shareholder value-oriented approach on going. Labor-management-politician meeting made management authority weak. Failure of so-called big deal of conglomerates and Collapse of Daewoo. Banking holding company tested. Corporate restructuring 2nd stage, at stake, on going. Categories Economy Stage Shareholder Management Strategy 25 Table 5. Comparison of Stake-holder- and Share-holder-oriented Approach STAKEHOLDER (Oriented) SHAREHOLDER (Value-oriented) 1. Origin of value stems from employees and clients accepted commodity, quality and

more competence. 2. Shareholder oriented management makes difficult for competition in the community and labor market. 3. Investor usually makes decision on shortterm basis 4. More competence naturally smoothen cash flow. 5. Long-term investment will not be made, if short-term investors are highly appreciated. 6. Investor usually is oversensitive on financial statements. 1. Origin of value stems from sufficient profit out of used capital. 2. Shareholder-oriented approach increases consequently the value of corporation. 3. Short-term investor supplies liquidity and long-term investor makes share price. 4. Shareholders value-oriented approaches prevent the waste of cash flows. 5. Shareholders value-oriented approach accelerates the long-term investments. 6. Investor usually reflects to the cash flows 26 Table 6. Four Elements of Shareholder Value and Merits of Indicator FOUR ELEMENTS: EFFICIENCY OF CAPITAL INDICATORS: ROE ROA ROCE (RETURN ON CAPITAL EMPLOYEE) ROI

CFROI (CASH FLOW RETURN ON INVESTMENT) GROWTH POTENTIALITY EBITDA FCF (FREE CASH FLOW) 27 CAPITAL EFFICIENCY, GROWTHPOTENTIALITY, CAPITAL COST EVA MVA CAPITALEFFICIENCY, CAPITAL COST, FCF TBR TSR Table 7. Concluding Process of Shareholder Value-Oriented Approach Recognition of Managerial Environment • U.S conglomerates historical problem • History of U.S conglomerates • Regulatory environments • Regards of capital efficiency • Shareholder composition • Share-holder composition • Share-holder value-oriented approach • M. Jensen’s suggestion Direction of Managerial Restructuring System • Triangle restructuring systems 1. Decision making system 2. Evaluation system 3. Compensation system • Pick-up the problem-solving attitude for restructuring Consensus Formation Setting Up Realistic Scheduling • Leadership of top management for restructuring • Clarity of restructuring direction • Financial and program planning teams support •

Activation of corporate training • Outside consultant utilization • Short-term impact approach or long-term gradual approach • Utilization of pilot project • Utilization of internal training • Utilization of outside consultant 28