34 Corporate Finance
Euromoney conducted a survey (results of which are shown in Exhibit 1.5) of the biggest companies from
emerging markets.^18 It considers the following factors in ranking:
- Ownership transparency
- Financial transparency
- Board structure and processes
- Shareholder relations
- Alignment of managerial and shareholder interests
Exhibit 1.5 Corporate governance rankings
Rank Company Country Final score
1 Infosys Technologies India 89 percent
2 Pohang Iron & Steel South Korea 88 percent
3 Global Securities Turkey 86 percent
4 Gujarat Ambuja Cement India 83 percent
5 Silverline Technologies India 83 percent
6 Dr Reddy’s Laboratories India 83 percent
7 GAZPROM Russian Federation 83 percent
8 Thai Farmers Bank Thailand 82 percent
9 British American Tobacco Malaysia 81 percent
10 CTC Chile 81 percentSome companies have embraced the shareholder wealth maximization philosophy in the recent years.
Here is an excerpt from the EID Parry 1997–98 annual report:
At EID Parry, value creation is central to operations. It is the force that drives our highly focussed
agenda for growth. It is the insight to find better, more effective ways of doing business. Maximizing Value is
more than a slogan. It is the cornerstone of our corporate culture.
But believing is not the same as achieving. Exhibit 1.6 presents the market price to Book Value (P/BV)
ratios of stocks of some well-known companies.
Exhibit 1.6 P/BV ratios of some well-known companies
Company Market price P/BV
Arvind Mills 65.20 0.60
Atul Products 19.50 0.28
Ballarpur 32.25 0.25
Ceat 23.50 0.27
Videocon 44.15 0.24
Voltas 23.40 0.73
Source: Business Today (April 1998).
If you were to give one buck to Arvind Mills, it was worth 60 paise in 1998. Why is it that some companies
trade below their book values? Is it that investors do not recognize the intrinsic value of these companies?
Finance theorists argue that stock markets react rationally to corporate strategies at least in the long-run.
According to a recent Mckinsey study, the return on capital employed during 1993–97 was lower than
the cost of capital—9.5 percent in the public sector, 16.7 percent in the private sector. A half of the top
(^18) Euromoney (July 2002).