SINGAPORE (July 16): In the past two consecutive weeks, InsiderAsia, in collaboration with The Edge Malaysia, has painstakingly compiled the total remuneration for boards of directors for all the companies listed on Bursa Malaysia as well as compensations for their CEOs. The latter includes not just fixed salary but also bonus, benefits in kind and share options. Next week, The Edge Singapore will carry the same information for all Singapore Exchange-listed companies.

The subject of remuneration is currently a hot topic in Malaysia, especially in respect of the chiefs of government-linked companies. The narratives and arguments for both sides of the divide are all over the news as well as social media. But that is not what I want to talk about here. 

Rather, I want to highlight how analysts and investors rarely mention CEO compensation as a valuation metric. They should. 

In addition to the usual suspects of fundamental valuation metrics, it is in the interest of investors to know how much the board, CEO and senior management are paid. How are their remunerations determined and are they articu­lated to shareholders in a transparent manner? More crucially, are management’s interests aligned to those of shareholders? 

The InsiderAsia reports show how huge the differences can be from one company to the next, with remunerations ranging from the tens of thousands to tens of millions. 

There are hundreds of companies (including loss-making ones) where the directors/CEO are paid more than the entire profits attributable to shareholders for the year and many more where the remunerations account for a substantial portion of annual profits.  

Few would argue against the concept that the remuneration package must be based on performance. Otherwise, the best managers will leave for greener pastures. Without transparent means of benchmarking, however, how will shareholders determine whether management performance is up to par?

There are, in fact, a handful of companies that do articulate their remuneration structures. I believe that others should emulate this practice. It is good corporate governance.

InsiderAsia used a combination of earnings growth, returns on shareholder equity and total shareholder returns (share price gains plus dividends) over a three-year period to evaluate the performance of companies. 

The board of a company can go further — to measure its actual return on capital employed against the required rate of return that is adjusted for the risks of its businesses. The flexible portion of their remunerations could then be determined by the excess of actual profits achieved over this minimum return. 

This variable bonus system is what the remuneration committee of Avarga proposed and shareholders approved.

Readers may know that Avarga has three main businesses — a pulp and paper mill in Malaysia; an independent power producer (IPP) in Myanmar; and a wholesale distributor of building materials based in Canada. 

Clearly, each of the business arms has different levels of risks and therefore its own risk premium. 

For instance, the IPP would have relatively low earnings risk (since cash flows are governed by a long-term power purchase agreement), but it would have comparatively higher country risk and moderate currency (US dollar) risk. On the other hand, we can expect the paper mill to have higher earnings volatility and currency (ringgit) risks. 

The required rate of return is the risk-free rate plus the weighed average risk premium based on the proportion of capital employed for each business. 

A similar system of this kind will set a formal and transparent method to reward or penalise and, thus, hold management accountable for each decision made to ensure they are aligned with shareholders’ long-term interests.

Stocks in my Global Portfolio recovered some lost ground in the past week. This mirrored the rebound in most markets around the world on the back of bargain hunting after the recent rout.  

Total portfolio value gained 3.31% for the week, lifting total returns to 1.4% since inception. This portfolio is still slightly underperforming the MSCI World Return index, which is up 1.8% over the same period. 


Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore 

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.