Proactive transformers better for shareholders, according to study

SOUTHEAST ASIAN companies that took transformative actions proactively posted more shareholder returns than those doing so reactively, based on a study by strategy consulting organization EY-Parthenon.

Angela Ee, EY ASEAN and Singapore restructuring leader, said in a virtual round table discussion on Thursday that the report called “Transformation in Southeast Asia: Four archetypes of outperformers” showed that companies in Southeast Asia that were “proactive” transformers outperformed companies that were “reactive” transformers by an additional 13 percentage points (pp) in terms of total shareholder returns.

The study defined proactive transformers as companies that transformed even if they are already outpacing other firms, while reactive companies are those that undertook transformation only when they were underperforming against the industry. 

Ms. Ee said the study covered the top 70 listed companies by market capitalization across various sectors in Southeast Asia and reviewed their performance between 2018 and 2021.

She added that the countries covered by the study were the Philippines, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. The sectors included in the study were advanced manufacturing and mobility, consumer products and retail, energy and utilities, financial services, healthcare, real estate and technology, and media and telecommunications.

The study also showed that proactive transformers in the region that were serial transactors, or those that acquire or divest more than reactive companies, had 13% more transactions between 2018 and 2021 and were 23% more active during the economic slowdown in 2021.

It added that companies dubbed as active investors had a higher investment rate versus other companies. The active investors had an average of 17% higher capital expenditure compared to other companies. 

The study also showed there are companies called holistic transformers, or those that undertook transformation on multiple fronts. Over 90% of these companies pursued environmental, social, and corporate governance (ESG) initiatives, 83% invested in digitalization, and 51% invested in supply chain management.

However, the study also showed that companies gave little attention to key parts of transformation, such as their balance sheet and financial restructuring.

“Initiatives such as digital transformation are typically expensive, with unclear business cases that some boards may struggle to navigate. It is critical that such initiatives are combined with cash release through cost optimization, working capital optimization and financial restructuring,” EY ASEAN Value Creation Leader Sriram Changali added.

Mr. Changali said many transformation actions as a result of the coronavirus pandemic have not translated into value creation for companies.

“Hence, it is important for companies to understand how their transformation approaches and their execution impact the success of their transformation journey and enhance the value of their organization,” Mr. Changali said.

Meanwhile, the study also highlighted five imperatives for successful transformation: aligning the company’s chief executive officer and the board on the purpose of transformation; setting aspirational targets and incentivizing success; setting up execution rigor and getting commitment from the top level; calibrating the journey to balance costs with potential upsides; and building capabilities.

“Transformation is not just for companies in distress. We see that companies that have been resilient during the pandemic have also undertaken transformative actions that helped to position them for long-term success,” Ms. Ee said.

“When undertaking a transformation project, companies should not discount restructuring, which can be a way to turn adversity into opportunity,” she added. — Revin Mikhael D. Ochave