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Relation Of Corporate Strategy With Maximizese Share-Holders

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Relation Of Corporate Strategy With Maximizese Share-Holders

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    RELATION OF CORPORATE STRATEGY WITH MAXIMIZESE SHARE-HOLDER’S WEALTH OBSERVES 20 BANK WHITH

    THE HIGHEST ASSETS 1998 2005 IN INDONESIA

    Dr Hamidah

    Universitas Negeri Jakarta

    ABSTRAK

    The purpose of this research is to analyze the implementation of corporate strategy

    (Financial Restructuring, Assets Rehabilitation, Risk Management System and Operational

    Efficiency) to maximize share holder’s wealth. The research had been done in 1998,when the

    starting point of banking recapitalization in Indonesia, to 2007. The increasing of share holder’s

    wealth is reflected in Economic value added (EVA) return on equity (ROE).

    The research observes 20 banks whith the highest asset and which had been operated in

    Indonesia. Analysis model used for this research is descriptive statistics and hypothesist test

    using regression models. The result shows that ROE has increased after recapitalization and

    positive EVA. In 2005, EVA was negative due to bad performance of NPL by Mandiri and BNI.

    Negative EVA is also caused by low quality of asset management, which we can see in high

    NPL and low LDR. The examination result shows:1) negative relationship between independent

    variable (Financial restructuring, asset rehabilitation and operational efficiency) with dependent

    variable (shareholder wealth EVA),and also 2) asset rehabilitation(LDR),risk management(CAR)

    had positive correlation to EVA .

    The corporation's strategy (Financial Restructuring, Assets Rehabilitation, Risk Management

    System and Operational Efficiency) post recapitalization towards the owner's prosperity of own

    capital. The observation period was 1998, when being begun banking recapitalization, up to 2005.

    The increase in shareholders's prosperity reflected in the profitability of own capital (return on

    equity). This research will also see relations between the profitability of economics, the return

    rate on assets towards economic value added (EVA).

    The object of the research 20 biggest banks from the side of assets that operated in Indonesia.

    The analysis model that was used was the analysis model descriptif and corelasional (analysed

    the development of the performance from year by year) and the analysis of the hypothetical test

    by using the regression model to know relations and the influence of the independent variable

    (modules of the corporation's strategy) against the dependent variable.

    Keywords : (1) Corporate Strategy, (2) Recapitalization, (3) Economic Value Added (EVA), (4)

    Financial Restructuring, (5) Assets Rehabilitation, (6) Risk Management System, (7) Operational

    Efficiency. (8) Return on Equity dan 9. (Return on Assets).

    A. Introduction

    1 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

     The restructuring of banking finance basically was the increase in capital by the

    government in order to reach minimal CAR. The recapitalization program of banking was

    determined through the Republic of Indonesia Government Regulation number 84/1988 on

    December 31, 1988. PP was followed up by the Surat Keputusan Bersama between the Finance

    Minister and Bank Indonesia Governor who basically were: a) the Formation of three

    committees in the recapitalization program of the public's bank that is the Policies Committee, Evaluation Committee and the Teknis Committee. b) the Together Decision that arranged

    concerning the implementation on the recapitalization program of the public's bank.

    As the condition for the program recapitalization, the BANK must carry out the operational restructuring and the restructuring of finance to comply with the provisions of Letter of Intent between the RI government and IMF. The rules to join the recapitalization program was appointed in SKB Finance Minister and Governor BI number 53/KMK.017/1999 and number

    31/12/KEP/GBI on February 8, 1999 about the implementation of the Recapitalization program

    of public’s Bank. The recapitalization program of the public’s Bank belonging to country (Bank

    Umum Milik Negara) clearly was arranged in the Government Regulation number 52 in 1999

    that its implementation was arranged in SKB Finance Minister and Governor BI number

    389/KMK.017/1999 and 1/10/KEP/GBI on July 29, 1999 (Year Report of BNI, [1999]).

    Research aimed to finding strategic indicators which determine the performance of finance that increased prosperity for shareholders to the banking company. The strategic

    indicator that will be researched was to be linked with the program “sustainable value

    restructuring”. Sustainable value restructuring program to make the BANK could be better time

    by time. This program included eight strategic modules as part of the restructuring program of

    finance and operational that is: (1) Financial Restucturing, (2) Divestment Plan, (3) Assets

    Rehabilitation, (4) Risk Management System, (5) Good Corporate Governance, (6) the Strategic

    Business Unit Development (SBU), (7) Operational efficiency, and (8) the IT system Creation.

    B. Literature Study

    Srategic of The Company

    The restructuring was a part of srategic that was undertaken by a company to overcome

    the competition or continuation of the company. Essentially the restructuring was repeated

    revised a process to produce the output became more efficient. In the restructuring also including reengineering (the repeated engineering) that is designing again the structure of the organisation and the company's operation (Madura, [2007]). The restructuring of banking appointed by the

    regulator, there were five regulation reasons or the bank's regulation (MacDonald and Koch,2006) that is: (1) To ascertain the safety and the health of banks and other finance institution, (2) made the competitive and efficient financial system, (3) consolidated the monetary stability, (4)

    maintained the integrity of the payment system, and (5) protected the consumer from the act of

    abuse of the financial agency towards the consumer's belief.

    The strategy was to be the plan or the blueprint to achieve the mission and the target that

    were formulated, as being raised by Yukl (2002): “ Strategy Is a plan or blueprint for carrying out the mission and attaining strategic objectives”. Further, the corporation's strategy was the

    way that was chosen by the company to create the value through the configuration and the co-2 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    ordination on the multimarket activity. “Corporate strategy is the way a company creates value

    through the configuration and coordination of its multimarket activities” (Weston, et al. [2001]).

    Hambrick dan Fredrickson (2001) said “A strategy consist of an integrated set of choices, but it

    isn’t a catchall for every important choice an executive faces”. Strategic contain a horde of

    integration alternative but it is not a place for all of the important alternative for chosen by the

    executive.

    Measure performance of the Company

    In evaluating the strategy of the assets management of the company as center investment

    and the profit of center, Anthony and Govindarajan (2004) stated that ROI and EVA as two tools

    of performance that often used by the company that had the profit of center as the writer quoted

    as follows: “In our examination of the alternative treatments of assets and the comparison of ROI

    and Eva the two ways of relating the profit to assets employed- we are primarily interested in

    how well the alternatives serve these two purposes of providing information for sound decision-

    making and measuring business the unit economic performance.” Steward, III (1999) stated,

    “The one performance measure to account properly for all of the ways in which corporate value

    may be added or lost is economic value added (EVA) EVA is residual income measure that

    subtracts the cost of capital from the operating profits generated in the business,” that mean, the

    only way for measured precisely the value of the company is EVA.

    Basically, the compilation or the implementation of a strategy of company not the end

    goal of the company. The strategy is means of achieving the aim of the company, that is giving

    the maximal value to shareholders. Increasing the maximal value could be seen in the increasing

    of the profit level for the holder of capital or ROE (return on equity). Sinkey, Jr (2002) the

    assessment of the achievement of the bank could through: (1) the Analysis toward Return On

    Equity (ROE) along with the analysis of components that affected it. (2) the Analysis toward

    Return On Assets (ROA) and its variability. (3) from policy makers's side usually used the

    Requirement based Capital of the risk and CAMELS (Capital adequacy, Assets quality,

    Management, Earning, Liquidity and Sensitivity to risk). Koch and MacDonald (2000)

    mentioned that to measure the performance of the management of a bank apart from these factors

    above was Economic Value Added (Eva) that was the reduction from the operation Net Income

    after tax (NOPAT) at a cost of capital.

    C. Research Method

    This research was carried out by researching the implementation of the corporation's

    strategy to 20 banks total biggest assets. Based on the characteristics, the problem and its aim,

    this research was the corelational and explanatory research, that is the research had a purpose to

    know and analysed the relations. If having relations, as big the level of its relations between the

    variable of the corporation's strategy that was reflected in the variable: (1) Financial

    Restructuring, (2) Assets Rehabilitation, (3) Risk Management System, and (4) Operational

    Efficiency as independent variable towards economic added value to 20 biggest banks in

    Indonesia as the dependent variable.

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    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    Dependent variable was measured with return rate of assets between variable of EVA,

    refer to Anthony and Govindarajan research stated that ROI and EVA as two tools for measure

    performance was often used by the company which has the profit center while Bacidore (1997)

    stated EVA is precise proxy to indicate the creation of added value for shareholder. If EVA is

    positive, indicate that there is added value for shareholder, and vice versa, as like Stern and

    Stewart (1991), Darmodaran (1997), and Koch (2000). After knowing the strength of relations

    and the direction of relations between dependent and independent variable, then analyze to know

    which variable can be the value driver toward EVA and increase ROA in the bank.

    Research Object

     The object of the research was 20 public's banks, that is the bank that occupied the highest

    level from the place of assets of the total of the public's banks in December 2007. The

    determination of the number of samples in the research was by choosing the highest place from

    the aspect of assets from 127 the public's banks in Indonesia. The number of the total asset was

    as the criteria chosen to determine the measurement of the company, that is the number of the

    total asset was based on the report on finance that was published per December 2007. The bank's

    election was based on the criteria, that is the bank that filled the condition as follows:

    a. Carried out by the ranking of the total asset to all of the bank in Indonesia was based on the

    report on finance per December 2007, then choose 20 biggest banks.

    b. Chosen by the consistent bank published the report on finance that was published from the

    year 1999-2007. Based on the taking criteria of the sample above, Permata Bank not including in

    the list of the sample that was chosen because Permata Bank just operated during 2002. Further,

    banks that were chosen as the sample shown on the table 2. That is 20 sample banks or the

    biggest bank from the aspect of assets in December 2007.

    Table 2 List of 20 Sample Bank

    No Nama Bank No Nama Bank

    1 Bank Mandiri 11 Bank LIPPO

    2 Bank Central Asia 12 HSBC

    3 Bank Negara Indonesia 13 Deutsche Bank

    4 Bank Rakyat Indonesia 14 Bank Mega

    5 Bank Danamon 15 Standard Chartered

    Indonesia Bank

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    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    6 BII 16 Bank NISP

    7 Bank Niaga 17 ABN Amro Bank

    8 Bank Panin 18 Bank BUKOPIN

    9 Citibank 19 Bank Buana

    10 Bank Tabungan Negara 20 Bank JABAR

     Sumber : Laporan Keuangan Yang Dipublikasikan.

Research Variable and Definitions of Operational Variable

    Research Variable

     In this research, that will be researched was the influence of the corporation's strategy on

    economic value added. The corporation's strategy as independent variable was four that was

    researched that is (1) Financial Restucturing (2) Assets Rehabilitation (3) Risk management

    system and (4) Operational efficiency and as the dependent variable was economic value added

    (EVA and ROA).

    Analysis Model :

    To see whether the implementation of the corporation's strategy succeeded in giving

    added value for shareholders, so the analysis model that was used was the descriptive

    comparative analysis model and the analysis of the statistical test. The descriptive comparative

    analysis was meant to know the development of the change in the performance from the year by

    year for the period of the research 1998 to 2007. The descriptive analysis analysed development

    the corporation's strategy (1) Financial Restucturing that was reflected in the debt to equty ratio

    (2) Assets Rehabilitation that was reflected in the NPL ratio and LDR ratio (3) Risk management

    system was reflected in CAR and (4) Operational efficiency that was reflected in the ratio of

    BOPO. Statistical test using the regression model to learn relations and the influence of the

    independent variable against dependent variable. The economic model:

    Dependent Variable: (Y) = EVA (Economic Value Added) Independent Variabel: X = 1

    financial restructuring X = assets rehabilitations NPL = Non Performing Loan X = risk 23

    management system CAR=Capital Adequate Ratio X = operational efficiency CIR = Cost to 4Income Ratio

    Definition of operational variable

    Based on the problem and the aim of the research, can be explained the concept and

    definition of variable operational :

    5 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    The Creation of the Economic Value Added (Y)

    In this research the grating of the added value creation (creating value) used Economic

    Value Added (Eva) and the Return Rate on assets (ROA) and (ROE). ROE was one of the

    indicators to see as big the company could give the profit to the owner of capital. Bigger ratio, so,

    increasingly big the company gave the profit for the owner of capital. The return rate on assets

    (ROA) ratio was one of the indicators to see as effective the strategy of the assets management

    on the whole. Bigger ratio showed the effectiveness of the company in managing assets and the

    exact strategy of the assets management. The implementation of the strategy in the assets

    management was the decision that was carried out on the allocation of the fund in various

    choices of investment that was reflected in portfolio the bank's assets.

Economic Value Added

     Economic value added was one of the gratings of the best achievement at this time that

    could be used to measure whether a strategy or the policy that was undertaken gave added value

    for shareholders (shareholder value). The achievement was seen in the table IV.6. (attachments).

    After recapitalization, pointed out EVA that was positive. EVA's value was received from the

    deducting between the Operation Net Profit After the Tax (Net Operating Profit After Tax =

    NOPAT) with Cost of Capital After the Tax that was needed to support the Operation.

    EVA = NOPAT t { k(debt portfolio) + k(equity portfolio)}capital de

    In the NOPAT calculation was carried out the adjustment that is by put out the non-operational

    income and adding elimination and the decline in the productive asset and the contraction toward

    the proceeding year profit after the tax.

    K before crisis = SBI + Std.Dev ROE (8%), K crisis = SBI + Std. Dev ROE etititietititi

    (11%), keown cost of capital at the i bank in the year t, SBI = free risk return rate ti = ti

    at the i bankin the yeart Std. Dev Re= individual risk at the i bank in the year t , ti

    Counted the amount of capital that was invested. Capital was invested in this research was to

    consist of all the short-term and long-term debt that bore the interest (interest bearing liabilities),

    the number equity of shareholders as well as all the other obligation.

    Financial Restructuring X 1The measurement financial restructuring that is how the company decides the amount of the

    funding proportion, would the change in the proportion size of funding between debt and

    personal capital be influential towards economic added value.

    Assets Rehabilitations X 2NPL = Non Performing Loan, and LDR = Loan to Deposit Ratio were the indicator towards the

    quality assets. The amount of the credit problems and the size of distributed credit compared

    with the number of the third parties obtained funds showed the capabilities of a bank in carry out

    6 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    the improvement of the quality assets. This was connected with the structure of assets of a bank or in banking that the most assets were dominated by the amount of credit.

    Risk Management System X 3

    CAR = Capital Adequate Ratio or adequacy capital ratio. It was the indicator in measuring the risk of capital that was dealt by banking, which is indicating of how much the value of assets that could be tolerated decreased before it could dangerous to the depositor and the assets creditor, until the certain limit that could protect the risk of bankruptcy.

    Operational Efficiency X 4

    The operational cost was compared by the operational income (BOPO) as Cost to Income Ratio was the indicator that measured efficiency efforts by looking the size of operational cost towards the operational income in one period of specific time.

    Collecting Data Procedure

    This research used the secondary data. The data was gathered from the annual report of bank that was published. The validity of this data was considered sufficient because it passed from the public accountants and the existence of homogeneity reports between the banks, because there was a standardized report from the regulator, which is the Bank of Indonesia.

    Model and Technique Analysis

     Analysis Model

    The model that was used in this research was the multiple regression analysis. Generally,

    the regression analysis basically was the study of the dependences of dependent variable with one or more the independent variables (the clarifier variable), with the aim to estimated and/or predicted in the average population or the value average dependent variable based on the value of independent variable that was known (Gujarat, [1995]). The aim of using the multiple regression analysis in this research was to explain and analyze the relations between the independent variable that was researched; (1) Financial Restructurings, (2) Assets Rehabilitation, (3) Risk Management system, and (4) Operational efficiency with its independent variables was the economic added value (EVA). In this research used statistical significance, the level of the significance that was used in this research was of 0.05 (5%).

    D. THE RESULT OF DATA ANALYSIS

    This research is related to the assessment of corporate strategy application and its influence

    towards the increase in value added for shareholders (shareholder value). Figure below showed that it has not been created the increase in value added for shareholders, which is reflected in the development of the economic value added (EVA), after the implementation of corporate strategy at the 20 banks with their largest assets. Corporate strategy was reflected in the policies: (1) Financial Restructuring, (2) Assets Rehabilitation (3) Risk management system, and (4) Operational efficiency. The period of observation was begun in December 1998, when banks did recapitalize of up to 2005.

    7 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

     EVA 20 BANK TERBESAR PERIODE 1998-20050,00

    Bars show Means

    -10,00

    EVA-20,00

    -30,00

    2,55,07,510,012,5

    Semester

Development level of profitability for shareholders can be seen with the indicator ROE, from

    the visible image of REOE development was seen that corporate strategy that was undertaken,

    has not been able to restore the prosperity achieved at the time before the crisis.

    ROE 20 BANK TERBESAR PERIODE 1998-2005

    Bars show Means

    1,00

    ROE

    0,00

    -1,00

    2,55,07,510,012,5

    Semester

For modules that examined strategies, performance assessment is tailored to the assessment of

    how the banking authorities do, in this case of Bank Indonesia as the following:

Financial Restructuring Policy

    8 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    Basically, financial restructuring was the arrangement financial structure to improve

    performances of banks. Assessment of Financial Restructuring module was by observing the

    debt ratio towards personal capital since recapitalize programs to the period in December 2007.

    Financial restructuring was required by the bank to balance the needs of funds that came from

    their debt and personal capital for the interests of solvability that is the company's ability to meet

    obligations. For banking, seen from the pasiva structure, where most of the assets of banks

    funded by debt so that debt ratio or debt total per assets was more appropriate to describe the

    restructuring strategy. Associated with the bank’s obligation to provide capital was only eight

    percent from weighted asset according to its risk.

    FINANCIAL RESTRUCTURING 20 BANK PERIODE 1998-20052,00

    Bars show Means

    1,50

    1,00

    FINREST

    0,50

    0,002,55,07,510,012,5Semester

    Assets Rehabilitation Policy

    Asset rehabilitation, the assessment was by observing the bad debt or Non Performing

    Loans or NPL ratio loan ratio given to the deposit received by bank from the third party or Loan

    to Deposit Ratio (LDR). NPL was a not fluent part of the delivered total credit. Bank Indonesia

    determined a classification credit based on the its collectibles as follows: (a) Current Credit, (b)

    Credit in Special Attention, (c) Current Less Credit, (d) Doubted Credit, and (e) bad debts.

    Basically, if the credit would be distributed smoothly, the higher the credit distributed the greater

    the income that will be obtained. However the high LDR result the bank would be difficult of

    liquidities when customers withdraw of funds in large amounts. Meanwhile, when the distributed

    credit was stuck it could cause a loss to the bank because: (a) stalled credit did not produce

    interest, (b) the bank must pay interest to the customers, (c) the bank must establish stockpile as

    the existing provisions, and (d) bad debts charge results extra large costs.

    Asset rehabilitation policies related to effectiveness in the credit management seen from

    the amount of NPL. The small NPL showed more effective assets management. Assets management in the banking sector in Indonesia is still dominated by credit; this is one of the

    operating characteristics of conventional banks. In the more developed countries that the

    operational of bank has shifted to the income management from the services as intermediaries

    institutions (fee base). Figure below shows the development of NPL that was increasingly good on the twenty banks with the biggest asset.

    9 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

2009 Oxford Business & Economics Conference Program ISBN : 978-0-9742114-1-9

    NPL 20 BANK TERBESAR PERIODE 1998-2005

    Bars show Means

    1,00

    NPL0,50

    0,00

    2,55,07,510,012,5

    SemesterLoan Deposit Ratio (LDR) If the bank was able to collect funds (deposit) with a cheaper price

    and allocate them in the form of credit (loan) then will receive the difference interest (interest

    margin), which is one of the value drivers that create the increase in EVA. On the other hand, the

    debt ratios towards low savings indicate two possibilities: first, the company can not afford to

    allocate funds, or weakening real sector so that it can not afford to absorb the funds provided by

    banks. This data shows that the efficiency in the BNI program is still a constraint. Picture below

    shows that in general, the LDR is still low at around 50 percent. This means the ability to

    distribute credit in the bank to the community has not been optimal.

    LDR 20 BANK TERBESAR PERIODE 1998-2005

    Bars show Means1,00

    0,50

    LDR

    0,00

    2,55,07,510,012,5

    Semester

    10 June 24-26, 2009

    St. Hugh’s College, Oxford University, Oxford, UK

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