Samsung has been under huge pressure lately from investors to boost shareholder value after they decided to stop the production of their flagship smartphone Note 7 in October 2016. This decision was brought about by unresolved battery problems.
Samsung has already stated that it will pay out half of its free cash flow to shareholders for 2016-2017 and up the dividends by 36%. On top of this, they will nominate a new, independent board member as well as setup a separate governance.
However, according to hedge fund Elliott Management, Samsung is better off splitting the firm in two parts – Holding unit for ownership purposes and a separate operating company.
Elliott Management argues that this move will make it easier to know exactly what the firm assets are and how much they are worth.
Financial Control Lessons from Samsung
At the moment, companies within Samsung Group have a complex structure. There is a crisscross of shareholding within the company because Samsung Electronics is linked to different firms and lines of businesses such as shipping, insurance, and heavy industries.
This setup makes it easier to fully grasp the true valuation of the company because cross-shareholding will now affect only the holding company part.
It is worth mentioning that Samsung is not alone in this type of scenario. In fact, many multinational organizations suffer from the same problems as well – cross-shareholding and difficulty in getting a true assessment of the operational business ‘unit.
Here are 3 financial control lessons that we can learn from this experience.
- Good Corporate Governance Practice
What Samsung teaches us in their tumultuous time is that the importance of Good Corporate Governance cannot be overemphasized. These practices are necessary in order to create a culture of openness and transparency.
There have been many studies in the past that concluded that in general South Korean companies like Samsung have a different approach to corporate governance practices than many other countries.
Many companies in the past did not believe in external interference of business nor does it have mandatory requirements of independent directors and committees to look after the company´s operations. This is quickly changing though. Samsung has voiced out their intent to not only have an independent, international board member, it will also form a separate governance.
Today, there are many legislations in place to improve corporate governance practices and disclosure norms. While the implementation may not have been as quick as the South Korean government had hoped it would be due to high concentration of family run businesses, it is heading that direction at least.
- Importance of Real time Access to Financial Figures
As mentioned earlier, Samsung will pay out half of its free cash flow to shareholders and raise dividends by 36%. The importance of having real time access to the financial figures is so critical. We live in such a volatile and fiercely competitive market that every company must be prepared to weather through unforeseen tough times.
It is not always easy to have a full and clear view of the overall financial health of a company especially for companies that own or are linked to many other businesses. Consolidation of the numbers can be disastrous for some and takes a significant amount of time that by the time the consolidation of numbers is done, the numbers have become irrelevant.
The case for many companies is that they have to prepare varied reports meant for investors, another one for senior managers, one for frontline managers, or another one for the CFO and CEO. All these can be tedious without a structured process in place and can be error prone depending on how reliant on human input the process can be.
- Necessary Investments
In continuation of the importance of easy access to figures – For any mid-sized to large corporations there is an undeniable need to invest in a corporate performance management tool such as Performance Canvas Financials by DSPanel.
CPM tools not only automate the entire budgeting process, it also streamlines the finance process by forcing the business to think in a logically consistent way how they want to operate.
CPM tools allows for easier CAPEX planning, FX analysis, Profit analysis, A/R and A/P analysis, and Cash flow planning.
Further, for companies like Samsung with a complex web of shareholding, it is a good idea to invest in a modern consolidation tool like Performance Canvas Legal by DSPanel that can handle minority interests, complex ownership, currency automation, multi GAAP, IFRS, inter-company automation, and inter-company matching among other things.
Having both a budgeting tool and an advanced consolidation tool will not only save the time of the finance department, it will also boost the integrity of the figures, and give finance analysts more time to actually analyze data that truly matters. This way, every single company will be prepared to act quickly to market stressors.
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