Note fiasco sends Samsung profit up in smoke

BY Richard Summerfield

The smartphone industry is a fast moving and fickle market. As Samsung Electronics well knows, a company’s fortunes can rise and fall on the strength of a single device. When the company released its Galaxy S7 line of phones earlier this year, Samsung recorded its strongest profits in over two years.

In July, revenue of $45.2bn was up 5 percent on the previous year, while the firm’s operating profit was up 18 percent to $7.22bn.

However, as quickly as things can improve, they can fall apart. The debacle surrounding the release, replacement and subsequent recall of its Galaxy Note 7 device has plunged the company’s brand and reputation into chaos. Indeed, the furore surrounding Samsung’s exploding ‘phablet’ could not have come at a worse time for the South Korean firm, with major rivals Google and Apple launching competing devices in the last few weeks. It appears that Samsung’s brand and balance sheet may be adversely affected, contrary to what the company originally claimed.

Just last week, Samsung issued earnings guidance which claimed that the company’s recall of the device would not adversely impact its balance sheet. However, on Wednesday it said it expects third quarter profits of $4.7bn or 5.2 trillion won, around a third lower than its original estimate of 7.8 trillion won. The company has also dramatically reduced revenue expectations, cutting them by 2 trillion won to 47 trillion ($41.8bn).

Samsung also noted that in light of the difficulties it has had with the Note 7 device, it was stopping all sales and production of the phablet, citing consumer safety concerns. “For the benefit of consumers' safety, we have stopped sales and exchanges of the Galaxy Note 7 and have consequently decided to stop production," Samsung said in a statement.

The day before the company made the announcement, Samsung saw $18bn wiped off its market capitalisation. The following day the company’s shares continued to fall. How Samsung recovers from here will be telling. Undoubtedly, the momentum the firm built up through the release of the Galaxy S7 device has slowed considerably.

News: Samsung slashes profit forecast over Galaxy Note 7 crisis

Asian growth slower and profits elusory, says new EY/HBR Analytic Services report

BY Fraser Tennant

Opportunities for companies in the Asia-Pacific region to grow are fewer and profits more elusive, according to a new report by EY and Harvard Business Review (HBR) Analytic Services.

In ‘Asia: Time to Refocus’, EY/HBR Analytic Services note that despite Asia having been a major source of growth for multinationals and private equity firms for 20 years, expected profits have not materialised and the current outlook is that the land-grabbing strategies of old are no longer sustainable.

Moreover, the Asia-Pacific companies that once relied upon an almost unlimitless potential for growth but that are now struggling to adapt their products and value propositions, are being advised to adopt a ‘depth-over-breadth’ capital strategy in order to re-engage with the region’s complex business environment. 

“Asia today is not the Asia of 20 years ago, or 10 years ago, or even five years ago," said Vikram Chakravarty, EY’s Asia-Pacific capital transformation and operational transaction services leader. “It continues to grow faster than most developed economies, but more slowly than it did in the past.

“It remains a region of great opportunity, but also one where profitability remains elusive for those unwilling to invest the resources necessary to tailor their offerings and business models to its individual markets.”

The challenge for companies in the region, says Chakravarty, is for them to identify how and where they should be focusing their capital and other resources, and also where they should be taking a step back.

To do this, the EY/HBR Analytic Services report advises companies looking to transition to a new capital strategy in Asia to: (i) conduct a portfolio review; (ii) launch a large-scale cost-cutting initiative to improve profitability; (iii) right-size their go-to-market models; (iv) reorganise to emphasise country over category; (v) plan a path to exit, and limit losses, where market leadership and profitability are not realistic; and (vi) double down in priority countries by undertaking transformative deals — big-bang M&A transactions and partnerships — to boost market share quickly.

Chakravarty concluded: “Companies that have yet to see Asia’s promise cascade to the bottom line must determine where they have a path to profitability and focus their attention there. Depth, not breadth, will win the day.”

Report: ‘Asia: Time to Refocus’

FTSE 100 executive pay provokes revolt among investors

BY Fraser Tennant

FTSE 100 executive remuneration is now a major cause for concern, with investors increasingly disapproving of salaries, bonuses and long-term incentives, according to a new report by Deloitte, which is being previewed this week.

Deloitte’s annual ‘FTSE 100 remuneration report’ covers constituents of the FTSE 100 index and provides a detailed analysis of their remuneration policies. The headline findings of the report include the disclosure that eight companies received a vote below 75 percent in favour of their remuneration report, with two failing to secure a majority. Furthermore, just 26 percent of the top 30 companies had their report approved by 95 percent of shareholders or more. This compares to 52 percent last year.

The report also notes that with FTSE companies receiving less than three-quarters of votes in support of their remuneration report so far this year, this is already higher than in the ‘shareholder spring’ of June 2012 - a so-called rebellion by investors over excessive executive pay packages.

“So far this year we have seen a higher proportion of companies receiving less than three quarters of votes in support of their remuneration report,” said Stephen Cahill, a partner in Deloitte’s remuneration team. “While we’re still talking about a relatively small number of companies this is rightly a cause for concern. The 2016 AGM season has been bruising for a number of companies, perhaps even more so than the shareholder spring of 2012.”

Partially addressing concerns over executive pay, the report does suggest that, due to new disclosure regulations introduced in 2013, the total pay received by chief executives in FTSE 100 companies has been broadly flat year on year, with the median salary increase remaining at around 2 percent. That said, the report does reveal that bonus payments have increased. The median bonus payout as a percentage of the maximum possible is 77 percent, compared with 73 percent in 2015.

“Median bonus payouts have consistently been between 70 percent and 80 percent of the maximum every year for the last ten years,” confirms Mr Cahill. “We believe there needs to be much more rigour in the way the targets for these plans are determined, more discretion used to ensure payouts reflect overall performance, and greater scrutiny by investors once the targets are disclosed.

“When we look back at 2016 it may turn out to be a pivotal moment for executive pay.”

The full Deloitte ‘FTSE remuneration report’ will be published at the end of September 2016.

News: Investor revolts over executive pay 'double since shareholder spring'

The blockchain is coming

BY Richard Summerfield

In recent years, many industries have been turned on their head by disruptive new technologies. According to a new report from EY, the blockchain is the latest development with the potential to revolutionise business practices across a wide spectrum of industries.

The report, 'Blockchain reaction: Tech plans for critical mass', identifies the blockchain’s potential uses and the threat it could pose to existing business models and practices.

“To date, blockchain has transformed only people’s thinking,” said Channing Flynn, EY’s global technology sector leader, tax services. “We don’t yet even know all the questions blockchain technology will raise, much less the answers. But waiting for the technology to take hold is too late. Now is the time to start defining the questions and influencing policy that will lead to answers.”

Cyber security could be hugely affected by the rise of the blockchain. As Paul Brody, EY’s Americas strategy leader technology sector, notes: “Blockchain shifts cyber security from depending on one to depending on many, and a large volume of people are much more trustworthy than any one individual.”

Furthermore, the blockchain has the potential to transform many industries, particularly those that rely on trusted intermediaries or that currently require strong central authorities to carry out transactions. It could replace those institutions with algorithmically based trust among peers, similar to the Bitcoin system, the most pre-eminent cryptocurrency, which has begun to flirt with the fringes of the mainstream.

Should the blockchain be fully embraced by organisations, however, it could do so much more. According to EY, the technology has the ability to disrupt business models and processes, as well as supply chains and customer relationships throughout the global economy.

With this in mind, companies that were slow to respond to the challenges and opportunities presented by the dawn of the mobile era and cloud computing need to embrace the disruptive and transformative elements of the blockchain. Failure to do so could see them pay the price down the road.

Report: Blockchain reaction: Tech companies plan for critical mass

Boards now wising up to the true value of corporate culture, says new EY report

BY Fraser Tennant

Organisational culture is fundamentally important to corporate strategy and performance and should be embedded into decision-making and oversight processes, according to a new report released this week by EY.

The report – ‘Governing culture: practical considerations for the board and its committees’ – highlights the importance of culture to businesses, but, at the same time, suggests that the deliberation and focus in this area by the boards of many companies is often not adequate and appropriate.

Indeed, the EY report suggests that boards could be doing more, and cites a recent survey of FTSE 350 board members (conducted by EY and the FT) which saw the majority of respondents stating their belief that their board should take greater responsibility for shaping and monitoring culture.

Moreover, although 86 percent of survey respondents said that corporate culture was fundamental or very important to their company’s overall strategy and performance, only 19 percent said the board has primary responsibility for embedding it. In addition, 47 percent felt there was little or only partial consensus at board level as to what company culture should be.

“The board has an important role in relation to the political, social, performance and operational architecture that shapes culture”, states the EY report. “This begins with creating the vision for the desired culture within the organisation. Responsibility for bringing that vision to life and embedding it within operations or sometimes driving change falls to management, but the board must then apply rigorous methods for assessing, monitoring and overseeing culture.”

Whilst recognising that the concept of culture poses a great many questions from a governance perspective, the report stipulates that boards and board committees must apply a cultural lens to their roles and responsibilities to fully embrace the governance challenge. “Culture shouldn’t just be a hot topic for discussion, but also for governance action”, the report concludes.

As well as drawing on the findings of the EY and FT board survey on culture, the new EY report also showcases data from a recent paper by EY’s Corporate Integrity team: ‘The route to risk reduction: better rules or better decisions?’

Report: Governing culture – practical considerations for the board and its committees (June 2016)