Business Valuation for Corporate Governance

Introduction

Valuation is a fundamental tool in corporate decision-making, used by stakeholders such as banks, companies, professionals, and regulators in varying scenarios and circumstances. However, the underlying reason remains that of facilitating informed decision making. These circumstances include acquisition/disposal of assets, loan applications, litigation, restructuring or even divorce proceedings.

At its core, valuation is an objective assessment to arrive at an appraised value for a target company or target asset. In its most basic form, a valuation serves to provide the user the valuer’s opinion of the value based on facts and information available at the valuation date.

The focus of this article is on valuation in a corporate transaction involving the acquisition or disposal of a company.

In such transaction, valuation assumes a prominent role as one of the check and balance tools for its Board and management to assess the transaction, especially in evaluating the transaction pricing. Based on this evaluation and together with other evaluation factors to be considered, it would assist them to make an informed decision. This reinforces corporate governance as it facilitates thorough deliberation for well informed decisions to be made.

Valuation does not replace the Board’s inquiry but it catalyses discussions and adds a broader dimension to the evaluation including the basis of valuation, underlying assumptions and recent comparable transactions. Such robust discussions and deliberations lead to better decisions making and strengthens corporate governance. In a publicly listed entity, this sends a positive signal to investors.

How should the valuation be undertaken?

The credentials of a valuer and the valuation standards or guidelines used plays an important role in a valuation exercise. If the valuer is not competent or does not have the necessary knowledge or experience to undertake the valuation or do not apply applicable international standards or guidelines, it can undermine the valuation’s credibility. The International Valuation Standards Council (IVSC) issues a set of valuation standards entitled International Valuation Standard. IVSC, a not-for-profit organisation whose membership include valuation institutes and regulators sets valuation standards to promote consistency, transparency and professionalism in valuation.

Who should the valuer be?

In Malaysia, the Malaysian Institute of Accountants (MIA) prescribes the International Valuation Standards as a Best Practice Guide, which encourages all members undertaking valuation to comply with these Standards. At the same time, the MIA has also approved the Skills Set to Perform Business Valuation in Malaysia, which draws reference from the Competency Framework for Professional Valuers issued by the International Valuation Standards Council that sets out the minimum qualifications of its members who wish to act as a valuer. In addition to this, MIA members are to comply with its By-Laws (On Professional Ethics, Conduct and Practice) to further strengthen the valuer’s independence and qualifications. All of these are expected to instil confidence in valuations undertaken by MIA members that meet the above.

The most important traits of the valuer must be possession of extensive knowledge and experience in valuation and be able to value the subject matter objectively and independently, utilising a set of internationally accepted guidelines or standards in undertaking the valuation.

A valuation by a third-party expert valuer allows the Board of Directors to gain access to an independent opinion, which strengthens the corporate governance process.

For example, in a related party transactions involving a purchase or disposal of an asset/company, independent valuations by an expert independent valuer play a very important role in the decision-making functions as the Non Interested Directors could use these valuations amongst other important reports to deliberate and evaluate the proposed transaction to safeguard the interests of the company and its shareholders.

Conclusion

Valuation is integral to effective corporate governance, adding value to companies engaged in significant transactions.

Given its importance, the role of the valuer remains essential and that it is performed by those that possesses the necessary competency and in compliance with a set of applicable valuation standards.

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