Record inflows from foreign investors helped Asia's stock markets record hefty gains in 2005. But despite the region's attractions, Asian companies still tend to trade at a discount to Western ones. At the end of 2004, for instance, the median P/E ratio for companies in the S&P 500 was 19.9, compared with 11.8 for big listed companies in Hong Kong and 6.8 for those in South Korea. In other words, even if a Western company and an Asian one have the same earnings in any one year, investors tend to be willing to pay more for the shares of the former, believing it will create more shareholder value.

Higher risk factors, such as corruption and uncertain regulatory regimes, are often cited as the explanation—and in some cases they play a part. But an important and sometimes overlooked reason why many large Asian companies are valued lower than their Western peers is because of their historical focus on growth rather than on returns on invested capital (ROIC). Asian companies seeking to improve their valuations need to rethink their strategies, and consider carefully not only how best to create sustained shareholder value but also how to communicate progress on this front to...