A company that lacks a formal, systematic approach to capital allocation often displays lower-than-expected returns on investments and pressure from investors for increased dividends and share repurchases. Conversely, a business that adopts an efficient approach to capital allocation will be better placed to reap value from its investment decisions and have the flexibility to quickly assess new investment opportunities that emerge.
Who is responsible?
A systematic, resilient Capital Agenda requires strong input from C-suite leaders who can foresee problems and work across the entire company. Additionally, company boards have the right to exercise their governance responsibilities by asking the right questions concerning large share repurchases and acquisitions. Throughout the business, leaders in key functions – manufacturing, supply chain, risk management, sales and marketing and more – must also understand how their daily activities align with and bolster the Capital Agenda.
Ultimately, organizations must work together to implement a complete, aligned and resilient Capital Agenda while simultaneously attempting to protect their companies from future shocks.
The Stress Test Every Business Needs examines which Capital Agenda questions must be continually asked by company leaders. The book offers an understanding of how to approach each question independently and sheds light on how each works as part of the wider Capital Agenda.
The following are some of what we consider the most important self-assessment questions, which we explore in more detail through dedicated chapters in the book:
- How resilient is your Capital Agenda?
- Do you know the intrinsic value of your company and how to manage it?
- Are you allocating capital across the enterprise to reduce C-suite stress?
- Are your portfolio reviews timely, objective and thorough?
- Do your acquisitions consistently pay off for shareholders?
- Are you planning and executing divestments for maximum value?
- How well does working capital management contribute to cash flow and earnings?
- Are strategy, finance and operations integrated for optimal value creation?
- How can you preempt activist shareholders?
A company’s full potential ultimately depends on its leaders' comprehensive approach to managing capital, executing transactions and applying practical corporate finance tools and processes that optimize strategic and operational decisions. Failure to align these actions can ultimately hinder growth and long-term success. The examples given in the EY Stress Test book tellingly show how companies that do not adopt a holistic approach to their Capital Agenda can quickly move from the top of the heap to the bottom of the pile.
We encourage you to read the entire book, rather than just this article alone, to understand how the EY Stress Test book can add valuable insight and guidance to every step of your Capital Agenda.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.