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The Stress Test Every Business Needs

Our book helps boards and management teams make better and more informed decisions around their Capital Agenda.

The EY book The Stress Test Every Business Needs: A Capital Agenda for confidently facing digital disruption, difficult investors, recessions and geopolitical threats provides a framework for managing capital, executing transactions and applying corporate finance tools to make strategic and operational decisions in pursuit of high growth. Our definition of stress encompasses not only traditional macroeconomic and sovereign risks, but also forces like technological disruption, hostile takeovers and activist shareholders. So companies that make poor strategic decisions or underperform operationally — even in a benign economic and geopolitical climate — can still find themselves facing great stresses. And stress is symmetric; threats come from downside risks as well as from missed opportunities.

This book synthesizes lessons learned from thousands of engagements helping clients balance risk and growth in an increasingly uncertain business environment that presents great opportunities and threats every day. The authors address a range of topics that includes setting strategy in a digital world, pre-empting activist shareholders, acquiring and divesting for value, liberating excess cash, and getting the most out of your advisors.

The authors have distilled decades of specialized experience into compelling recommendations for executives striving to create value in a volatile world.
Robert Nardelli
Founder, XLR-8, LLC, Former Chairman and CEO of The Home Depot and Chrysler

Who can benefit from the book?

We created the EY Stress Test book to help boards and management teams make better, more informed decisions around their Capital Agenda. We synthesize more than four hundred years of the contributors’ collective experience into practical guidance for executives trying to future-proof their companies. But fluency with the Capital Agenda is necessary for everyone from directors to functional leaders to middle managers. The book challenges readers to think differently about critical issues facing executives, including:

  • Setting corporate strategy in a digital world
  • Pre-empting activist shareholders
  • Using advisors wisely
  • Proactively managing intrinsic value
  • Allocating capital across the enterprise
  • Acquiring and divesting for optimum value
  • Liberating excess cash

To make tomorrow’s growth possible, you must effectively manage your Capital Agenda today. 

The book’s clarity and comprehensive coverage make it an excellent practitioner’s guide to value creation in an uncertain world, especially for CEOs and CFOs who usually have to learn these lessons 'on the job.'
Richard S. Ruback
Willard Prescott Smith Professor of Corporate Finance, Harvard Business School


How you manage your Capital Agenda today will define your competitive position tomorrow. Finding the right opportunities to invest capital – both organically and inorganically – is fundamental to driving growth.

  • Investing: Finding the right opportunities to invest capital – both organically and inorganically – is fundamental to driving growth.
  • Optimizing: Strategy, finance and operations must integrate to optimize decision-making.
  • Preserving: Companies must continually focus on preserving their strengths and identifying potential risks.
  • Raising: Raising capital to fund growth must balance efficiency and flexibility.

Standing still or being reactive are not options on the quest to future-proof the business.

Review excerpts from all 15 chapters below.

How resilient is your Capital Agenda?

The well-documented process of scenario planning goes back decades, but we find that very few companies have come close to fully implementing its fundamental practices. One way to get started is to perform a “premortem” for important decisions. As with many powerful ideas, this one is simple and straightforward to apply to new strategic, operational, and capital decisions, as well as to initiatives already underway. Instead of asking what could go wrong, the team begins by assuming the effort failed in dramatic fashion. Then everyone writes down individually all the possible reasons he or she can think of for the failure, before each is considered in turn for ways to better future-proof the project.

CFO.com article: "Are your portfolio reviews timely, objective and thorough?" with Jeff Green and Jeff Wray

Read the first chapter

Chapter author: Jeffrey R. Greene

Do you know the intrinsic value of your company, and how to manage it?

When there is a gap between market value and intrinsic value, CEOs and CFOs need to diagnose and act on the reasons:

  • Do investors not understand the company?
  • Or does management lack credibility?

Activist shareholders often use the size of the gap to decide whether and how to intervene. Even though your market value may be rising, if intrinsic value is a lot higher, you could be vulnerable.

Chapter author: Daniel Burkly

Are you allocating capital across the enterprise to reduce C-suite stress?

While leading practices are often company-specific, world-class capital allocators usually have these, among others, in common:

  • Focus on metrics that reflect an outside-in perspective to creating shareholder value
  • Employ consistent criteria and objective processes for all investment decisions
  • Establish a “cash culture” that prizes cash flow and does not tolerate unnecessarily tying up capital
  • Embed stress testing across capital allocation to strengthen resilience
  • Align capital allocation, strategy and communications
  • Maintain information systems that generate granular data

Chapter author: Jeffrey R. Greene

Are your portfolio reviews timely, objective, and thorough?

Contemplating answers to the sample questions below will help you identify the strengths and weaknesses in your capabilities:

  • How does each component of your portfolio complement the enterprise strategy?
  • Do you apply the same investment model and metrics to evaluate existing businesses as you do for new uses of capital?
  • Can you calculate the ROIC and the risk-adjusted discount rate for each business?
  • How quickly could you execute a divestiture for full value in response to an internal need for liquidity or high interest from potential buyers?
  • When was the last time you used your planning process to test how enterprise value would react to alternative portfolio strategies or external scenarios?

CFO article:  "Does your M&A Integration Playbook Need Updating?" with Brian Salsberg

Chapter authors: Jeffrey R. Greene and Jeff Wray

Do your acquisitions consistently pay off for shareholders?

When acquisitions underperform, the main reasons are often overpaying for the deal, and missteps in integrating the acquired company. In many cases management tends to underestimate both deal integration costs and the difficulty in capturing synergies.

Consequently, boards are requesting more detailed integration strategies and road maps as part of their M&A approval process. They want to know the source of synergies, a rough timeline to capture value, who will drive integration, how leaders will set up the process so that it does not distract employees nor detract from the business, and how it will be funded. Executives need to build a robust integration strategy and create that more-detailed road map by focusing on five elements of a strong integration.

Chapter author: Brian Salsberg

Are you planning and executing divestments for maximum value?

Following these guiding principles will help you avoid the major cause of value erosion:

  • Define the perimeter of the transaction early 
  • Fully consider structuring alternatives
  • Develop a buyer mindset 
  • Plan for separation early
  • Address all stakeholders

Chapter authors: Paul Hammes and Subin Baral

Do your financing choices support flexibility and efficiency?

Too many companies find themselves with a capital structure that either complicates the attraction of new capital, or prohibits certain critical business activities. How does this happen? Sometimes it’s a significant unforeseen change in the business or marketplace, like a disruptive technology or an economic collapse. More often it’s a non-deliberate, reactionary approach to building the capital structure.

Managers can improve their capital structure decisions if they commit to a detailed business review process through the capital lens. As a group they must thoroughly review their operations, marketplace, stakeholders and the long-term strategy of their business. They need to understand how capital structure and the capital markets affect each of these elements. To arrive at an optimal capital structure, they then must explore ways to match the key characteristics of the business and its strategy with those of possible capital instruments in current capital market conditions.

Chapter author: K.C. Brechnitz

How well does working capital management contribute to cash flow and earnings?

One of our recent studies used peer-to-peer performance comparison as a proxy, and found that more than US$1 trillion is tied up in excess working capital in companies across the globe.

Why is all this unproductive cash just sitting around, waiting to be claimed by someone who knows where to look?

Business leaders are in the best position to seize opportunities when they value the advantages of optimizing working capital, internalize the right mindset, and follow a disciplined process.

What are some strategic imperatives driving better performance?

  • Cash liberated from working capital is the cheapest source of liquidity.
  • Shareholder activism is on the rise, and one of the most cited areas of value creation is increased cash flow.
  • Most industries are cyclical, and in the down stroke of a cycle, it’s preferable to be one of the companies with strong cash flow.
  • Transactions are opportunities to reset cash flow performance.

Chapter authors: Sven Braun and Steve Payne

Is tax a full partner in building resilience and driving value?

International tax reforms, digitization and a heightened controversy environment have transformed the global tax landscape and contributed to the elevated role of tax on the boardroom agenda. Planning for any restructuring, realignment, or transaction in a single country or across borders requires factoring in an ever-broader range of tax-related issues — from effective tax rate and legal entity structures, to supply chain and operating models; from IP strategy to IT needs; and from treasury function to exit strategy..

Chapter authors: Bridget Walsh and Erica Lawee

Are strategy, finance, and operations integrated for optimal value creation?

For many companies, value is eroded by slowly-made or incomplete decisions, second-guessing during execution, and implementing good decisions poorly. High-velocity decision-making and embracing external trends are both critical to creating value by capitalizing on change. For sustained success, the critical parts of the organization — strategy, finance and operations — have to work together seamlessly.

Strategy, finance and operations (SFO) represent the key internal-stakeholder groups that assess, make and implement mission-critical decisions within organizations. SFO must integrate more and better than they ever have in the past because the pace of change has accelerated dramatically and the complexity of that change has increased significantly.

Chapter authors: Sharath Sharma and Daniel Burkly

How can you get the most out of your advisors?

A Fortune 100 senior executive whom we greatly respect, and who has worked with many consultants, has this to say about why to hire an advisor:

“At the end of the day, the only reason to hire an advisor is to change the outcome of a situation, whether it’s an opportunity or a crisis. You do that by getting an advisor whose proven methodology is directly applicable to the problem you’d like to solve.”

Other executives who’ve successfully used advisors do so to:

  • Get an unbiased, “outside-in” assessment of a situation
  • Confirm—or question—the feasibility of a proposed solution
  • Receive insights and perspectives based on expertise and experience
  • Help apply leading practices in order to solve a problem
  • Help an organization raise its capabilities to a higher level

Chapter authors: Giri Varadarajan and Aayush Tulsyan

Can your strategy thrive in a digital world?

This chapter won’t try to convince you that digital technologies are important and worth investing in; you know that already. It’s about helping you see that digital is likely much more far-reaching than your organization currently thinks, regardless of your industry.

In fact, asking “What is our digital strategy?” these days is too narrow. Rather, companies and leadership should be asking, “What is our business strategy in a digital world?” If you are not, there’s a very good chance you’re thinking about digital incorrectly.

Chapter authors: Tony Qui and Glenn Engler

How can you pre-empt activist shareholders?

We are now in the third phase of activism: mainstreaming.

In its earlier incarnations, activists tended to be specialists. Often they were dedicated funds that focused on companies from which they could generate higher returns by taking an active role.

In this new phase of activism, we are seeing the growth come from occasional activists, who usually are traditional institutional investors that get active in specific situations. Gone are the days where “passive” institutions had to call a specialist activist to promote their agenda. Now they can take the mantle by themselves.

Mainstreaming has had dramatic implications. It has expanded the investment theses that activists pursue. Historically, activists focused on whole company sales and balance sheet restructuring. Now the target’s value improvement comes from business portfolio restructuring and operational improvements as well.

This shift will continue to have dramatic effects on board composition, board-management interactions, and overall corporate governance—and successful approaches to engaging with activists.

CFO.com article: "Are your portfolio reviews timely, objective and thorough?" with Shyam Giduma

Chapter author: Shyam Gidumal

How should you restore a distressed company to health?

Most restructurings are multidimensional and require a combination of capabilities including strategic planning, stakeholder management, operational transformation, cash flow management, and M&A expertise — essentially every element of the Capital Agenda. The intricacies of restructuring affect each company in a unique way.

However, successful processes have a common set of characteristics, including:

  • Understanding the nature of financial restructurings versus operational turnarounds
  • Managing the human dimension of corporate distress
  • Marshaling the recovery
  • Maintaining control of the situation
  • Dramatically accelerating planning and implementation cycles

Capital can’t be allocated properly and the right transactions won’t get done until strategic decisions get made, including deciding which markets to operate in and how to best serve customers. And strategic alternatives need to be evaluated with the financially disciplined mindset and tools we discussed in Chapters 2 and 3.

One of your most important roles as a business leader is to establish realistic and achievable goals to guide decisions around choosing what markets to compete in and how.

Chapter authors: Andrew Wollaston and Donald Featherstone

Will your strategic goals ensure your company reaches its full potential?

Your Capital Agenda needs some heavy lifting from your strategy to fully answer questions about capital allocation, portfolio optimization, and valuation. And neither your Capital Agenda nor your strategy can be determined independently of the other.

The Full Potential Paradigm™ is a proprietary and integrated framework with four complementary elements that help illuminate part of the “Which targets should we set?” question:

  • Market context
  • Margin performance
  • Growth opportunities
  • Investor alignment

Chapter authors: Bill Achtmeyer and John Trustman

About this article

Authors

Jeffrey Greene

EY Corporate Development Leadership Network Leader

Counsels senior executives on the corporate finance implications of strategic and operating decisions. Thought leader on life sciences and the capital agenda — M&A, portfolio management and valuation.

Steve Krouskos

EY Global Vice Chair – Transaction Advisory Services

Driving growth and investment priorities for global EY TAS. University of Florida alumnus. Son, husband and father of four.

Julie Hood

EY Global Deputy Vice Chair – Transaction Advisory Services

Passionate ambassador of an entrepreneurial mind-set in the workplace. Aspiring digital guru. Avid supporter of innovation. Trained architect. Youth mentor. Charity volunteer. Mother.

Bill Casey

EY Americas Vice Chair, Transaction Advisory Services

Experienced transaction advisor. Fluent in English, Spanish and Portuguese. Competitive triathlete.

Harsha Basnayake

EY Asia-Pacific Transaction Advisory Services Managing Partner

Harsha is an experienced leader in deals, capital advisory and succesful transactions in Asia. He has pioneered many businesses in Asia-Pacific and is a passionate supporter of team diversity.

Daniel Burkly

Ernst & Young LLP US Senior Manager, Transaction Advisory Services

Transaction advisor experienced in corporate finance.