How To Take the ‘Outside View’

It may be easier than you think to debias your decisions and make better forecasts by building the “outside view.”

The Case Against Corporate Short Termism

Despite strong pressures to focus on the short term, it is possible to manage for the long term and reap considerable rewards.

Resisting Managing for the Short Term

Executives don’t have to fall into the trap of short-termism to serve their shareholders, say McKinsey principal Tim Koller and senior expert Marc Goedhart, two of the coauthors of the sixth edition of Valuation: Measuring and Managing the Value of Companies. In this episode of the McKinsey Podcast, Koller and Goedhart talk with McKinsey Publishing editorial director and McKinsey Quarterly editor in chief Allen Webb … [ Read more ]

The Six Types of Successful Acquisitions

Companies advance myriad strategies for creating value with acquisitions—but only a handful are likely to do so.

Marc Goedhart, Tim Koller, David Wessels

Our research shows that even if short-term investors cause day-to-day fluctuations in a company’s share price and dominate quarterly earnings calls, longer-term investors are the ones who align market prices with intrinsic value.

Marc Goedhart, Tim Koller, David Wessels

As an illustration of how executives get caught up in a short-term EPS focus, consider our experience with companies analyzing a prospective acquisition. The most frequent question managers ask is whether the transaction will dilute EPS over the first year or two. Given the popularity of EPS as a yardstick for company decisions, you might think that a predicted improvement in EPS would be an … [ Read more ]

Marc Goedhart, Tim Koller, David Wessels

Creating shareholder value is not the same as maximizing short-term profits—and companies that confuse the two often put both shareholder value and stakeholder interests at risk. Indeed, a system focused on creating shareholder value from business isn’t the problem; short-termism is.

Marc Goedhart, Tim Koller, David Wessels

The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value.

How to Choose Between Growth and ROIC

Investors reward high-performing companies that shift their strategic focus prudently, even if that means lower returns or slower growth.

The Four Cornerstones of Corporate Finance

The four cornerstones of corporate finance start with the axiom that companies exist to meet customer needs in a way that translates into reliable returns to investors. Together, the cornerstones form a foundation upon which executives can ground decisions about strategy, M&A, budgets, financial policy, technology, and performance measurement—even as markets, economies, and industries change around them.

Building a Better Income Statement

If neither companies nor investors find GAAP reported earnings useful, it’s clearly time for a new approach.

Avoiding the Consensus-Earnings Trap

The promise of meeting or beating consensus estimates and the peril of missing them are profoundly overstated.

Overcoming a Bias Against Risk

Risk-averse midlevel managers making routine investment decisions can shift an entire company’s risk profile. An organization-wide stance toward risk can help.

Tim Koller, Dan Lovallo, and Zane Williams

Many of the managerial tactics used by companies in their capital-allocation and evaluation processes fail to take note of basic [behavioral biases]. By considering the success or failure of projects in isolation, for example, they fail to understand how each will add risk to the company’s overall portfolio and institutionalize a tendency toward risk aversion, essentially recreating the narrow framing that occurs at the individual … [ Read more ]

Why Bad Multiples Happen to Good Companies

A premium multiple is hard to come by and harder to keep. Executives should worry more about improving performance.

Susan Nolen Foushee, Tim Koller, and Anand Mehta

Executives focused on having the highest multiple are missing the point. Rather, as companies with high total returns to shareholders (TRS) know, executives should focus on the amount of value they create—with regard to growth, margins, and capital productivity. Doing so won’t necessarily lead to a higher earnings multiple.

Do Fundamentals—or Emotions—Drive the Stock Market?

Emotions can drive market behavior in a few short-lived situations. But fundamentals still rule.

Editor’s Note: one of the least compelling defenses of efficient or rational markets I have read, but still the topic and specific examples and issues discussed are worthy of consideration.

Testing the Limits of Diversification

A diversification strategy can create value, but only if a company is the best possible owner of businesses outside its core industry.