MoF Issue 40 Summer 11

The enduring value of fundamentals
Special 10-year
anniversary issue
20012011
Number 40,
Summer 2011
McKInsey on Inunce
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McKinsey on Finance is a quarterly
publication written by experts and
practitioners in McKinsey & Companys
corporate nance practice. This
publication offers readers insights
into value-creating strategies
and the translation of those strategies
into company performance.
This and archived issues of McKinsey
on Finance are available online at
corporatenance.mckinsey.com, where
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Editorial Contact: McKinsey_on_
Finance@McKinsey.com
To request permission to republish an
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Quarterly_Reprints@McKinsey.com.
Editorial Board: David Cogman,
Ryan Davies, Marc Goedhart,
Bill Huyett, Bill Javetski, Tim Koller,
Werner Rehm, Dennis Swinford
Editor: Dennis Swinford
Art Direction: Veronica Belsuzarri
Design and layout:
Veronica Belsuzarri, Cary Shoda
Managing Editor: Drew Holzfeind
Information Design Editor:
Mary Reddy
Editorial Production: Kelsey Bjelland,
Roger Draper
Circulation: Diane Black
Illustrations by Brian Stauffer
The editors would also like to thank
past members of the McKinsey
on Finance editorial board who have
contributed to many of the articles
included in this anniversary edition. They
include James Ahn, Richard Dobbs,
Massimo Giordano, Keiko Honda, Rob
McNish, Jean-Hugues Monier,
Herbert Pohl, and Michelle Soudier.
Copyright 2011 McKinsey & Company.
All rights reserved.
This publication is not intended to be
used as the basis for trading
in the shares of any company or for
undertaking any other complex
or signicant nancial transaction
without consulting appropriate
professional advisers.

No part of this publication may
be copied or redistributed in any form
without the prior written consent of
McKinsey & Company.
The enduring value of fundamentals
McKInsey on Inunce
Special 10-year
anniversary issue
20012011
Number 40,
Summer 2011
z
WIen we pubIIsIed LIe InuuguruI Issue oI
McKinse on Iincnce, In LIe summer oI zoo1,
COs were IucIng LIe cIuIIenges oI nuvIguL-
Ing u gIobuI economy recoverIng Irom u downLurn
und bruIsed by corporuLe mIsbeIuvIor durIng
LIe doL-com murkeL crusI. TIe ouLIook Ior growLI,
vuIuuLIon, und hnuncIuI reguIuLIon wus
uncerLuIn uL besL.
TIe pIIIosopIy oI LIe new pubIIcuLIon`s
edILorIuI bourd wus LIuL compunIes couId besL
Improve LIeIr perIormunce In LIe Iuce oI
LIese uncerLuInLIes by druwIng on LIe esLubIIsIed
prIncIpIes oI hnunce. AILer u decude murked
by boLI crIsIs und proIound cIunges In gIobuI
hnuncIuI murkeLs, LIuL remuIns our upproucI.
I u sIngIe LIeme Ius run LIrougI LIe puges oI
McKinse on Iincnce over LIe pusL Len yeurs, IL
Ius been LIe ImporLunce oI cIuIIengIng LIe
muny und recurrIng IncompIeLe, mIsIeudIng, und
IuddIsI InLerpreLuLIons oI hnunce. We Iuve
udvunced InLerpreLuLIons oI vuIue creuLIon LIuL
respecL LIe Iong-Lerm eIIecLIveness oI cupILuI
murkeLs-und ure cuuLIous ubouL mIsLukIng sIorL-
Lerm noIse Ior IndIcuLIons oI Iong-Lerm vuIue
creuLIon. Our uuLIors Iuve uIso sougIL Lo provIde
specIhc LooIs Lo IeIp hnunce Ieuders run LIeIr
vurIed IuncLIons more eIIecLIveIy und eIhcIenLIy,
und LIus Lo Inuence LIe dIrecLIon oI
LIeIr compunIes.
or LIIs specIuI unnIversury unLIoIogy, we`ve
compIIed u seIecLIon oI urLIcIes und excerpLs Irom
LIe pusL decude LIuL we beIIeve remuIn useIuI
Ior drIvIng perIormunce even Loduy.
Editors note
n LIIs Issue, youÌI hnd TIe CEO`s guIde Lo

corporuLe hnunce, wIIcI uppIIes LIe Iour corner-
sLones oI corporuLe hnunce Lo decIsIons In
mergers und ucquIsILIons, dIvesLILures, projecL
unuIysIs und downsIde rIsk, und execuLIve
compensuLIon. TIe secLIon on growLI exumInes
LIe dIIhcuILy LIuL Iurge successIuI compunIes
Iuve In susLuInIng IL, us weII us some oI LIe pruc-
LIcuI Lrude-oIIs uIIorded by dIIIerenL Lypes
oI growLI.
urLIer In, youÌI hnd u secLIon on governunce
und rIsk, urLIcIes LIuL druw Irom our experIence
wILI ucLIve munugers In prIvuLe equILy und
Irom IundumenLuI unuIysIs oI IedgIng und rIsk
munugemenL. TIere`s uIso u secLIon on deuIIng
wILI InvesLors: descrIbIng u beLLer wuy Lo
communIcuLe wILI dIIIerenL segmenLs oI InvesLors,
consIderIng LIe vuIue oI Lrunspurency In
uccounLIng und InvesLor communIcuLIons,
und exumInIng LIe cIeuresL IndIcuLIon oI InvesLor
LIInkIng-LIe movemenL oI sLock murkeLs.
InuIIy, LIe unLIoIogy ends wILI u prucLIcuI Iook
uL LIe roIe oI LIe CO und Iow Lo Improve
LIe eIhcIency oI LIe hnunce IuncLIon.
We Iope LIuL LIe urLIcIes und excerpLs LIuL IoIIow
wIII IeIp you Lo expIore LIe vuIue und creuLIve
uppIIcuLIon oI LesLed hnunce IundumenLuIs In u
rupIdIy cIungIng worId. AddILIonuI reIuLed
reudIng, us weII us LIIs coIIecLIon und LIe IuII
versIons oI excerpLed urLIcIes, cun be Iound
on mckInseyquurLerIy.com.
Bill Huyett and Tim Koller
Finance and strategy
Features
7 The CEOs guide to corporate finance (Autumn 2010)
16 Making capital structure support strategy (Winter 2006)
Excerpts from
8 Are you still the best owner of your assets? (Winter 2010)
15 Stock optionsthe right debate (Summer 2002)
23 The value of share buybacks (Summer 2005)
24 Paying back your shareholders (Spring 2011)
How to grow
Features
27 Why the biggest and best struggle to grow (Winter 2004)
35 Running a winning M&A shop (Spring 2008)
Excerpts from
32 How to choose between growth and ROIC (Autumn 2007)
34 All P/Es are not created equal (Spring 2004)
36 M&A teams: When small is beautiful (Winter 2010)
39 Managing your integration manager (Summer 2003)
41 The five types of successful acquisitions (Summer 2010)
Governance and risk
Features
43 The voice of experience: Public versus private equity (Spring 2009)
49 The right way to hedge (Summer 2010)
Excerpts from
54 Risk: Seeing around the corners (Autumn 2009)
55 Emerging markets arent as risky as you think (Spring 2003)
Contents
Dealing with investors
Features
57 Communicating with the right investors (Spring 2008)
64 Do fundamentalsor emotionsdrive the stock market? (Spring 2005)
Excerpts from
60 Inside a hedge fund: An interview with the managing partner of
Maverick Capital (Spring 2006)
62 Numbers investors can trust (Summer 2003)
63 The misguided practice of earnings guidance (Spring 2006)
69 The truth about growth and value stocks (Winter 2007)
The CFO
Features
71 Starting up as CFO (Spring 2008)
Excerpts from
72 Toward a leaner finance department (Spring 2006)
75 Organizing for value (Summer 2008)

6
Finance
and strategy
;
Richard Dobbs, Bill Huyett, and Tim Koller
The CEOs guide
to corporate nance
Four principles can help you make great financial decisionseven when
the CFOs not in the room.
Number 37,
Autumn 2010
L`s one LIIng Ior u CO Lo undersLund LIe
LecInIcuI meLIods oI vuIuuLIon-und Ior
members oI LIe hnunce orgunIzuLIon Lo uppIy
LIem Lo IeIp IIne munugers monILor und
Improve compuny perIormunce. BuL IL`s sLIII
more powerIuI wIen CEOs, bourd members, und
oLIer nonhnuncIuI execuLIves InLernuIIze
LIe prIncIpIes oI vuIue creuLIon. DoIng so uIIows
LIem Lo muke IndependenL, courugeous,
und even unpopuIur busIness decIsIons In LIe
Iuce oI myLIs und mIsconcepLIons ubouL wIuL
creuLes vuIue.
WIen un orgunIzuLIon`s senIor Ieuders Iuve u sLrong
hnuncIuI compuss, IL`s eusIer Ior LIem Lo resIsL LIe
sIren songs oI hnuncIuI engIneerIng, excessIve
Ieveruge, und LIe Ideu (common durIng boom LImes)
LIuL someIow LIe esLubIIsIed ruIes oI economIcs
no Ionger uppIy. MIsconcepLIons IIke LIese-wIIcI
cun Ieud compunIes Lo muke vuIue-desLroyIng
In this section: Features
7 The CEOs guide to corporate finance (Autumn 2010)
16 Making capital structure support strategy (Winter 2006)
Excerpts from
8 Are you still the best owner of your assets? (Winter 2010)
15 Stock optionsthe right debate (Summer 2002)
23 The value of share buybacks (Summer 2005)
24 Paying back your shareholders (Spring 2011)
8 McKInsey on Inunce Anthology 2011
decIsIons und sIow down enLIre economIes-Luke
IoId wILI surprIsIng und dIsLurbIng euse.
WIuL we Iope Lo do In LIIs urLIcIe Is sIow Iow
Iour prIncIpIes, or cornersLones, cun IeIp
senIor execuLIves und bourd members muke some
oI LIeIr mosL ImporLunL decIsIons. TIe Iour
cornersLones ure dIsurmIngIy sImpIe:
1. The core-of-value principle esLubIIsIes LIuL
vuIue creuLIon Is u IuncLIon oI reLurns on
cupILuI und growLI, wIIIe IIgIIIgILIng some
ImporLunL subLIeLIes ussocIuLed wILI
uppIyIng LIese concepLs.
2. The conservation-of-value principle suys LIuL
IL doesn`L muLLer Iow you sIIce LIe hnuncIuI pIe
wILI hnuncIuI engIneerIng, sIure repurcIuses,
or ucquIsILIons; onIy ImprovIng cusI ows wIII
creuLe vuIue.
3. The expectations treadmill principle expIuIns
Iow movemenLs In u compuny`s sIure
prIce reecL cIunges In LIe sLock murkeL`s
expecLuLIons ubouL perIormunce, noL
jusL LIe compuny`s ucLuuI perIormunce (In
Lerms oI growLI und reLurns on InvesLed
cupILuI). TIe IIgIer LIose expecLuLIons, LIe
beLLer LIuL compuny musL perIorm jusL
Lo keep up.
4. The best-owner principle sLuLes LIuL no
busIness Ius un InIerenL vuIue In und oI ILseII;
IL Ius u dIIIerenL vuIue Lo dIIIerenL owners
The best-owner life cycle means that executives must continually seek out new acquisitions for which their
companies could be the best owner. Applying the best-owner principle often leads acquirers toward
targets very different from those that traditional target-screening approaches might uncover. Traditional
ones often focus on targets that perform well nancially and are somehow related to the acquirers
business lines. But through the best-owner lens, such characteristics might have little or no importance. It
might be better, for instance, to seek out a nancially weak company that has great potential for
improvement, especially if the acquirer has proven performance-improvement expertise. Or it might be
better to focus attention on tangible opportunities to cut costs or on the existence of common customers
than on vague notions such as how related the target may be to the acquirer.
Keeping the best-owner principle front and center can also help with negotiations for an acquisition
by keeping managers focused on what the target is worth specically to their own companyas well as to
other bidders. Many managers err in M&A by estimating only an acquisitions value to their own com-
pany. Because they are unaware of the targets value to other potential better ownersor how high those
other owners might be willing to bidthey get lulled into conducting negotiations right up to their
breakeven point, creating less value for their own shareholders. Instead of asking how much they can pay,
they should be asking whats the least they need to pay to win the deal and create the most value.
Excerpt from
Are you still the best owner of your assets?
Number 34,
Winter 2010
Richard Dobbs, Bill Huyett, and Tim Koller
q
or poLenLIuI owners-u vuIue bused on Iow LIey
munuge IL und wIuL sLruLegy LIey pursue.
gnorIng LIese cornersLones cun Ieud Lo poor
decIsIons LIuL erode LIe vuIue oI compunIes. Con-
sIder wIuL Iuppened durIng LIe run-up Lo LIe
hnuncIuI crIsIs LIuL begun In zoo;. PurLIcIpunLs In
LIe securILIzed-morLguge murkeL uII ussumed
LIuL securILIzIng rIsky Iome Iouns mude LIem more
vuIuubIe becuuse IL reduced LIe rIsk oI LIe usseLs.
BuL LIIs noLIon vIoIuLes LIe conservuLIon-oI-vuIue
ruIe. SecurILIzuLIon dId noL Increuse LIe uggre-
guLed cusI ows oI LIe Iome Iouns, so no vuIue
wus creuLed, und LIe InILIuI rIsks remuIned.
SecurILIzIng LIe usseLs sImpIy enubIed LIe rIsks Lo
be pussed on Lo oLIer owners: some InvesLors,
somewIere, Iud Lo be IoIdIng LIem.
ObvIous us LIIs seems In IIndsIgIL, u greuL muny
smurL peopIe mIssed IL uL LIe LIme. And LIe sume
LIIng Iuppens every duy In execuLIve suILes und
bourdrooms us munugers und compuny dIrecLors
evuIuuLe ucquIsILIons, dIvesLILures, projecLs,
und execuLIve compensuLIon. As weÌI see, LIe Iour
cornersLones oI hnunce provIde u perennIuIIy
sLubIe Irume oI reIerence Ior munugerIuI decIsIons
IIke LIese.
Mergers and acquisitions
AcquIsILIons ure boLI un ImporLunL source oI
growLI Ior compunIes und un ImporLunL eIemenL
oI u dynumIc economy. AcquIsILIons LIuL puL
compunIes In LIe Iunds oI beLLer owners or mun-
ugers or LIuL reduce excess cupucILy LypIcuIIy
creuLe subsLunLIuI vuIue boLI Ior LIe economy
us u wIoIe und Ior InvesLors.
You cun see LIIs eIIecL In LIe Increused combIned
cusI ows oI LIe muny compunIes InvoIved In
ucquIsILIons. BuL uILIougI LIey creuLe vuIue overuII,
Exhibit 1
1.0
0.4
1.4
Value received
0.1
Value created
for acquirer
1.0
0.3
1.3
Price paid
MoF 37 2010
Stakeholders
Exhibit 1 of 2
To create value, an acquirer must achieve performance
improvements that are greater than the premium paid.
Premium paid
by acquirer
Targets market
value
Targets stand-
alone value
$ billion
Value of
performance
improvements
1o McKInsey on Inunce Anthology 2011
Exhibit 2
MoF 37 2010
Stakeholders
Exhibit 2 of 2
Present value of announced
performance improvements as
% of targets stand-alone value
Net value created
from acquisition as %
of purchase price
Premium paid as
% of targets
stand-alone value
Kellogg acquires
Keebler (2000)
4570 3050 15
PepsiCo acquires
Quaker Oats (2000)
3555 2540 10
Clorox acquires
First Brands (1998)
70105 525 60
Henkel acquires
National Starch (2007)
6090 55 525
Dramatic performance improvements created
signicant value in these four acquisitions.
LIe dIsLrIbuLIon oI LIuL vuIue Lends Lo be IopsIded,
uccruIng prImurIIy Lo LIe seIIIng compunIes`
sIureIoIders. n IucL, mosL empIrIcuI reseurcI
sIows LIuL jusL IuII oI LIe ucquIrIng com-
punIes creuLe vuIue Ior LIeIr own sIureIoIders.
TIe conservuLIon-oI-vuIue prIncIpIe Is un exceIIenL
reuIILy cIeck Ior execuLIves wIo wunL Lo
muke sure LIeIr ucquIsILIons creuLe vuIue Ior LIeIr
sIureIoIders. TIe prIncIpIe remInds us LIuL
ucquIsILIons creuLe vuIue wIen LIe cusI ows oI
LIe combIned compunIes ure greuLer LIun
LIey wouId oLIerwIse Iuve been. Some oI LIuL
vuIue wIII uccrue Lo LIe ucquIrer`s sIureIoIders II
IL doesn`L puy Loo mucI Ior LIe ucquIsILIon.
ExIIbIL 1 sIows Iow LIIs process works. Compuny
A buys Compuny B Ior $1. bIIIIon-u LrunsucLIon
LIuL IncIudes u o percenL premIum over ILs
murkeL vuIue. Compuny A expecLs Lo Increuse LIe
vuIue oI Compuny B by qo percenL LIrougI
vurIous operuLIng ImprovemenLs, so LIe vuIue oI
Compuny B Lo Compuny A Is $1.q bIIIIon.
SubLrucLIng LIe purcIuse prIce oI $1. bIIIIon Irom
$1.q bIIIIon Ieuves $1oo mIIIIon oI vuIue creuLIon
Ior Compuny A`s sIureIoIders.
n oLIer words, wIen LIe sLund-uIone vuIue oI LIe
LurgeL equuIs LIe murkeL vuIue, LIe ucquIrer creuLes
vuIue Ior ILs sIureIoIders onIy wIen LIe vuIue
oI ImprovemenLs Is greuLer LIun LIe premIum puId.
WILI LIIs In mInd, IL`s eusy Lo see wIy mosL
oI LIe vuIue creuLIon Irom ucquIsILIons goes Lo LIe
seIIers` sIureIoIders: II u compuny puys
u o percenL premIum, IL musL Increuse LIe LurgeL`s
vuIue by uL IeusL o percenL Lo creuLe uny vuIue.
WIIIe u o or qo percenL perIormunce Improve-
menL sounds sLeep, LIuL`s wIuL ucquIrers
oILen ucIIeve. or exumpIe, ExIIbIL z IIgIIIgILs
Iour Iurge deuIs In LIe consumer producLs
secLor. PerIormunce ImprovemenLs LypIcuIIy
exceeded o percenL oI LIe LurgeL`s vuIue.
Our exumpIe uIso sIows wIy IL`s dIIhcuIL Ior
un ucquIrer Lo creuLe u subsLunLIuI umounL
oI vuIue Irom ucquIsILIons. eL`s ussume LIuL
Compuny A wus worLI ubouL LIree LImes
Compuny B uL LIe LIme oI LIe ucquIsILIon. SIgnIh-
cunL us sucI u deuI wouId be, IL`s IIkeIy Lo
Increuse Compuny A`s vuIue by onIy percenL-
LIe $1oo mIIIIon oI vuIue creuLIon depIcLed In
ExIIbIL 1, dIvIded by Compuny A`s vuIue, $ bIIIIon.
11
InuIIy, IL`s worLI noLIng LIuL we Iuve noL
menLIoned un ucquIsILIon`s eIIecL on eurnIngs per
sIure (EPS). AILIougI LIIs meLrIc Is oILen
consIdered, no empIrIcuI IInk sIows LIuL expecLed
EPS uccreLIon or dIIuLIon Is un ImporLunL
IndIcuLor oI wIeLIer un ucquIsILIon wIII creuLe
or desLroy vuIue. DeuIs LIuL sLrengLIen neur-Lerm
EPS und deuIs LIuL dIIuLe neur-Lerm EPS ure
equuIIy IIkeIy Lo creuLe or desLroy vuIue. Bunkers
und oLIer hnunce proIessIonuIs know uII LIIs,
buL us one LoId us recenLIy, muny noneLIeIess use
IL us u sImpIe wuy Lo communIcuLe wILI bourds
oI dIrecLors. To uvoId conIusIon durIng sucI com-
munIcuLIons, execuLIves sIouId remInd
LIemseIves und LIeIr coIIeugues LIuL EPS Ius
noLIIng Lo suy ubouL wIIcI compuny Is LIe
besL owner oI specIhc corporuLe usseLs or ubouL
Iow mergIng Lwo enLILIes wIII cIunge LIe
cusI ows LIey generuLe.
Divestitures
ExecuLIves ure oILen concerned LIuL dIvesLILures
wIII Iook IIke un udmIssIon oI IuIIure, muke
LIeIr compuny smuIIer, und reduce ILs sLock murkeL
vuIue. YeL LIe reseurcI sIows LIuL, on LIe
conLrury, LIe sLock murkeL consIsLenLIy reucLs
posILIveIy Lo dIvesLILure unnouncemenLs.
1

TIe dIvesLed busIness unILs uIso benehL. ReseurcI
Ius sIown LIuL LIe prohL murgIns oI spun-oII
busInesses Lend Lo Increuse by one-LIIrd durIng LIe
LIree yeurs uILer LIe LrunsucLIons ure compIeLe.
z

TIese hndIngs IIIusLruLe LIe benehL oI conLInuuIIy
uppIyIng LIe besL-owner prIncIpIe: LIe
uLLrucLIveness oI u busIness und ILs besL owner
wIII probubIy cIunge over LIme. AL dIIIerenL
sLuges oI un IndusLry`s or compuny`s IIIespun,
resource decIsIons LIuL once mude economIc
sense cun become probIemuLIc. or InsLunce, LIe
compuny LIuL InvenLed u groundbreukIng
InnovuLIon muy noL be besL suILed Lo expIoIL IL.
SImIIurIy, us demund IuIIs oII In u muLure
IndusLry, compunIes LIuL Iuve been In IL
u Iong LIme ure IIkeIy Lo Iuve excess cupucILy und
LIereIore muy no Ionger be LIe besL owners.
A vuIue-creuLIng upproucI Lo dIvesLILures cun
Ieud Lo LIe prunIng oI good und bud busInesses uL
uny sLuge oI LIeIr IIIe cycIes. CIeurIy, dIvesLIng
u good busIness Is oILen noL un InLuILIve cIoIce
und muy be dIIhcuIL Ior munugers-even II
LIuL busIness wouId be beLLer owned by unoLIer
compuny. L LIereIore mukes sense Lo enIorce
some dIscIpIIne In ucLIve porLIoIIo munugemenL.
One wuy Lo do so Is Lo IoId reguIur revIew
meeLIngs specIhcuIIy devoLed Lo busIness exILs,
ensurIng LIuL LIe LopIc remuIns on LIe
execuLIve ugendu und LIuL eucI unIL receIves
u duLe sLump, or esLImuLed LIme oI exIL.
TIIs prucLIce Ius LIe udvunLuge oI obIIgIng
execuLIves Lo evuIuuLe uII busInesses us
LIe seII-by duLe upproucIes.
ExecuLIves und bourds oILen worry LIuL dIves-
LILures wIII reduce LIeIr compuny`s sIze und LIus
cuL ILs vuIue In LIe cupILuI murkeLs. TIere
IoIIows u mIsconcepLIon LIuL LIe murkeLs vuIue
Iurger compunIes more LIun smuIIer ones.
BuL LIIs noLIon IoIds onIy Ior very smuII hrms,
wILI some evIdence LIuL compunIes wILI
u murkeL cupILuIIzuLIon oI Iess LIun $oo mIIIIon
mIgIL Iuve sIIgILIy IIgIer cosLs oI cupILuI.
InuIIy, execuLIves sIouIdn`L worry LIuL

u dIvesLILure wIII dIIuLe EPS muILIpIes. A compuny
seIIIng u busIness wILI u Iower PJE ruLIo LIun
LIuL oI ILs remuInIng busInesses wIII see un overuII
reducLIon In eurnIngs per sIure. BuL don`L
IorgeL LIuL u dIvesLed underperIormIng unIL`s
Iower growLI und reLurn on InvesLed cupILuI
(ROC) poLenLIuI wouId Iuve prevIousIy depressed
LIe enLIre compuny`s PJE. WILI LIIs unIL gone,
LIe compuny LIuL remuIns wIII Iuve u IIgIer
growLI und ROC poLenLIuI-und wIII be vuIued uL
1z McKInsey on Inunce Anthology 2011
u correspondIngIy IIgIer PJE ruLIo.
q
As LIe
core-oI-vuIue prIncIpIe wouId predIcL, hnuncIuI
mecIunIcs, on LIeIr own, do noL creuLe or
desLroy vuIue. By LIe wuy, LIe muLI works ouL
regurdIess oI wIeLIer LIe proceeds Irom
u suIe ure used Lo puy down debL or Lo repurcIuse
sIures. WIuL muLLers Ior vuIue Is LIe busIness
IogIc oI LIe dIvesLILure.
Project analysis and downside risks
RevIewIng LIe hnuncIuI uLLrucLIveness oI projecL
proposuIs Is u common Lusk Ior senIor execuLIves.
TIe sopIIsLIcuLed LooIs used Lo supporL LIem-
dIscounLed cusI ows, scenurIo unuIyses-oILen
IuII Lop munugemenL InLo u IuIse sense oI
securILy. or exumpIe, one compuny we know
unuIyzed projecLs by usIng udvunced sLuLIs-
LIcuI LecInIques LIuL uIwuys sIowed u zero
probubIIILy oI u projecL wILI neguLIve neL presenL
vuIue (NPV). TIe orgunIzuLIon dId noL Iuve
LIe ubIIILy Lo dIscuss IuIIure, onIy vuryIng degrees
oI success.
SucI un upproucI Ignores LIe core-oI-vuIue
prIncIpIe`s IuserIIke Iocus on LIe IuLure cusI ows
underIyIng reLurns on cupILuI und growLI, noL
jusL Ior u projecL buL Ior LIe enLerprIse us u wIoIe.
AcLIveIy consIderIng downsIde rIsks Lo IuLure
cusI ows Ior boLI Is u crucIuI subLIeLy oI projecL
unuIysIs-und one LIuL oILen Isn`L underLuken.
or u momenL, puL yourseII In LIe mInd
oI un execuLIve decIdIng wIeLIer Lo underLuke
u projecL wILI un upsIde oI $8o mIIIIon,
u downsIde oI -$zo mIIIIon, und un expecLed
vuIue oI $6o mIIIIon. GeneruIIy uccepLed
hnunce LIeory suys LIuL compunIes sIouId Luke on
uII projecLs wILI u posILIve expecLed vuIue,
regurdIess oI LIe upsIde-versus-downsIde rIsk.
BuL wIuL II LIe downsIde wouId bunkrupL LIe
compuny? TIuL mIgIL be LIe cuse Ior un eIecLrIc-
power uLIIILy consIderIng LIe consLrucLIon
oI u nucIeur IucIIILy Ior $1 bIIIIon (u rougI zooq
esLImuLe Ior u IucIIILy wILI Lwo reucLors).
Suppose LIere Is un 8o percenL cIunce LIe pIunL
wIII be successIuIIy consLrucLed, brougIL
In on LIme, und worLI, neL oI InvesLmenL cosLs,
$1 bIIIIon. Suppose IurLIer LIuL LIere Is uIso
u zo percenL cIunce LIuL LIe uLIIILy compuny wIII
IuII Lo receIve reguIuLory upprovuI Lo sLurL
operuLIng LIe new IucIIILy, wIIcI wIII LIen be
worLI -$1 bIIIIon. TIuL meuns LIe neL expecLed
vuIue oI LIe IucIIILy Is more LIun $; bIIIIon-
seemIngIy un uLLrucLIve InvesLmenL.
TIe decIsIon geLs more compIIcuLed II LIe cusI

ow Irom LIe compuny`s exIsLIng pIunLs wIII
be InsuIhcIenL Lo cover ILs exIsLIng debL pIus LIe
debL on LIe new pIunL II IL IuIIs. TIe economIcs
oI LIe nucIeur pIunL wIII LIen spIII over InLo LIe
1
vuIue oI LIe resL oI LIe compuny-wIIcI Ius
$z bIIIIon In exIsLIng debL und $z bIIIIon In
equILy murkeL cupILuIIzuLIon. uIIure wIII
wIpe ouL uII LIe compuny`s equILy, noL jusL LIe
$1 bIIIIon InvesLed In LIe pIunL.
As LIIs exumpIe mukes cIeur, we cun exLend LIe
core-oI-vuIue prIncIpIe Lo suy LIuL u compuny
sIouId noL Luke on u rIsk LIuL wIII puL ILs IuLure
cusI ows In dunger. n oLIer words, don`L do
unyLIIng LIuL Ius Iurge neguLIve spIIIover eIIecLs
on LIe resL oI LIe compuny. TIIs cuveuL sIouId
be enougI Lo guIde munugers In LIe eurIIer
exumpIe oI u projecL wILI un $8o mIIIIon upsIde,
u -$zo mIIIIon downsIde, und u $6o mIIIIon
expecLed vuIue. I u $zo mIIIIon Ioss wouId
endunger LIe compuny us u wIoIe, LIe munugers
sIouId Iorgo LIe projecL. On LIe oLIer Iund,
II LIe projecL doesn`L endunger LIe compuny, LIey
sIouId be wIIIIng Lo rIsk LIe $zo mIIIIon Ioss
Ior u Iur greuLer poLenLIuI guIn.
Executive compensation
EsLubIIsIIng perIormunce-bused compensuLIon
sysLems Is u duunLIng Lusk, boLI Ior bourd
dIrecLors concerned wILI LIe CEO und LIe senIor
Leum und Ior Iumun-resource Ieuders und oLIer
execuLIves Iocused on, suy, LIe Lop oo munugers.
AILIougI un enLIre IndusLry Ius grown up
uround LIe compensuLIon oI execuLIves, muny
compunIes conLInue Lo rewurd LIem Ior
sIorL-Lerm LoLuI reLurns Lo sIureIoIders (TRS).
TRS, Iowever, Is drIven more by movemenLs
In u compuny`s IndusLry und In LIe brouder murkeL
(or by sLock murkeL expecLuLIons) LIun
by IndIvIduuI perIormunce. or exumpIe, muny
execuLIves wIo becume weuILIy Irom sLock
opLIons durIng LIe 1q8os und 1qqos suw LIese
guIns wIped ouL In zoo8. YeL LIe underIyIng
cuuses oI sIure prIce cIunges-sucI us IuIIIng
InLeresL ruLes In LIe eurIIer perIod und LIe
hnuncIuI crIsIs more recenLIy-were IrequenLIy
dIsconnecLed Irom unyLIIng munugers dId or
dIdn`L do.
UsIng TRS us LIe busIs oI execuLIve compensuLIon
reecLs u IundumenLuI mIsundersLundIng oI
LIe LIIrd cornersLone oI hnunce: LIe expecLuLIons
LreudmIII. I InvesLors Iuve Iow expecLuLIons
Ior u compuny uL LIe begInnIng oI u perIod oI sLock
murkeL growLI, IL muy be reIuLIveIy eusy Ior
LIe compuny`s munugers Lo beuL LIem. BuL LIuL
uIso Increuses LIe expecLuLIons oI new sIure-
IoIders, so LIe compuny Ius Lo Improve ever IusLer
jusL Lo keep up und muInLuIn ILs new sLock prIce.
AL some poInL, IL becomes dIIhcuIL II noL
ImpossIbIe Ior munugers Lo deIIver on LIese
ucceIeruLIng expecLuLIons wILIouL IuILerIng, mucI
us unyone wouId evenLuuIIy sLumbIe on u
LreudmIII LIuL kepL geLLIng IusLer.
TIIs dynumIc underscores wIy IL`s dIIhcuIL
Lo use TRS us u perIormunce-meusuremenL LooI:
exLruordInury munugers muy deIIver onIy
ordInury TRS becuuse IL Is exLremeIy dIIhcuIL
Lo keep beuLIng ever-IIgIer sIure prIce
expecLuLIons. ConverseIy, II murkeLs Iuve Iow
perIormunce expecLuLIons Ior u compuny,
ILs munugers mIgIL hnd IL eusy Lo eurn u IIgI TRS,
uL IeusL Ior u sIorL LIme, by ruIsIng murkeL
expecLuLIons up Lo LIe IeveI Ior ILs peers.
nsLeud, compensuLIon progrums sIouId Iocus
on growLI, reLurns on cupILuI, und TRS
perIormunce, reIuLIve Lo peers (un ImporLunL
poInL) ruLIer LIun un ubsoIuLe LurgeL. TIuL
upproucI wouId eIImInuLe mucI oI LIe TRS LIuL Is
noL drIven by compuny-specIhc perIormunce.
SucI u soIuLIon sounds sImpIe buL, unLII recenLIy,
wus mude ImprucLIcuI by uccounLIng ruIes
und, In some counLrIes, Lux poIIcIes. PrIor Lo zooq,
Ior exumpIe, compunIes usIng US generuIIy
uccepLed uccounLIng prIncIpIes (GAAP) couId
uvoId IIsLIng sLock opLIons us un expense
1q McKInsey on Inunce Anthology 2011
on LIeIr Income sLuLemenLs provIded LIey meL
cerLuIn crILerIu, one oI wIIcI wus LIuL LIe exercIse
prIce Iud Lo be hxed. To uvoId LukIng un
eurnIngs IIL, compunIes uvoIded compensuLIon
sysLems bused on reIuLIve perIormunce,
wIIcI wouId Iuve requIred more exIbIIILy In
sLrucLurIng opLIons.
SInce zooq, u Iew compunIes Iuve moved Lo
sIure-bused compensuLIon sysLems LIed
Lo reIuLIve perIormunce. GE, Ior one, grunLed ILs
CEO u perIormunce uwurd bused on LIe
compuny`s TRS reIuLIve Lo LIe TRS oI LIe S&P
oo Index. We Iope LIuL more compunIes
wIII IoIIow LIIs dIrecLIon.
AppIyIng LIe Iour cornersLones oI hnunce
someLImes meuns goIng uguInsL LIe crowd. L
meuns uccepLIng LIuL LIere ure no Iree
IuncIes. L meuns reIyIng on duLu, LIougILIuI
unuIysIs, und u deep undersLundIng oI LIe
compeLILIve dynumIcs oI un IndusLry. None oI LIIs
Is eusy, buL LIe puyoII-LIe creuLIon oI vuIue
Ior u compuny`s sLukeIoIders und Ior socIeLy uL
Iurge-Is enormous.
1
J. MuIIerIn und Audru Boone, CompurIng ucquIsILIons und
dIvesLILures, 1ourncl oj Corporcte Iincnce, zooo, VoIume 6,
Number z, pp. 11;-q.
z
PuLrIck CusuLIs, Jumes MIIes, und J. WooIrIdge, Some new
evIdence LIuL spInoIIs creuLe vuIue, 1ourncl oj Applied
Corporcte Iincnce, 1qqq, VoIume ;, Number z, pp. 1oo-1o;.

See RoberL S. McNIsI und MIcIueI W. PuIys, Does scuIe
muLLer Lo cupILuI murkeLs? McKinse on Iincnce, Number 16,
Summer zoo, pp. z1-z.
q
SImIIurIy, II u compuny seIIs u unIL wILI u IIgI PJE reIuLIve
Lo ILs oLIer unILs, LIe eurnIngs per sIure (EPS) wIII Increuse buL
LIe PJE wIII decIIne proporLIonuLeIy.

TIe expecLed vuIue Is $;.q bIIIIon, wIIcI represenLs LIe sum oI
8o percenL oI $1 bIIIIon ($z8 bIIIIon, LIe expecLed vuIue
oI LIe pIunL, Iess LIe $1 bIIIIon InvesLmenL) und zo percenL
oI -$1 bIIIIon ($o, Iess LIe $1 bIIIIon InvesLmenL).
1
Excerpt from
Stock optionsthe right debate
Number 4,
Summer 2002
Neil W. C. Harper
A valuable debate for shareholders would be to examine the structure of stock options. Consider that
in recent years stock options have reached 50 to 60 percent of the total compensation of CEOs of large
US corporations. Most are issued with an exercise price at or above current market price, and as
the share price rises, the management team earns additional compensation. At rst glance, this seems
a logical way to align the interests of managers and shareholders, since in theory option-holding
executives would have a common interest with shareholders in seeing stock price appreciation. But
the theory can be thwarted in two important ways.
Not all stock price appreciation is equal. When a stock rises as a result of good strategic or operational
decision making by the management team, additional compensation through option value gains is
well deserved. However, stock options can also gain signicantly in value as a result of several additional
factorsthe general economic environment, interest rates, leverage, and business risk. All else being
equal, as the economic environment improves, as interest rates fall, as leverage rises, and as business
risk rises, the value of an executives options will also rise. However, many such gains are not the
result of managements actions, and increasing leverage or business risk is not necessarily in the best
interests of shareholders.
There are limits to downside risk. Even if option contracts were structured to more closely tie executive
reward to value-creating actions, the current structure of most company options plans places less
risk on managers in the case of poor performance than on shareholders. If unsuccessful strategic and
operational decision making leads to a stock price decline, shareholders continue to lose until the
decline bottoms out. Managers, though, have a limit to their downside exposure through option holdings;
once the stock price falls signicantly below option exercise price, their options are essentially
worthless (unless there remains a signicant time period before exercise date). Their downside to this
extent is limited. Furthermore, they can frequently expect to be issued repriced options at the new
lower stock price, further limiting their overall downside. Correcting for interest rate movements, economic
cycles, and other environmental issues is not as straightforward as it appears.
Many have pondered the issue for decades without coming up with easy solutions, precisely because
fully aligning incentives via a compensation plan is so complex. Executive option contracts could
be structured to adjust for economic conditions as reected, for example, by overall market or sector
performance, interest rates, leverage, and risk. Some have even proposed so-called outperformance
options, in which value creation is linked to an executives ability to generate returns above their
peers. These approaches can improve alignment between shareholder and manager interests, but only
to some extent.
COs InvurIubIy usk LIemseIves Lwo reIuLed
quesLIons wIen munugIng LIeIr buIunce sIeeLs:
sIouId LIey reLurn excess cusI Lo sIure-
IoIders or InvesL IL, und sIouId LIey hnunce new
projecLs by uddIng debL or druwIng on equILy?
ndeed, ucIIevIng LIe rIgIL cupILuI sLrucLure-
LIe composILIon oI debL und equILy LIuL
u compuny uses Lo hnunce ILs operuLIons und
sLruLegIc InvesLmenLs-Ius Iong vexed
Marc H. Goedhart, Tim Koller, and Werner Rehm
Making capital structure
support strategy
ucudemIcs und prucLILIoners uIIke.
1
Some Iocus
on LIe LIeoreLIcuI Lux benehL oI debL, sInce
InLeresL expenses ure oILen Lux deducLIbIe. More
recenLIy, execuLIves oI pubIIc compunIes Iuve
wondered II LIey, IIke some prIvuLe-equILy hrms,
sIouId use debL Lo Increuse LIeIr reLurns.
MeunwIIIe, muny compunIes ure IoIdIng sub-
sLunLIuI umounLs oI cusI und deIIberuLIng
on wIuL Lo do wILI IL.
A companys ratio of debt to equity should support its business strategy, not help it
pursue tax breaks. Heres how to get the balance right.
Number 18,
Winter 2006
1;
TIe Issue Is more nuunced LIun some pundILs
suggesL. n LIeory, IL muy be possIbIe Lo reduce
cupILuI sLrucLure Lo u hnuncIuI cuIcuIuLIon-
Lo geL LIe mosL Lux benehLs by IuvorIng debL, Ior
exumpIe, or Lo boosL eurnIngs per sIure
superhcIuIIy LIrougI sIure buybucks. TIe resuIL,
Iowever, muy noL be consIsLenL wILI u com-
puny`s busIness sLruLegy, purLIcuIurIy II execuLIves
udd Loo mucI debL.
z
n LIe 1qqos, Ior exumpIe,
muny LeIecommunIcuLIons compunIes hnunced
LIe ucquIsILIon oI LIIrd-generuLIon (G)
IIcenses enLIreIy wILI debL, InsLeud oI wILI equILy
or some combInuLIon oI debL und equILy, und
LIey Iound LIeIr sLruLegIc opLIons consLruIned
wIen LIe murkeL IeII.
ndeed, LIe poLenLIuI Iurm Lo u compuny`s
operuLIons und busIness sLruLegy Irom u bud
cupILuI sLrucLure Is greuLer LIun LIe poLenLIuI
benehLs Irom Lux und hnuncIuI Ieveruge. nsLeud
oI reIyIng on cupILuI sLrucLure Lo creuLe vuIue
on ILs own, compunIes sIouId Lry Lo muke IL work
Iund In Iund wILI LIeIr busIness sLruLegy, by
sLrIkIng u buIunce beLween LIe dIscIpIIne und Lux
suvIngs LIuL debL cun deIIver und LIe greuLer
exIbIIILy oI equILy. n LIe end, mosL IndusLrIuI
compunIes cun creuLe more vuIue by mukIng
LIeIr operuLIons more eIhcIenL LIun LIey cun wILI
cIever hnuncIng.
Capital structures long-term impact

CupILuI sLrucLure uIIecLs u compuny`s overuII vuIue
LIrougI ILs ImpucL on operuLIng cusI ows
und LIe cosL oI cupILuI. SInce LIe InLeresL expense
on debL Is Lux deducLIbIe In mosL counLrIes,
u compuny cun reduce ILs uILer-Lux cosL oI cupILuI
Exhibit 1 Tax benets of debt are often negligible.
McKinsey on <practice> <issue number>
<Article slug>
Exhibit < > of < >
1
EurnIngs beIore InLeresL, Luxes, und umorLIzuLIon.
z
CompunIes wILI -A Lo BBB ruLIng.
Ratio of enterprise value to EBITA
1
10
5
0
15
20
0 2 6 8 10
Interest coverage ratio (EBITA
1
annual interest expense)
Investment-grade companies
2
4
6% growth in
revenues
3% growth in
revenues
by IncreusIng debL reIuLIve Lo equILy, LIereby
dIrecLIy IncreusIng ILs InLrInsIc vuIue. WIIIe
hnunce LexLbooks oILen sIow Iow LIe Lux benehLs
oI debL Iuve u wIde-rungIng ImpucL on vuIue,
LIey oILen use Loo Iow u dIscounL ruLe Ior LIose
benehLs. n prucLIce, LIe ImpucL Is mucI Iess
sIgnIhcunL Ior Iurge InvesLmenL-grude compunIes
(wIIcI Iuve u smuII reIevunL runge oI cupILuI
sLrucLures). OveruII, LIe vuIue oI Lux benehLs Is
quILe smuII over LIe reIevunL IeveIs oI InLeresL
coveruge (ExIIbIL 1). or u LypIcuI InvesLmenL-
grude compuny, LIe cIunge In vuIue over LIe runge
oI InLeresL coveruge Is Iess LIun percenL.
TIe eIIecL oI debL on cusI ow Is Iess dIrecL buL
more sIgnIhcunL. CurryIng some debL Increuses u
compuny`s InLrInsIc vuIue becuuse debL Imposes
dIscIpIIne; u compuny musL muke reguIur InLeresL
und prIncIpuI puymenLs, so IL Is Iess IIkeIy Lo
pursue IrIvoIous InvesLmenLs or ucquIsILIons LIuL
don`L creuLe vuIue. HuvIng Loo mucI debL,
Iowever, cun reduce u compuny`s InLrInsIc vuIue
by IImILIng ILs exIbIIILy Lo muke vuIue-creuLIng
InvesLmenLs oI uII kInds, IncIudIng cupILuI
expendILures, ucquIsILIons, und, jusL us ImporLunL,
InvesLmenLs In InLungIbIes sucI us busIness
buIIdIng, R&D, und suIes und murkeLIng.
MunugIng cupILuI sLrucLure LIus becomes u
buIuncIng ucL. n our vIew, LIe Lrude-oII
u compuny mukes beLween hnuncIuI exIbIIILy
und hscuI dIscIpIIne Is LIe mosL ImporLunL
consIderuLIon In deLermInIng ILs cupILuI sLrucLure
und Iur ouLweIgIs uny Lux benehLs, wIIcI ure
negIIgIbIe Ior mosL Iurge compunIes unIess LIey
Iuve exLremeIy Iow debL.
q
MuLure compunIes wILI sLubIe und predIcLubIe
cusI ows us weII us IImILed InvesLmenL
opporLunILIes sIouId IncIude more debL In LIeIr
cupILuI sLrucLure, sInce LIe dIscIpIIne LIuL
debL oILen brIngs ouLweIgIs LIe need Ior
exIbIIILy. CompunIes LIuL Iuce IIgI uncerLuInLy
becuuse oI vIgorous growLI or LIe cycIIcuI
nuLure oI LIeIr IndusLrIes sIouId curry Iess debL,
so LIuL LIey Iuve enougI exIbIIILy Lo Luke
udvunLuge oI InvesLmenL opporLunILIes or Lo deuI
wILI neguLIve evenLs.
NoL LIuL u compuny`s underIyIng cupILuI sLrucLure
never creuLes InLrInsIc vuIue; someLImes IL does.
WIen execuLIves Iuve good reuson Lo beIIeve LIuL
u compuny`s sIures ure under- or overvuIued,
Ior exumpIe, LIey mIgIL cIunge LIe compuny`s
underIyIng cupILuI sLrucLure Lo creuLe vuIue-
eILIer by buyIng buck undervuIued sIures or by
usIng overvuIued sIures InsLeud oI cusI Lo
puy Ior ucquIsILIons. OLIer exumpIes cun be Iound
In cycIIcuI IndusLrIes, sucI us commodILy
cIemIcuIs, wIere InvesLmenL spendIng LypIcuIIy
IoIIows prohLs. CompunIes InvesL In new
munuIucLurIng cupucILy wIen LIeIr prohLs ure
IIgI und LIey Iuve cusI.
UnIorLunuLeIy,
LIe cIemIcuI IndusLry`s IIsLorIcuI puLLern Ius
been LIuL uII pIuyers InvesL uL LIe sume
LIme, wIIcI Ieuds Lo excess cupucILy wIen uII oI
TIe Lrude-oII u compuny mukes beLween
hnuncIuI exIbIIILy und hscuI dIscIpIIne Is LIe mosL
ImporLunL consIderuLIon In deLermInIng
ILs cupILuI sLrucLure.
1q
LIe pIunLs come on IIne sImuILuneousIy. Over
LIe cycIe, u compuny couId eurn subsLunLIuIIy
more LIun ILs compeLILors II IL deveIoped
u counLercycIIcuI sLruLegIc cupILuI sLrucLure und
muInLuIned Iess debL LIun mIgIL oLIerwIse
be opLImuI. DurIng bud LImes, IL wouId LIen Iuve
LIe ubIIILy Lo muke InvesLmenLs wIen ILs
compeLILors couIdn`L.
A practical framework for developing
capital structure
A compuny cun`L deveIop ILs cupILuI sLrucLure
wILIouL undersLundIng ILs IuLure revenues und
InvesLmenL requIremenLs. Once LIose pre-
requIsILes ure In pIuce, IL cun begIn Lo consIder
cIungIng ILs cupILuI sLrucLure In wuys LIuL supporL
LIe brouder sLruLegy. A sysLemuLIc upproucI cun
puII LogeLIer sLeps LIuL muny compunIes uIreudy
Luke, uIong wILI some more noveI ones.
TIe cuse oI one gIobuI consumer producL busIness
Is IIIusLruLIve. GrowLI uL LIIs compuny-weÌI
cuII IL Consumerco-Ius been modesL. ExcIudIng
LIe eIIecL oI ucquIsILIons und currency move-
menLs, ILs revenues Iuve grown by ubouL percenL
u yeur over LIe pusL hve yeurs. AcquIsILIons
udded u IurLIer ; percenL unnuuIIy, und LIe operuL-
Ing prohL murgIn Ius been sLubIe uL uround
1q percenL. TrudILIonuIIy, Consumerco IeId IILLIe
debL: unLII zoo1, ILs debL Lo enLerprIse vuIue
wus Iess LIun 1o percenL. n recenL yeurs, Iowever,
LIe compuny Increused ILs debL IeveIs Lo
uround z percenL oI ILs LoLuI enLerprIse vuIue In
order Lo puy Ior ucquIsILIons. Once LIey were
compIeLe, munugemenL Iud Lo decIde wIeLIer Lo
use LIe compuny`s cusI ows, over LIe nexL
severuI yeurs, Lo resLore ILs prevIous Iow IeveIs
oI debL or Lo reLurn cusI Lo ILs sIureIoIders
und IoId debL sLubIe uL LIe IIgIer IeveI. TIe com-
puny`s decIsIon-mukIng process IncIuded
LIe IoIIowIng sLeps.
1. Estimate the financing deficit or surplus. IrsL,
Consumerco`s execuLIves IorecusL LIe hnuncIng
dehcIL or surpIus Irom ILs operuLIons und
sLruLegIc InvesLmenLs over LIe course oI LIe
IndusLry`s busIness cycIe-In LIIs cuse,
LIree Lo hve yeurs.

zo McKInsey on Inunce Anthology 2011
n LIe buse cuse IorecusLs, Consumerco`s execu-
LIves projecLed orgunIc revenue growLI oI
percenL uL prohL murgIns oI uround 1q percenL.
TIey dId noL pIun Ior uny ucquIsILIons over
LIe nexL Iour yeurs, sInce no Iurge LurgeL compu-
nIes remuIn In Consumerco`s reIevunL producL
segmenLs. As ExIIbIL z sIows, LIe compuny`s
cusI ow uILer dIvIdends und InLeresL
wIII be posILIve In zoo6 und LIen grow sLeudIIy
unLII zoo8. You cun see on LIe rIgIL-Iund
sIde oI ExIIbIL z LIuL EBTA (eurnIngs beIore
InLeresL, Luxes, und umorLIzuLIon) InLeresL
Exhibit 2
Disguised global consumer product company
Consumerco started by forecasting its nancing debt or surplus.
McKinsey on Finance
Capital structure
Exhibit 2 of 3
1.4
0.9
0.4
0.1
0.6
1.1
1.6
Interest coverage ratio (EBITA
1
annual
interest expense)
Free cash ow (FCF),
billion
2000 2002 2004 2006
2
2008
2
2000 2002 2004 2006
2
2008
2
12
11
10
9
8
7
6
5
4
Projected 2008 EBITA,
1
billion
Target interest coverage ratio
Target 2008 interest expense, billion
2008 debt at target coverage, billion
Extra cushion, billion
Base case
scenario
3
Downside
scenario
3
1.9
4.5x
0.4
8.3
0.5
1.4
4.5x
0.3
6.2
Interest rate on debt 5% 5%
0.5
Target 2008 debt level, billion 7.8 5.7
FCF
FCF after dividends,
interest
1
EurnIngs beIore InLeresL, Luxes, und umorLIzuLIon.
z
ProjecLed.
Assumes orgunIc revenue growLI oI % uL proIIL murgIns oI uround % und no ucquIsILIons over nexL yeurs.
Source: AnuIysLs` reporLs; SLundurd & Poor`s; McKInsey unuIysIs

z1
coveruge wIII quIckIy reLurn Lo IIsLorIcuIIy
IIgI IeveIs-even exceedIng Len LImes
InLeresL expenses.
2. Set a target credit rating. NexL, Consumerco
seL u LurgeL credIL ruLIng und esLImuLed
LIe correspondIng cupILuI sLrucLure ruLIos.
Consumerco`s operuLIng perIormunce Is
normuIIy sLubIe. ExecuLIves LurgeLed LIe IIgI
end oI u BBB credIL ruLIng becuuse LIe
compuny, us un exporLer, Is perIodIcuIIy
exposed Lo sIgnIhcunL currency rIsk (oLIerwIse
LIey mIgIL Iuve gone IurLIer, Lo u Iow BBB
ruLIng). TIey LIen LrunsIuLed LIe LurgeL credIL
ruLIng Lo u LurgeL InLeresL coveruge ruLIo
(EBTA Lo InLeresL expense) oI q.. EmpIrIcuI
unuIysIs sIows LIuL credIL ruLIngs cun be
modeIed weII wILI LIree IucLors: IndusLry, sIze,
und InLeresL coveruge. By unuIyzIng oLIer
Iurge consumer producL compunIes, IL Is
possIbIe Lo esLImuLe LIe IIkeIy credIL ruLIng uL
dIIIerenL IeveIs oI coveruge.
3. Develop a target debt level over the business
cycle. InuIIy, execuLIves seL u LurgeL debL IeveI
oI C.; bIIIIon Ior zoo8. or LIe buse cuse
scenurIo In LIe IeIL-Iund coIumn uL LIe boLLom
IuII oI ExIIbIL z, LIey projecLed C1.q bIIIIon
oI EBTA In zoo8. TIe LurgeL coveruge ruLIo oI
q. resuILs In u debL IeveI oI C8. bIIIIon.
A hnuncIng cusIIon oI spure debL cupucILy Ior
conLIngencIes und unIoreseen evenLs
udds Co. bIIIIon, Ior u LurgeL zoo8 debL IeveI
oI C;.8 bIIIIon.

ExecuLIves LIen LesLed LIIs IorecusL uguInsL
u downsIde scenurIo, In wIIcI EBTA wouId
reucI onIy C1.q bIIIIon In zoo8. oIIowIng
LIe sume IogIc, LIey urrIved uL u LurgeL debL
IeveI oI C.; bIIIIon In order Lo muInLuIn
un InvesLmenL-grude ruLIng under LIe down-
sIde scenurIo.
n LIe exumpIe oI Consumerco, execuLIves used
u sImpIe downsIde scenurIo reIuLIve Lo LIe
buse cuse Lo udjusL Ior LIe uncerLuInLy oI IuLure
cusI ows. A more sopIIsLIcuLed upproucI
mIgIL be useIuI In some IndusLrIes sucI us com-
modILIes, wIere IuLure cusI ows couId be
modeIed usIng sLocIusLIc-sImuIuLIon LecInIques
Lo esLImuLe LIe probubIIILy oI hnuncIuI dIsLress
uL vurIous debL IeveIs.
TIe hnuI sLep In LIIs upproucI Is Lo deLermIne
Iow LIe compuny sIouId move Lo LIe
LurgeL cupILuI sLrucLure. TIIs LrunsILIon InvoIves
decIdIng on LIe upproprIuLe mIx oI new
borrowIng, debL repuymenL, dIvIdends, sIure
repurcIuses, und sIure Issuunces over
LIe ensuIng yeurs.
A compuny wILI u surpIus oI Iunds, sucI us
Consumerco, wouId reLurn cusI Lo sIureIoIders
eILIer us dIvIdends or sIure repurcIuses.
Even In LIe downsIde scenurIo, Consumerco wIII
generuLe C1.; bIIIIon oI cusI ubove ILs LurgeL
EBTA-Lo-InLeresL-expense ruLIo.
or one upproucI Lo dIsLrIbuLIng LIose Iunds Lo
sIureIoIders, consIder LIe dIvIdend poIIcy oI
Consumerco. GIven ILs modesL growLI und sLrong
cusI ow, ILs dIvIdend puyouL ruLIo Is currenLIy
Iow. TIe compuny couId eusIIy ruIse LIuL ruLIo Lo
q percenL oI eurnIngs, Irom o percenL.
ncreusIng LIe reguIur dIvIdend sends LIe sLock
murkeL u sLrong sIgnuI LIuL Consumerco
LIInks IL cun puy LIe IIgIer dIvIdend comIorLubIy.
TIe remuInIng C1. bIIIIon wouId LIen
LypIcuIIy be reLurned Lo sIureIoIders LIrougI
sIure repurcIuses over LIe nexL severuI
yeurs. Becuuse oI IIquIdILy Issues In LIe sLock
murkeL, Consumerco mIgIL be ubIe Lo
repurcIuse onIy ubouL C1 bIIIIon, buL IL couId
consIder IssuIng u one-LIme dIvIdend Ior
LIe remuInder.
zz McKInsey on Inunce Anthology 2011
TIe sIgnuIIng eIIecL
6
Is probubIy LIe mosL
ImporLunL consIderuLIon In decIdIng beLween
dIvIdends und sIure repurcIuses. CompunIes
sIouId uIso consIder dIIIerences In LIe LuxuLIon
oI dIvIdends und sIure buybucks, us weII us
LIe IucL LIuL sIureIoIders Iuve LIe opLIon oI noL
purLIcIpuLIng In u repurcIuse, sInce LIe cusI
LIey receIve musL be reInvesLed.
WIIIe LIese Lux und sIgnuIIng eIIecLs ure reuI, LIey
muInIy uIIecL LucLIcuI cIoIces ubouL Iow Lo
move Lowurd u dehned Iong-Lerm LurgeL cupILuI
sLrucLure, wIIcI sIouId uILImuLeIy supporL
u compuny`s busIness sLruLegIes by buIuncIng LIe
exIbIIILy oI Iower debL wILI LIe dIscIpIIne
(und Lux suvIngs) oI IIgIer debL.
1
runco ModIgIIunI und MerLon MIIIer, TIe cosL oI cupILuI,
corporuLe hnunce, und LIe LIeory oI InvesLmenL,
Americcn Economic Retieu, June 1q8, VoIume q8, Number ,
pp. z61-q;.
z
TIere Is uIso some poLenLIuI Ior Loo IILLIe debL, LIougI LIe
consequences uren`L us dIre.

RIcIurd Dobbs und Werner ReIm, TIe vuIue oI sIure
buybucks, McKinse on Iincnce, Number 16, Summer zoo,
pp. 16-zo.
q
AL exLremeIy Iow IeveIs oI debL, compunIes cun creuLe greuLer
vuIue by IncreusIng debL Lo more LypIcuI IeveIs.

TIomus AuguL, ErIc BurLeIs, und IorIun Budde, MuILIpIe
cIoIce Ior LIe cIemIcuI IndusLry, mckInseyquurLerIy.com,
AugusL zoo.
6
TIe murkeL`s percepLIon LIuL u buybuck sIows Iow
conhdenL munugemenL Is LIuL LIe compuny`s sIures ure
undervuIued, Ior exumpIe, or LIuL IL doesn`L need
LIe cusI Lo cover IuLure commILmenLs, sucI us InLeresL
puymenLs und cupILuI expendILures.
z
The share price increase from a buyback in theory results purely from the tax benets of a companys
new capital structure rather than from any underlying operational improvement. Take, for example, a
company with 200 million in excess cash, a 3 percent interest rate, a 30 percent tax rate, and a discount
rate at the cost of equity (10 percent). Assuming that the amount of cash doesnt grow and that it is
held in perpetuity, the company incurs a value penalty of 18 million from additional taxes on the income
of its cash reserves. A buyback removes this tax penalty and so results in a 1.4 percent rise in the
share price. In this case, repurchasing more than 13 percent of the shares results in an increase of less
than 2 percent. A similar boost occurs when a company takes on more debt to buy back shares.
Yet while such increases in earnings per share help managers hit EPS-based compensation targets,
boosting EPS in this way doesnt signify an increase in underlying performance or value. Moreover, a
companys xation on buybacks might come at the cost of investments in its long-term health.
Share buyback analysis (including tax), hypothetical example
Analyzing the value of a share buyback (including tax)
McKinsey on Finance 16
Share buyback
Exhibit 2 of 4
1
PosLLux EBT - operuLIng cupILuI.
Balance sheet
Cash, million
Before After
Operating assets, million
Total assets, million
Equity, million
200 0
580 580
780 580
780 580
Value
Value of operations, million
Cash, million
Tax penalty of cash, million
1,300 1,300
200 0
18 0
Total equity value, million 1,482 1,300
Income statement
Before After
Interest, million
Earnings before taxes,
million
Tax, million
134 134
6 0
140 134
42 40
Net income, million 98 94
Shares outstanding, million 100 86.5
Share price,
Earnings per share (EPS),
P/E
14.80 15.00
0.98 1.09
15.1 13.8
Return on invested
capital (ROIC)
1
16% 16%
Earnings before interest,
taxes (EBIT), million
Excerpt from
The value of share buybacks
Number 16,
Summer 2005
Richard Dobbs and Werner Rehm
zq McKInsey on Inunce Anthology 2011
In most cases, simple math leaves successful companies with little choice: if they have moderate growth
and high returns on capital, its functionally impossible for them to reinvest every dollar they earn.
Consider this example: a company earning $1 billion a year in after-tax prots, with a 25 percent return
on invested capital (ROIC) and projected revenue growth of 5 percent a year, needs to invest about
$200 million annually to continue growing at the same rate. That leaves $800 million of additional cash
ow available for still more investment or returning to shareholders. Yet nding $800 million of
new value-creating investment opportunities every year is no simple taskin any sector of the economy.
Furthermore, at a 25 percent ROIC, the company would need to increase its revenues by 25 percent
a year to absorb all of its cash ow. It has no choice but to return a substantial amount of cash
to shareholders.
Does it matter whether distributions take the form of dividends or share repurchases? Empirically,
the answer is no. Whichever method is used, earnings multiples are essentially the same for companies
when compared with others that have similar total payouts (Exhibit A). Total returns to shareholders
(TRS) are also the same regardless of the mix of dividends and share repurchases (Exhibit B). These
results should not be surprising. What drives value is the cash ow generated by operations. That
cash ow is in turn driven by the combination of growth and returns on capitalnot the mix of how excess
cash is paid out.
So how should a company decide between repurchases and dividends? That depends on how condent
management is of future cash owsand how much exibility it needs. Share repurchases offer
companies more exibility to hold onto cash for unexpected investment opportunities or shifts in a volatile
economic environment. In contrast, companies that pay dividends enjoy less exibility because
investors have been conditioned to expect cuts in them only in the most dire circumstances. Thus,
managers should employ dividends only when they are certain they can continue to do so. Even
increasing a dividend sends signals to investors that managers are condent that they will be able to
continue paying the new, higher dividend level.
Share repurchases also signal condence but offer more exibility because they dont create
a tacit commitment to additional purchases in future years. As you would expect, changing the proportion
of dividends to share buybacks has no impact on a companys valuation multiples or TRS, regardless
of payout level.
Excerpt from
Paying back your shareholders
Number 39,
Spring 2011
Bin Jiang and Tim Koller
z
Earnings multiples are not affected by the payout mix.
MoF 2011
Payback
Exhibit 3 of 4
Payout mix: average share of dividends
in total payouts, 200207, %
1
nsuIIIcIenL duLu Ior puyouL IeveIs oI q6-1o% uL puyouL mIx oI >6 Lo 1oo% dIvIdends und Ior puyouL IeveIs oI
>1o% Ior uII puyouL mIxes.
z
or z;q nonhnuncIuI compunIes LIuL were In LIe S&P oo uL LIe end oI zooq, were conLInuousIy In operuLIon sInce
1qqq, und puId dIvIdends or repurcIused sIures. EBTA = eurnIngs beIore InLeresL, Luxes, und umorLIzuLIon.
Ratio of median enterprise value to EBITA multiple,
year-end 2007
2
065% 6695% 96130%
0 5 10 15 20 25
0 (100% share repurchases)
>20 to 40%
>40 to 65%
>0 to 20%
>65 to 100%
Level of total payouts: average annual payouts (dividends +
share repurchases) as % of total net income,
1
200207
0 (100% share repurchases)
>20 to 40%
>40 to 65%
>0 to 20%
>65 to 100%
Returns to shareholders are unrelated to the payout mix.
MoF 2011
Payback
Exhibit 4 of 4
Level of total payouts: average annual payouts (dividends +
share repurchases) as % of total net income,
1
200207
1
nsuIIIcIenL duLu Ior puyouL IeveI oI 66-q% uL puyouL mIx oI zero dIvIdends (1oo% sIure repurcIuse).
z
or zq nonhnuncIuI compunIes LIuL were In LIe S&P oo uL LIe end oI zooq, were conLInuousIy In operuLIon sInce
1qqq, und puId dIvIdends or repurcIused sIures. CAGR = compound unnuuI growLI ruLe.
Median total returns to shareholders (TRS),

CAGR, 200207,
2
%
065% 6695% 96130% >130%
0 5 5 10 15 20 25
Payout mix: average share of
dividends in total payouts, 200207, %
Exhibit A
Exhibit B
z6
How to grow
z;
TIe IurgesL, mosL successIuI compunIes wouId
seem Lo be IdeuIIy posILIoned Lo creuLe vuIue Ior
LIeIr sIureIoIders LIrougI growLI. AILer uII,
LIey commund IeudIng murkeL und cIunneI posI-
LIons In muILIpIe IndusLrIes und geogrupIIes;
LIey empIoy deep bencIes oI Lop munugemenL
LuIenL uLIIIzIng proven munugemenL processes;
und LIey oILen Iuve IeuILIy buIunce sIeeLs Lo Iund
LIe InvesLmenLs mosL IIkeIy Lo produce growLI.
YeL uILer yeurs oI ImpressIve Lop- und boLLom-IIne
growLI LIuL propeIIed LIem Lo LIe Lop oI LIeIr
murkeLs, LIese compunIes evenLuuIIy hnd LIey cun
no Ionger susLuIn LIeIr puce. ndeed, over LIe
pusL qo yeurs NorLI AmerIcu`s IurgesL compunIes-
LIose, suy, wILI more LIun ubouL $z bIIIIon In
murkeL cupILuIIzuLIon-Iuve consIsLenLIy under-
perIormed LIe S&P oo,
1
wILI onIy Lwo
sIorL-IIved excepLIons.
27 Why the biggest and best struggle to grow (Winter 2004)
35 Running a winning M&A shop (Spring 2008)
Excerpts from
32 How to choose between growth and ROIC (Autumn 2007)
34 All P/Es are not created equal (Spring 2004)
36 M&A teams: When small is beautiful (Winter 2010)
39 Managing your integration manager (Summer 2003)
41 The five types of successful acquisitions (Summer 2010)
Nicholas F. Lawler, Robert S. McNish, and Jean-Hugues J. Monier
Why the biggest and best
struggle to grow
The largest companies eventually find size itself an impediment to creating new value.
They must recognize that not all forms of growth are equal.
Number 10,
Winter 2004
z8 McKInsey on Inunce Anthology 2011
TuIk Lo senIor execuLIves uL LIese orgunIzuLIons,
Iowever, und IL Is dIIhcuIL Lo hnd muny wIIIIng Lo
buck oII Irom umbILIous growLI progrums LIuL
ure LypIcuIIy InLended Lo doubIe LIeIr compuny`s
sIure prIce over LIree Lo hve yeurs. YeL In uII
buL LIe ruresL oI cuses, sucI uggressIve LurgeLs ure
unreusonubIe us u wuy Lo moLIvuLe growLI
progrums LIuL creuLe vuIue Ior sIureIoIders-und
muy even be rIsky, LempLIng execuLIves Lo scuIe
buck vuIue creuLIng orgunIc growLI InILIuLIves LIuL
muy be smuII or Iong-Lerm proposILIons, some-
LImes In Iuvor oI Iurger, neurer-Lerm, buL Iess
reIIubIe ucquIsILIons.
n our experIence, execuLIves wouId be beLLer
oII recognIzIng LIe IImILuLIons oI sIze und
revIsILIng LIe IundumenLuIs oI Iow growLI creuLes
sIureIoIder vuIue. By undersLundIng LIuL
noL uII Lypes oI growLI ure equuI wIen IL comes Lo
creuLIng vuIue Ior sIureIoIders, even LIe
IurgesL compunIes cun uvoId buIkIng up on LIe
busIness equIvuIenL oI empLy cuIorIes und
InsLeud nourIsI LIemseIves on LIe Lypes oI growLI
mosL IIkeIy Lo creuLe sIureIoIder vuIue.
What holds them back?
AL even weII-run bIg compunIes, growLI sIows or
sLops-und Ior compIex reusons. ronIcuIIy,
Ior some IL`s LIe nuLuruI resuIL oI pusL success:
LIeIr porLIoIIos ure weIgIed down by Iurge,
IeudIng busInesses LIuL muy Iuve once deIIvered
consIderubIe growLI, buL LIuL Iuve sInce
muLured wILI LIeIr IndusLrIes und now Iuve Iewer
nuLuruI uvenues Ior growLI. AL oLIers, mun-
ugemenL LuIenL und processes ure more grooved
Lo muInLuIn, noL buIId, busInesses; und LIeIr
equILy- und cusI-rIcI buIunce sIeeLs dumpen
LIe ImpucL growLI Ius on sIureIoIder vuIue.
or uII oI LIem, LIeIr mosL IormIdubIe growLI
cIuIIenge muy be LIeIr sIeer sIze: IL Lukes
Iurge IncremenLs oI vuIue creuLIon Lo Iuve u
meunIngIuI ImpucL on LIeIr sIure prIce.
TIe oLIer crucIuI IucLor Is Iow munugemenL
responds wIen orgunIc growLI sLurLs Lo IuILer.
TIIs Is oILen u IuncLIon oI compensuLIon
LIuL LIes bonuses Lo boLLom-IIne growLI. n uny
cuse, munugemenL Is oILen LempLed Lo
respond us II LIe sIowIng orgunIc growLI were
mereIy Lemporury, rejecLIng uny downwurd
udjusLmenL Lo neur-Lerm boLLom-IIne growLI.
TIuL muy work In LIe sIorL run, buL us IndIvIduuI
busInesses sLrIp ouL conLroIIubIe cosLs, LIey
soon begIn Lo cuL InLo LIe muscIe und bone beIInd
wIuLever vuIue-rIcI orgunIc growLI poLenLIuI
remuIns-suIes und murkeLIng, new-producL
deveIopmenL, new busIness deveIopmenL, R&D.
AL one IndusLrIuI compuny we ure IumIIIur
wILI, munugemenL proudIy poInLs Lo eucI suvIngs
InILIuLIve LIuL uIIows LIem Lo meeL quurLerIy
eurnIngs IorecusLs.
BuL LIe sIorL-Lerm Iocus on meeLIng
unreuIIsLIcuIIy IIgI growLI expecLuLIons cun
undermIne Iong-Lerm growLI. UILImuLeIy,
LIe scrumbIe Lo meeL quurLerIy numbers wIII
conLInue Lo InLensIIy us cosL cuLLIng IurLIer
deceIeruLes orgunIc growLI. I LIe sILuuLIon geLs
more desperuLe, munugemenL muy Lurn Lo
ucquIsILIons Lo keep boLLom-IIne growLI goIng.
BuL ucquIsILIons, on uveruge, creuLe reIuLIveIy
IILLIe vuIue compured Lo LIe InvesLmenL requIred,
wIIIe uddIng enormous InLegruLIon cIuIIenges
und porLIoIIo compIexILy InLo LIe mIx. SLruggIIng
under LIe workIoud, munugemenL cun Iose
Iocus on operuLIons. n LIIs downwurd spIruI
munugemenL cIuses growLI In wuys LIuL
creuLe Iess und Iess vuIue-und In LIe end wInds
up eIIecLIveIy LrudIng vuIue Ior growLI.
Some compunIes seem Lo Iuve recognIzed LIe
dunger In consLunLIy sLrIvIng Lo exceed
expecLuLIons. One compuny`s recenL decIsIon
Lo vesL IuII oI ILs CEO`s sLock uwurd Ior
zq How to grow
sImpIy meeLIng (ruLIer LIun IundIIy beuLIng)
LIe hve-yeur sIure prIce upprecIuLIon oI LIe S&P
oo muy be one sucI bow Lo good reuson.
ronIcuIIy, reIIevIng LIe CEO oI LIe pressure Lo
subsLunLIuIIy ouLperIorm LIe murkeL muy
Iuve gIven IIm LIe Ireedom Ie needs Lo Iocus on
Ionger-Lerm InvesLmenLs In vuIue-creuLIng
orgunIc growLI.
All growth is not created equal
TIe rIgIL wuy Ior Iurge compunIes Lo Iocus on
growLI, we beIIeve, Is Lo dIIIerenLIuLe umong
enLIre cIusses oI growLI on LIe busIs oI wIuL we
cuII LIeIr vuIue creuLIon InLensILy.
z
TIe vuIue
creuLIon InLensILy oI u doIIur oI Lop-IIne growLI
dIrecLIy depends on Iow mucI InvesLed
cupILuI Is requIred Lo IueI LIuL growLI-LIe more
InvesLed cupILuI, LIe Iower LIe vuIue creuLIon
InLensILy. SorLIng growLI InILIuLIves LIIs wuy
requIres undersLundIng LIe LIme Irume In
wIIcI sIureIoIder vuIue cun be creuLed-us sIorL
us u muLLer oI monLIs Ior some ucquIsILIons or
more LIun u decude Ior some R&D InvesLmenLs. L
uIso requIres ussessIng LIe sIze oI un oppor-
LunILy by LIe umounL oI vuIue IL creuLes Ior sIure-
IoIders, noL mereIy Iow mucI Lop-IIne revenues
IL udds. TIese ure LIe purLIcuIurIy crucIuI IucLors
Ior very Iurge compunIes, wIere smuIIer
InvesLmenLs cun geL IosL on LIe munugemenL
ugendu, Iong-Lerm InvesLmenLs IuII Lo
cupLure munugemenL`s ImugInuLIon, und LIe
LempLuLIon Is Lo InvesL In IIgIIy vIsIbIe neur-Lerm
projecLs wILI Iow vuIue creuLIon InLensILy.
To IIIusLruLe, we dIpped InLo M&A reseurcI
Lo see Iow mucI vuIue creuLIon even Lop-noLcI
ucquIrers cun reusonubIy expecL. We Iuve
uIso modeIed LIe vuIue creuLIon InLensILy oI Iour
dIIIerenL modes oI orgunIc growLI, by esLImuLIng
resuILs Ior proLoLypIcuI orgunIc growLI oppor-
LunILIes In LIe consumer goods IndusLry. WIIIe
LIIs specIhc IIerurcIy oI vuIue creuLIon
InLensILy muy noL IoId Ior every IndusLry, IL cun
serve us u useIuI exumpIe.
New product/market development Lends Lo
Iuve LIe IIgIesL vuIue creuLIon InLensILy.
L provIdes Lop-IIne growLI uL uLLrucLIve murgIns,
sInce compeLILIon Is IImILed und LIe murkeL
Is growIng. We esLImuLe LIuL LIe proLoLypIcuI new
producL In LIe consumer goods IndusLry
cun creuLe beLween $1.; und $z.oo In sIure-
IoIder vuIue Ior every doIIur oI new revenue.
ronIcuIIy, wIIIe LIIs Lype oI growLI creuLes LIe
mosL vuIue, IL`s purLIcuIurIy dIIhcuIL Ior
reuIIy Iurge compunIes. CreuLIng new demund
Ior u producL LIuL dId noL prevIousIy exIsL
requIres ouLsLundIng InnovuLIon cupubIIILIes-
und bIg compunIes LIuL Iuve LIgILened
LIe screws on operuLIonuI perIormunce ure
noLorIous Ior cuLLIng uwuy uL reseurcI
und deveIopmenL spendIng.
Expanding into adjacent markets LypIcuIIy
requIres IncremenLuI InvesLed cupILuI LIuL Ieuds Lo
Iower, LIougI sLIII very uLLrucLIve, vuIue creuLIon
InLensILy In LIe runge oI $o.o Lo $o.; per doIIur
oI new revenue. ucIIILuLIng udjucenL murkeL
expunsIon requIres ouLsLundIng execuLIon skIIIs
und orgunIzuLIonuI exIbIIILy.
Maintaining or growing share In u growIng murkeL
requIres subsLunLIuI IncremenLuI InvesLmenLs
Lo muke LIe producL und ILs vuIue dIsLIncLIve. BuL
us Iong us LIe murkeL Is sLIII growIng, murgIns
ure noL compeLed uwuy. As u resuIL, we esLImuLe
vuIue creuLIon In LIe runge oI $o.1o Lo $o.o
per doIIur oI new revenue.
Growing share in a stable market does noL uIwuys
creuLe vuIue. WIIIe IncremenLuI InvesLmenLs
ure noL uIwuys muLerIuI, compeLILIon Ior sIure In
order Lo muInLuIn scuIe Is LypIcuIIy InLense,
IeudIng Lo Iower murgIns. We esLImuLe LIuL
o McKInsey on Inunce Anthology 2011
Exhibit The intensity of value creation varies by mode of growth.
McKinsey on <practice> <issue number>
<Article slug>
Exhibit < > of < >
1
SLyIIzed resuILs bused on consumer producLs exumpIes.
z
Assumes u $o bIIIIon murkeL cup, uII-sLock compuny wILI $z bIIIIon oI revenue expecLed Lo grow uL GDP ruLes und consLunL
reLurn on InvesLed cupILuI (ROC).
ExumInuLIon oI 8 deuIs reveuIed sIorL-Lerm vuIue creuLIon Ior ucquIrer oI 11% Ior ;LI percenLIIe deuIs und -1% Ior oLI
percenLIIe deuIs.
Acquisition (25th to
75th percentile result)
3
0.50.20 n/m50
Category of growth
Shareholder value
created for incremental
$1 million of growth/
target acquisition size
1
Revenue growth/
acquisition size necessary
to double typical companys
share price,
2

$ billions
Competing for share
in a stable market
0.250.40 n/m25
Expanding an
existing market
0.300.75 1333
Maintaining/growing
share in a growing market
0.100.50 20100
New-product
market development
1.752.00 56
Consumer goods industry
IncreusIng sIure In u reIuLIveIy muLure murkeL
muy desLroy us mucI us $o.z or creuLe
us mucI us $o.qo oI sIureIoIder vuIue Ior every
doIIur oI new revenue. And Ior compunIes
wIose growLI Is uIreudy sLuIIIng, growLI In
u sLubIe murkeL mereIy posLpones
LIe InevILubIe.
Acquisitions. WIIIe LIey cun drIve u muLerIuI
umounL oI Lop-IIne growLI In LIe reIuLIveIy
sIorL order, IL Is now wIdeIy uccepLed LIuL LIe
uveruge ucquIrer cupLures reIuLIveIy IILLIe
sIureIoIder vuIue Irom ILs deuIs.
n IucL, LIe
numbers suggesL LIuL even un ucquIrer
wIo consIsLenLIy enjoys u Lop-quurLIIe murkeL
reucLIon In eucI oI ILs deuIs wIII creuLe
onIy ubouL $o.zo In sIureIoIder vuIue Ior every
$1 mIIIIon In revenues ucquIred.
q
ObvIousIy, LIe sIze und LImIng oI growLI oppor-
LunILIes ure deLermIned by busIness IundumenLuIs
wILIIn eucI IndusLry. TypIcuIIy, LIougI, LIey
Lend Lo come In reIuLIveIy smuII IncremenLs und
muLure over muILIpIe yeurs. n LIe consumer
goods IndusLry, one sLudy
Iound LIuL uImosL IuII

oI producL IuuncIes Iud hrsL-yeur suIes oI Iess
LIun $z mIIIIon, und LIe IurgesL wus onIy u IILLIe
more LIun $zoo mIIIIon. TIe number oI LIese
sorLs oI Lop-IIne growLI projecLs needed Lo move
LIe needIe Ior LIe bIggesL compunIes Is duunL-
Ing. WIen we sLund buck Irom LIIs unuIysIs, we
cun`L IeIp buL druw u very dIspIrILIng obser-
1
vuLIon Ior very Iurge compunIes: LIere ure remurk-
ubIy Iew growLI opporLunILIes LIuL ure Iurge
und neur-Lerm und IIgIIy vuIue creuLIng uII uL LIe
sume LIme. PuL unoLIer wuy, LIe umounL
oI Lop-IIne growLI requIred Lo ucIIeve u doubIIng
In sIureIoIder vuIue vurIes drumuLIcuIIy by
mode oI growLI, und Is Iuge In even LIe mosL
IuvorubIe modes oI growLI (exIIbIL).
Some execuLIves wIII no doubL hnd uncomIorLubIe
LIe sIIIL Lo u perspecLIve LIuL empIusIzes
LIe vuIue creuLIon InLensILy oI growLI InILIuLIves.
TIougI sucI u sIIIL wouId serve sIureIoIders
weII, IL muy uIso Ieud Lo Iower overuII IeveIs oI Lop-
IIne und eurnIngs-per-sIure (EPS) growLI.
ExecuLIve credIbIIILy wIII be on LIe IIne In
communIcuLIng LIIs messuge Lo LIe murkeLs. One
execuLIve we`ve worked wILI, Ior exumpIe,
recognIzed LIuL IIs compuny Iucked LIe credIbIIILy
Lo quIckIy Iower IIs overuII EPS growLI LurgeLs
In Iuvor oI u rIcIer mIx oI vuIue-creuLIng growLI
wILIouL geLLIng pummeIed by LIe murkeLs.
nsLeud, LIe compuny mude one more bIg pusI on
operuLIons, IeLLIng onIy enougI oI LIe suvIngs
IuII Lo LIe boLLom IIne Lo meeL LIe compuny`s sIorL-
Lerm growLI projecLIons. TIe resL oI LIe suvIngs
wus redIrecLed Lowurd sIower, buL more vuIue
creuLIng, orgunIc growLI, wILI LIe expecLuLIon LIuL
once LIe compuny Iud buIIL some credIbIIILy
In LIuL respecL wILI sIureIoIders, IL couId more
eusIIy muke ILs cuse Lo LIe murkeLs.
WIen growIng geLs LougI In LIe IurgesL compunIes,
LougI execuLIves musL Ieurn Lo geL growIng
In vuIue-creuLIng wuys. RuLIer LIun buIk up on
LIe busIness equIvuIenL oI empLy cuIorIes,
LIey sIouId expIore LIe vuIue creuLIon InLensILy oI
dIIIerenL modes oI growLI Lo buIId sIureIoIder
vuIue muscIe.
1
CredIL SuIsse IrsL BosLon, TIe pyrumId oI numbers, The
Consilient Dbserter, VoIume z, Number 1;, SepLember z, zoo.
z
SIureIoIder vuIue creuLIon per doIIur oI Lop-IIne revenue growLI.

See, Ior exumpIe, Huns BIesIuur, Jeremy KnIgIL,
und AIexunder vun Wussenuer, DeuIs LIuL creuLe vuIue,
mckInseyquurLerIy.com, ebruury zoo1.
q
L Is ImporLunL Lo noLe, Iowever, LIuL murkeL-enLerIng or
cupubIIILy-buIIdIng ucquIsILIons desIgned Lo IueI subsequenL
orgunIc growLI ure more IIkeIy Lo creuLe vuIue LIun
murkeL-consoIIduLIng ucquIsILIons desIgned Lo cupLure
cosL eIhcIencIes.

SLeve nnen, nnovuLIon uwurds zooz, Iood Processin,
December zooz, pp. -qo.
How to grow
z McKInsey on Inunce Anthology 2011
Excerpt from
How to choose between growth and ROIC
Number 25,
Autumn 2007
Value-minded executives know that although growth is good, returns on invested capital (ROIC) can be an
equallyor still moreimportant indicator of value creation. To understand better how value is created
over time, we identied all nonnancial US companies that had a market cap over $2 billion
1
in 1995 and
had been listed for at least a decade as of that year. When we examined their growth and ROIC
performance over the subsequent decade, we found clear patterns in the interaction between the two
measures. These patterns can help guide value creation strategies suited to a companys current
performance. For companies that already have high ROICs,
2
raising revenues faster than the market
generates higher total returns to shareholders (TRS) than further improvements to ROIC do.
This nding doesnt mean that companies with high ROICs can disregard the impact of growth on their
protability and capital returns. But executives do have the latitude to invest in growth even if ROIC
and protability erode as a resultas long as they can keep ROIC levels in or above the medium band.
Companies that fall in the middle of the ROIC scale
3
have no latitude to let their performance on
either measure decline. For these companies, improving ROIC without maintaining growth at the pace of
the market or generating growth at the cost of a lower ROIC usually results in a below-market TRS. In
most cases, the market rewarded these companies with above-market returns only when they maintained
their growth and improved their ROIC.
4
The pattern continues for companies with a low ROIC.
5
Although both ROIC and growth are still important,
an improvement in ROIC is clearly more important: companies that increased their ROIC generated,
on average, a TRS 5 to 8 percent higher than those that didnt. Growth relative to the market made less
difference (1 to 4 percent) for shareholders, particularly if the company improved its ROIC. This
result isnt surprising. Because such companies were generating returns at or below their weighted-
average cost of capital, they would have had difculty accessing capital to nance further growth
unless they improved their operations and earned the right to grow. Indeed, nearly one-third of the com-
panies in this category from 1995 were acquired or went bankrupt within the following decade.
1
NormuIIzed Lo zoo doIIurs.
z
TIose wILI u Len-yeur uveruge ROC greuLer LIun or equuI Lo zo percenL In 1qq.

TIose wILI u Len-yeur uveruge ROC In 1qq greuLer LIun or equuI Lo q percenL buL Iess LIun zo percenL.
q
Becuuse our duLu represenL LIe medIun oI u group, u compuny couId ucIIeve ubove-murkeL TRS even LIougI ILs growLI wus beIow
murkeL or ILs ROC Iud decIIned.
TIose wILI u Len-yeur uveruge ROC In 1qq greuLer LIun or equuI Lo 6 percenL buL Iess LIun q percenL.
Increased
Decreased
Total returns to shareholders (TRS),
1
19962005, compared with returns on invested capital (ROIC)
Companies with
high ROIC
2
Companies with
medium ROIC
3
Companies with
low ROIC
4
McKinsey on Finance
Growth
Exhibit 1 of 3
1
MedIun oI compound uveruge unnuuI TRS Irom 1qq6 Lo zoo Ior eucI group oI compunIes, udjusLed Ior compound
1qq6-zoo uveruge TRS oI S&P oo Index compunIes (6.q%).
z
;8 compunIes wILI 1o-yeur uveruge ROC azo% und murkeL cupILuIIzuLIon >$z bIIIIon In 1qq.
1zq compunIes wILI 1o-yeur uveruge ROC aq% und murkeL cupILuIIzuLIon >$z bIIIIon In 1qq.
q
6q compunIes wILI 1o-yeur uveruge ROC a6% buL <q% und murkeL cupILuIIzuLIon >$z bIIIIon In 1qq.
Compound unnuuI growLI ruLe.

Below
ROIC
(excluding
goodwill)
S&P 500 average TRS = 6.9
Above
6
11
7
15
Median TRS exceeds market
Below
Growth, CAGR
5
of revenues
Above
2
7
6
10
Below Above
3
7
11
12
How to grow
q McKInsey on Inunce Anthology 2011
Excerpt from
All P/Es are not created equal
Number 11,
Spring 2004
Nidhi Chadda, Robert S. McNish, and Werner Rehm
The relationship between P/E multiples and growth is basic arithmetic:
1
high multiples can result from high
returns on capital in average- or low-growth businesses just as easily as they can result from high
growth. But beware: any amount of growth at low returns on capital will not lead to a high P/E, because
such growth does not create shareholder value.
To illustrate, consider two companies with identical P/E multiples of 17 but with different mechanisms for
creating value. Growth, Inc., is expected to grow at an average annual rate of 13 percent over the
next ten years, while generating a 14 percent return on invested capital (ROIC), which is modestly higher
than its 10 percent cost of capital. To sustain that level of growth, it must reinvest 93 cents from each
dollar of income. The relatively high reinvestment rate means that Growth, Inc., turns only a small amount
of earnings growth into free cash ow growth. Many companies t this growth prole, including
some that need to reinvest more than 100 percent of their earnings to support their growth rate. In con-
trast, Returns, Inc., is expected to grow at only 5 percent per year, a rate similar to long-term nominal
GDP growth in the United States.
2
Unlike Growth, Inc., however, Returns, Inc., invests its capital extremely
efciently. With a return on capital of 35 percent, it needs to reinvest only 14 cents of each dollar to
sustain its growth. As its earnings grow, Returns, Inc., methodically turns them into free cash ow.
McKinsey on Finance
<Article slug>
Exhibit 2 of < >
Growth, Inc
1
Returns, Inc
1
Reinvestment rate 93% Reinvestment rate 14%
Year 1 Year 2 Year 1 Year 2
Operating prot less taxes 100 113 100 105
93 105 14 15 Reinvestment
7 8 86 90 Free cash ow
1
AssumIng 1o% cosL oI equILy, no debL, und 1o yeur`s excessIve growLI IoIIowed by % growLI uL IIsLorIc IeveIs oI ROC.
1
or InsLunce, ussumIng perpeLuILy growLI Ior u compuny wILIouL uny hnuncIuI Ieveruge, PJE = (1 - growLI - reLurn on
cupILuI) - (cosL oI cupILuI - growLI).
z
ReuI GDP growLI over LIe pusL qo yeurs In LIe UnILed SLuLes wus . percenL.
Because Growth, Inc., and Returns, Inc., take very different routes to the same P/E multiple, it would
make sense for a savvy executive to pursue different growth and investment strategies to increase
each businesss P/E. Obviously, the rare company that can combine high growth with high returns on
capital should enjoy extremely high multiples.
Robert T. Uhlaner and Andrew S. West

Running a winning
M&A shop
Picking up the pace of M&A requires big changes in a companys processes and
organizationeven if the deals are smaller.
Number 27,
Spring 2008
CorporuLe deuI mukIng Ius u new Iook-smuIIer,
busIer, und Iocused on growLI. NoL so Iong
ugo, M&A experLs sequenced, uL mosL, or q mujor
deuIs u yeur, LypIcuIIy wILI un eye on LIe benehLs
oI IndusLry consoIIduLIon und cosL cuLLIng. Toduy
we reguIurIy come ucross execuLIves IopIng Lo
cIose 1o Lo zo smuIIer deuIs In LIe sume umounL oI
LIme, oILen sImuILuneousIy. TIeIr objecLIve:
combInIng u number oI compIemenLury deuIs InLo
u sIngIe sLruLegIc pIuLIorm Lo pursue growLI-
Ior exumpIe, by ucquIrIng u sLrIng oI smuIIer
busInesses und meIdIng LIem InLo u unIL wIose
growLI poLenLIuI exceeds LIe sum oI ILs purLs.
NuLuruIIy, wIen execuLIves Lry Lo juggIe more
und dIIIerenL kInds oI deuIs sImuILuneousIy,
producLIvILy muy suIIer us munugers sLruggIe Lo
geL LIe underIyIng process rIgIL.
1
MosL com-
punIes, we Iuve Iound, ure noL prepured Ior LIe
InLense work oI compIeLIng so muny deuIs-
How to grow
und IumbIIng wILI LIe process cun jeopurdIze
LIe very growLI compunIes seek. n IucL, mosL oI
LIem Iuck Iocus, muke uncIeur decIsIons,
und IdenLIIy poLenLIuI ucquIsILIon LurgeLs In
u pureIy reucLIve wuy. CompIeLIng deuIs
uL LIe expecLed puce jusL cun`L Iuppen wILIouL
un eIhcIenL end-Lo-end process.
Even compunIes wILI esLubIIsIed deuI-mukIng
cupubIIILIes muy Iuve Lo udjusL LIem Lo pIuy In
LIIs new gume. Our reseurcI sIows LIuL
successIuI prucLILIoners IoIIow u number oI
prIncIpIes LIuL cun muke LIe udjusLmenL
eusIer und more rewurdIng. TIey IncIude IInkIng
every deuI expIIcILIy Lo LIe sLruLegy IL supporLs
und IorgIng u process LIuL compunIes cun reudIIy
udupL Lo LIe IundumenLuIIy dIIIerenL requIremenLs
oI dIIIerenL Lypes oI deuIs.
Eyes on the (strategic) prize
One oI LIe mosL oILen overIooked, LIougI
seemIngIy obvIous, eIemenLs oI un eIIecLIve M&A
progrum Is ensurIng LIuL every deuI supporLs
LIe corporuLe sLruLegy. Muny compunIes, we Iuve
Iound, beIIeve LIuL LIey ure IoIIowIng un
M&A sLruLegy even II LIeIr deuIs ure onIy generuIIy
reIuLed Lo LIeIr sLruLegIc dIrecLIon und LIe
connecLIons ure neILIer specIhc nor quunLIhubIe.
nsLeud, LIose wIo udvocuLe u deuI sIouId
expIIcILIy sIow, LIrougI u Iew LurgeLed M&A
LIemes, Iow IL udvunces LIe growLI sLruLegy.
A specIhc deuI sIouId, Ior exumpIe, be IInked Lo
sLruLegIc gouIs, sucI us murkeL sIure und
LIe compuny`s ubIIILy Lo buIId u IeudIng posILIon.
BoIder, cIeurer gouIs encouruge compunIes
Lo be LruIy proucLIve In sourcIng deuIs und IeIp Lo
esLubIIsI LIe scuIe, urgency, und vuIuuLIon
upproucI Ior growLI pIuLIorms LIuL requIre u
number oI LIem. ExecuLIves sIouId uIso
usk LIemseIves II LIey Iuve enougI peopIe deveIop-
Ing und evuIuuLIng LIe deuI pIpeIIne, wIIcI
mIgIL IncIude smuII compunIes Lo be ussembIed
InLo u sIngIe busIness, curve-ouLs, und more
obvIous LurgeLs, sucI us Iurge pubIIc compunIes
ucLIveIy sIoppIng Ior buyers.
urLIermore, muny deuIs underperIorm becuuse
execuLIves Luke u one-sIze-hLs-uII upproucI
Lo LIem-Ior exumpIe, by usIng LIe sume process
Lo InLegruLe ucquIsILIons Ior buck-oIhce
cosL synergIes und ucquIsILIons Ior suIes Iorce
synergIes. CerLuIn deuIs, purLIcuIurIy LIose
Iocused on ruIsIng revenues or buIIdIng new
cupubIIILIes, requIre IundumenLuIIy dII-
IerenL upproucIes Lo sourcIng, vuIuuLIon, due
dIIIgence, und InLegruLIon. L Is LIereIore
Excerpt from
M&A teams:
When small is beautiful
Number 34,
Winter 2010
Patrick Beitel and Werner Rehm
Executives at companies that dont have
large, standing teams may wonder if they are
really essential for successful deal making.
We dont think they are. If the essentials for the
governance and execution of M&A are in
place, many companies can carry it out
successfully with a small, experienced team that
pulls in resources project by project. In an
ongoing series of executive interviews on M&A,
weve run across a number of companies
that have small M&A teamswith as few as
two to three core team members, led
by the head of M&Awhich take this kind of
project-driven approach.
Indeed, it may even be more suitable than the
use of large, standing teamsat least for
companies in certain industries, depending on
the number of strategic M&A opportunities.
;
crILIcuI Ior munugers noL onIy Lo undersLund
wIuL Lypes oI deuIs LIey seek Ior sIorLer-Lerm cosL
synergIes or Ionger-Lerm Lop-IIne synergIes
(exIIbIL) buL uIso Lo ussess cundIdIy wIIcI Lypes
oI deuIs LIey reuIIy know Iow Lo execuLe und
wIeLIer u purLIcuIur LrunsucLIon goes uguInsL u
compuny`s LrudILIonuI norms or experIence.
CompunIes wILI successIuI M&A progrums
LypIcuIIy udupL LIeIr upproucI Lo LIe Lype oI deuI
uL Iund. or exumpIe, over LIe pusL sIx yeurs,
BM Ius ucquIred o soILwure compunIes, neurIy
zo percenL oI LIem murkeL Ieuders In LIeIr
segmenLs. L execuLes muny dIIIerenL Lypes oI
deuIs Lo drIve ILs soILwure sLruLegy, LurgeLIng
compunIes In IIgI-vuIue, IIgI-growLI segmenLs
LIuL wouId exLend ILs currenL porLIoIIo InLo
new or reIuLed murkeLs. BM uIso Iooks Ior
LecInoIogy ucquIsILIons LIuL wouId ucceIeruLe
LIe deveIopmenL oI LIe cupubIIILIes IL needs.
DeuI sponsors use u compreIensIve soILwure-
segmenL sLruLegy revIew und gup unuIysIs
Lo deLermIne wIen M&A (ruLIer LIun In-Iouse
deveIopmenL) Is cuIIed Ior, Lo IdenLIIy LurgeLs,
Exhibit Managers must understand not only which types of deals they
desire but also which they know how to execute.
Proactive M&A
Exhibit 1 of 2
Types of M&A deals
Large
Small
Stand-alone cost
improvements
Size of acquired
company relative
to acquirer
Need to expand current capabilities
Cross-selling
existing products
Building
new customer
relationships
Creating new
products
Building a
new business
Overcapacity
t Reduce industry capacity
and overhead
t Present fundamentally
similar product offering
Product/market
consolidation
t Create economies of
scale and consolidate
back ofce; expand
market presence
Transformation/
convergence
t Use deal to transform
the way industry works
t Create new value
proposition
Roll-up
t Transfer core strengths to
target business(es)
Short-term
cost synergies
Long-term top-line
synergies
Low High
Acquire
products/markets
t Expansion of market offering
and/or geographic reach
Strategic-growth bet
t Seek skill transfer into new
and/or noncore business
Pay mainly for clear
cost synergies
Pay for some growth
and channel access
Pay for opportunity to
attack new markets
and grow through new
capabilities
Pay for lower cost of
operating new businesses,
potential to increase
revenue by leveraging
brand strength
Pay largely for growth and
channel access; revenue
synergy potential via
pull-through also exists
Pay for high-risk option
value and ability to act in
market space
How to grow
und Lo deLermIne wIIcI ucquIsILIons sIouId
be execuLed.
BM Ius deveIoped LIe meLIods, skIIIs, und
resources needed Lo execuLe ILs growLI sLruLegy
LIrougI M&A und cun resIupe LIem Lo suIL
dIIIerenL Lypes oI deuIs. A subsLunLIuI InvesLmenL
oI money, peopIe, und LIme Ius been necessury.
n zoo;, BM`s soILwure group uIone wus concur-
renLIy InLegruLIng 18 ucquIsILIons; more LIun
1oo IuII-LIme experLs In u vurIeLy oI IuncLIons und
geogrupIIes were InvoIved, In uddILIon Lo
specIuIIzed Leums mobIIIzed Ior eucI deuI. BM`s
ubIIILy Lo LuIIor ILs upproucI Ius been crILIcuI
In drIvIng LIe perIormunce oI LIese busInesses.
CoIIecLIveIy, BM`s q ucquIsILIons beIow
$oo mIIIIon Irom zooz Lo zoo doubIed LIeIr
dIrecL revenue wILIIn Lwo yeurs.
Organization and process
WIen compunIes Increuse LIe number und puce
oI LIeIr ucquIsILIons, LIe bIggesL prucLIcuI
cIuIIenge mosL oI LIem Iuce Is geLLIng noL onIy
LIe rIgIL peopIe buL uIso LIe rIgIL number
oI peopIe InvoIved In M&A. I LIey don`L, LIey muy
buy LIe wrong usseLs, underInvesL In upproprIuLe
ones, or munuge LIeIr deuIs und InLegruLIon
eIIorLs poorIy. OrgunIzuLIons musL InvesL Lo buIId
LIeIr skIIIs und cupubIIILIes beIore IuuncIIng
un uggressIve M&A ugendu.
Support from senior management
n muny compunIes, senIor munugers ure oILen
Loo Impressed by wIuL uppeurs Lo be u Iow prIce
Ior u deuI or LIe uIIure oI u new producL. TIey
LIen IuII Lo Iook beyond LIe hnuncIuIs or Lo provIde
supporL Ior InLegruLIon. AL compunIes LIuL
IundIe M&A more producLIveIy, LIe CEO und
senIor munugers expIIcILIy IdenLIIy IL us u
pIIIur oI LIe overuII corporuLe sLruLegy. AL GE, Ior
exumpIe, LIe CEO requIres uII busIness unILs Lo
submIL u revIew oI eucI deuI. n uddILIon Lo
LIe hnuncIuI jusLIhcuLIon, LIe revIew musL urLIcu-
IuLe u ruLIonuIe LIuL hLs LIe sLory IIne oI LIe
enLIre orgunIzuLIon und speII ouL LIe requIremenLs
Ior InLegruLIon. A senIor vIce presIdenL LIen
coucIes LIe busIness unIL LIrougI eucI pIuse oI u
sLuge guLe process. Becuuse LIe sLrIcL process
precedIng LIe cIose oI LIe deuI ouLIInes wIuL LIe
compuny musL do Lo InLegruLe LIe ucquIsILIon,
senIor munugemenL`s InvoIvemenL wILI IL uILer
LIe cIose Is dehned cIeurIy.
TIe mosL common cIuIIenge execuLIves Iuce In
u deuI Is remuInIng InvoIved wILI IL und
uccounLubIe Ior ILs success Irom IncepLIon LIrougI
InLegruLIon. TIey Lend Lo Iocus on sourcIng
deuIs und ensurIng LIuL LIe Lerms ure uccepLubIe,
quIckIy movIng on Lo oLIer LIIngs once LIe
IeLLer oI InLenL Is sIgned und IeuvIng LIe InLegruLIon
work Lo unyone wIo Iuppens Lo Iuve LIe
LIme. To Improve LIe process und LIe ouLcome,
execuLIves musL gIve more LIougIL Lo LIe
uppoInLmenL oI key operuLIonuI pIuyers, sucI us
LIe deuI owner und LIe InLegruLIon munuger.
z
The deal owner
DeuI owners ure LypIcuIIy IIgI-perIormIng
munugers or execuLIves uccounLubIe Ior specIhc
ucquIsILIons, begInnIng wILI LIe IdenLIhcu-
LIon oI u LurgeL und runnIng LIrougI ILs evenLuuI
InLegruLIon. TIe mosL successIuI ucquIrers
uppoInL LIe deuI owner very eurIy In LIe process,
oILen us u prerequIsILe Ior grunLIng upprovuI
Lo negoLIuLe wILI u LurgeL. TIIs ussIgnmenL, wIIcI
muy be IuII or purL LIme, couId go Lo someone
Irom LIe busIness-deveIopmenL Leum or even u IIne
orgunIzuLIon, dependIng on LIe Lype oI deuI.
or u Iurge one regurded us u possIbIe pIuLIorm Ior
u new busIness unIL or geogrupIy, LIe rIgIL deuI
owner mIgIL be u vIce presIdenL wIo cun conLInue
Lo Ieud LIe busIness once LIe ucquIsILIon Is
compIeLe. or u smuIIer deuI Iocused on ucquIrIng
u specIhc LecInoIogy, LIe rIgIL person mIgIL be
q
u dIrecLor In LIe R&D IuncLIon or someone Irom
LIe busIness-deveIopmenL orgunIzuLIon.
The integration manager
OILen, LIe mosL underupprecIuLed und poorIy
resourced roIe Is LIuL oI LIe InLegruLIon munuger-
In eIIecL, LIe deuI owner`s cIIeI oI sLuII.
TypIcuIIy, InLegruLIon munugers ure noL suIhcIenLIy
InvoIved eurIy In LIe deuI process. Moreover,
muny oI LIem ure cIosen Ior LIeIr skIIIs us
process munugers, noL us generuI munugers wIo
cun muke decIsIons, work wILI peopIe LIrougIouL
LIe orgunIzuLIon, und munuge compIIcuLed
sILuuLIons IndependenLIy.
nLegruLIon munugers, our experIence sIows,
ougIL Lo become InvoIved us soon us
LIe LurgeL Ius been IdenLIhed buL beIore LIe
evuIuuLIon or negoLIuLIons begIn. TIey
sIouId drIve LIe end-Lo-end merger-munugemenL
process Lo ussure LIuL LIe sLruLegIc ruLIonuIe
oI u deuI InIorms LIe due dIIIgence us weII us LIe
pIunnIng und ImpIemenLuLIon oI LIe InLegru-
LIon eIIorL. DurIng BM`s ucquIsILIon oI MIcromuse,
Ior exumpIe, u vIce presIdenL-IeveI execuLIve
wus cIosen Lo Luke responsIbIIILy Ior InLegruLIon.
TIIs execuLIve wus brougIL InLo LIe process
weII beIore due dIIIgence und remuIns InvoIved
uImosL Lwo yeurs uILer LIe deuI cIosed.
BM munugers uLLrIbuLe ILs sLrong perIormunce
Lo LIe Iocused IeudersIIp oI LIe InLegru-
LIon execuLIve.
Sizing a professional
merger-management function
CompunIes LIuL concIude deuIs onIy occusIonuIIy
muy be ubIe Lo Lup IuncLIonuI und busIness
experLs Lo conducL due dIIIgence und LIen buIId
InLegruLIon Leums uround specIhc deuIs. BuL
u more umbILIous M&A progrum enLuIIs u voIume
oI work-Lo source und screen cundIduLes,
conducL preIImInury und hnuI due dIIIgence, cIose
deuIs, und drIve InLegruLIon-LIuL demunds
cupubIIILIes und processes on LIe scuIe oI uny
oLIer corporuLe IuncLIon. ndeed, our
experIence wILI severuI ucLIve ucquIrers Ius
LuugIL us LIuL LIe number oI resources
requIred cun be quILe Iurge. To do 1o deuIs u yeur,
u compuny musL IdenLIIy rougIIy 1oo cundI-
duLes, conducL due dIIIgence on uround qo, und
uILImuLeIy InLegruLe LIe hnuI 1o. TIIs kInd oI
eIIorL requIres LIe cupucILy Lo sIIL LIrougI muny
deuIs wIIIe sImuILuneousIy munugIng LIree
or Iour duLu rooms und severuI puruIIeI InLegruLIon
eIIorLs. WILIouL u suIhcIenL (und eIIecLIve)
InvesLmenL In resources, IndIvIduuI deuIs ure
doomed Lo IuII.
Excerpt from
Managing your
integration manager
Number 8,
Summer 2003
Michael J. Shelton
No surprise that the effectiveness of integration
managers varies widely. Many CEOs see them
simply as process coordinators or project
managers. But the best play a far more pivotal
role, helping mergers to succeed by keeping
everyone focused on the issues that have the
greatest potential for creating value and by
infusing integration efforts with the necessary
momentum. Unfortunately, however, too
many integration managers never assume such
a role or, if they do, nd it hard to succeed
in it. Our experience during the past ve years
with more than 300 integration efforts
most involving Global 500 corporations
suggests three reasons: CEOs fail to recruit the
right people for the job, integration managers
dont become involved in the merger process
early enough, and CEOs fail to give them
adequate support.
How to grow
qo McKInsey on Inunce Anthology 2011
A rigorous stage gate process
A compuny LIuL LrunsucLs Iurge numbers
oI deuIs musL Luke u cIeurIy dehned sLuge guLe
upproucI Lo mukIng und munugIng decIsIons.
Muny orgunIzuLIons Iuve poorIy dehned processes
or ure pIugued wILI cIoke poInLs, und eILIer
IuuIL cun muke good LurgeLs wuIk uwuy or Lurn Lo
compeLILIve bIds. Even cIosed deuIs cun geL
oII Lo u bud sLurL II u LurgeL`s munugemenL Leum
ussumes LIuL u sIoppy M&A process sIows
wIuL IIIe wouId be IIke under LIe ucquIrer.
An eIIecLIve sLuge guLe sysLem InvoIves LIree
sepuruLe pIuses oI revIew und evuIuuLIon.
AL LIe sLruLegy upprovuI sLuge, LIe busIness-
deveIopmenL Leum (wIIcI IncIudes one
or Lwo members Irom boLI LIe busIness unIL und
corporuLe deveIopmenL) evuIuuLes LurgeLs
ouLsIde-In Lo ussess wIeLIer LIey couId IeIp LIe
compuny grow, Iow mucI LIey ure worLI,
und LIeIr uLLrucLIveness us compured wILI oLIer
LurgeLs. Even uL LIIs poInL, LIe Leum sIouId
dIscuss key due dIIIgence objecLIves und InLegru-
LIon Issues. A subseL oI LIe Leum LIen drIves
LIe process und ussIgns key roIes, IncIudIng LIuL
oI LIe deuI owner. TIe crucIuI decIsIon uL
LIIs poInL Is wIeLIer u LurgeL Is compuLIbIe wILI
LIe corporuLe sLruLegy, Ius sLrong supporL
Irom LIe ucquIrIng compuny, und cun be
InLegruLed InLo IL.
AL LIe upprovuI-Lo-negoLIuLe sLuge, LIe Leum
decIdes on u prIce runge LIuL wIII uIIow LIe com-
puny Lo muInLuIn prIcIng dIscIpIIne. TIe
resuILs oI preIImInury due dIIIgence (IncIudIng LIe
IImILed excIunge oI duLu und eurIy munuge-
menL dIscussIons wILI LIe LurgeL) ure crILIcuI Iere,
us ure InLegruLIon Issues LIuL Iuve been revIewed,
uL IeusL Lo some exLenL, by LIe corporuLe IuncLIons.
A vIsIon Ior IncorporuLIng LIe LurgeL InLo
LIe ucquIrer`s busIness pIun, u cIeur operuLIng
progrum, und un undersLundIng oI LIe
ucquIsILIon`s key synergIes ure ImporLunL us weII,
no muLLer wIuL LIe sIze or Lype oI deuI. AL
LIe end oI LIIs sLuge, LIe Leum sIouId Iuve pro-
duced u nonbIndIng Lerm sIeeL or IeLLer oI
InLenL und u roudmup Ior negoLIuLIons, conhrmu-
Lory due dIIIgence, und process Lo cIose.
TIe bourd oI dIrecLors musL endorse LIe dehnILIve
ugreemenL In LIe deuI upprovuI sLuge. L sIouId
resembIe LIe upprovuI-Lo-negoLIuLe sLuge II LIe
process Ius been execuLed weII; LIe Iocus ougIL Lo
be on unswerIng key quesLIons ruLIer LIun
ruIsIng new sLruLegIc Issues, debuLIng vuIuuLIons,
or IookIng uIeud Lo InLegruLIon und dIscussIng
Iow Lo esLImuLe LIe deuI`s execuLIon rIsk.
EucI sLuge sIouId be LuIIored Lo LIe Lype oI deuI
uL Iund. SmuII R&D deuIs don`L Iuve Lo puss
LIrougI u deLuIIed bourd upprovuI process buL
muy InsLeud be uuLIorIzed uL LIe busIness
or producL unIL IeveI. urge deuIs LIuL requIre
sIgnIhcunL reguIuLory scruLIny musL cer-
LuInIy meeL deLuIIed upprovuI crILerIu beIore
movIng Iorwurd. DeLermInIng In udvunce
wIuL Lypes oI deuIs u compuny InLends Lo pursue
und Iow Lo munuge LIem wIII uIIow IL Lo
urLIcuIuLe LIe Lrude-oIIs und greuLIy Increuse ILs
ubIIILy Lo IundIe u Iurger number oI deuIs
wILI Iess LIme und eIIorL.
As compunIes udupL Lo u IusLer-puced, more
compIIcuLed eru oI M&A deuI mukIng, LIey musL
IorLIIy LIemseIves wILI u menu oI process und
orgunIzuLIonuI skIIIs Lo uccommoduLe LIe vurIeLy
oI deuIs uvuIIubIe Lo LIem.
1
TIese resuILs were umong LIe hndIngs oI our June zoo; survey
oI busIness-deveIopmenL und merger InLegruLIon Ieuders.
z
n some smuIIer deuIs, LIe InLegruLIon munuger und deuI owner
cun be LIe sume person In compIemenLury roIes.
q1
Excerpt from
The five types of successful acquisitions
Number 36,
Summer 2010
Marc H. Goedhart, Tim Koller, and David Wessels
In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least
one of the following ve archetypes.
Improve the target companys performance. This is one of the most common value-creating acquisition
strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash ows.
In some cases, the acquirer may also take steps to accelerate revenue growth.
Consolidate to remove excess capacity from industry. The combination of higher production from existing
capacity and new capacity from recent entrants often generates more supply than demand. It is in
no individual competitors interest to shut a plant, however. Companies often nd it easier to shut plants
across the larger combined entity resulting from an acquisition than to shut their least productive
plants without one and end up with a smaller company.
Accelerate market access for the targets (or buyers) products. Often, relatively small companies
with innovative products have difculty reaching the entire potential market for their products. Small
pharmaceutical companies, for example, typically lack the large sales forces required to cultivate
relationships with the many doctors they need to promote their products. Bigger pharmaceutical
companies sometimes purchase these smaller companies and use their own large-scale sales forces to
accelerate the sales of the smaller companies products.
Get skills or technologies faster or at lower cost than they can be built. Cisco Systems has used
acquisitions to close gaps in its technologies, allowing it to assemble a broad line of networking products
and to grow very quickly from a company with a single product line into the key player in Internet
equipment. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately
$350 million. Ciscos sales increased from $650 million in 1993 to $22 billion in 2001, with nearly
40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than
$36 billion in revenues and a market cap of approximately $150 billion.
Pick winners early and help them develop their businesses. The nal winning strategy involves making
acquisitions early in the life cycle of a new industry or product line, long before most others recognize that
it will grow signicantly. Johnson & Johnson pursued this strategy in its early acquisitions of medical-
device businesses. When J&J bought device manufacturer Cordis, in 1996, Cordis had $500 million in
revenues. By 2007, its revenues had increased to $3.8 billion, reecting a 20 percent annual growth
rate. J&J purchased orthopedic device manufacturer DePuy in 1998, when DePuy had $900 million in
revenues. By 2007, they had grown to $4.6 billion, also at an annual growth rate of 20 percent.
How to grow
qz
Governance and risk
q
43 The voice of experience: Public versus private equity (Spring 2009)
49 The right way to hedge (Summer 2010)
Excerpts from
54 Risk: Seeing around the corners (Autumn 2009)
55 Emerging markets arent as risky as you think (Spring 2003)
Viral Acharya, Conor Kehoe, and Michael Reyner
The voice of experience:
Public versus private equity
Few directors have served on the boards of both private and public companies.
Those who have give their views here about which model works best.
Number 31,
Spring 2009
AdvocuLes oI LIe prIvuLe-equILy modeI Iuve
Iong urgued LIuL LIe beLLer PE hrms perIorm
beLLer LIun pubIIc compunIes do. TIIs
udvunLuge, LIese udvocuLes suy, sLems noL onIy
Irom hnuncIuI engIneerIng buL uIso Irom
sLronger operuLIonuI perIormunce.
DIrecLors wIo Iuve served on LIe bourds oI boLI
pubIIc und prIvuLe compunIes ugree-und udd
LIuL LIe beIuvIor oI LIe bourd Is one key eIemenL
In drIvIng superIor operuLIonuI perIormunce.
Among LIe zo cIuIrmen or CEOs we recenLIy
InLervIewed us purL oI u sLudy In LIe UnILed
KIngdom,
1
mosL suId LIuL PE bourds were sIgnIh-
cunLIy more eIIecLIve LIun were LIose oI LIeIr
pubIIc counLerpurLs. TIe resuILs ure noL compre-
IensIve, nor do LIey IuIIy reecL LIe wIde
dIversILy oI pubIIc- und prIvuLe-compuny bourds.
NeverLIeIess, our hndIngs ruIse some ImporLunL
Issues Ior pubIIc bourds und LIeIr cIuIrmen.
qq McKInsey on Inunce Anthology 2011
Exhibit 1 Private-equity boards are considered effective overall
even if public boards have some advantages.
McKinsey on Finance
PE Directors
Exhibit 1 of 2
Source: nLervIews wILI ubouL zo UK-bused dIrecLors wIo Iuve served, over LIe pusL yeurs, on LIe bourds oI boLI prIvuLe und
pubIIc compunIes (TSE 1oo or TSE zo busInesses und prIvuLe-equILy owned), mosL wILI un enLerprIse vuIue oI >oo mIIIIon
Interviewees rating of boards (on a scale of 1 to 5, where 1= poor, 5 = world class)
Boards of private-equity
portfolio companies
Boards of public limited
companies (PLCs)
Overall effectiveness 4.6 3.5
Strategic leadership 4.3 3.3
3.1 4.8
Performance
management
4.1 3.8
Development/succession
management
4.8 3.3
Stakeholder
management
3.8 4.2
Governance (audit,
compliance, and risk)
WIen usked Lo compure LIe overuII eIIecLIveness
oI PE und pubIIc bourds, 1 oI LIe zo respondenLs
suId LIuL PE bourds cIeurIy udded more vuIue;
none suId LIuL LIeIr pubIIc counLerpurLs were
beLLer. TIIs senLImenL wus reecLed In LIe scores
LIe respondenLs guve eucI Lype oI bourd,
on u hve-poInL scuIe (wIere 1 wus poor und wus
worId cIuss): PE bourds uveruged q.6, pubIIc
bourds ..
CIeurIy, pubIIc bourds cunnoL (und sIouId noL)
seek Lo repIIcuLe uII eIemenLs oI LIe PE modeI: LIe
pubIIc-compuny one oIIers superIor uccess Lo
cupILuI und IIquIdILy buL In reLurn requIres u more
exLensIve und LrunspurenL upproucI Lo gover-
nunce und u more expIIcIL buIuncIng oI sLukeIoIder
InLeresLs. NeverLIeIess, our survey ruIses muny
quesLIons ubouL LIe Lwo ownersIIp modeIs und
Iow besL Lo enIunce u bourd`s eIIecLIveness. How,
Ior exumpIe, cun pubIIc bourds be sLrucLured
so LIuL LIeIr members cun puL more LIme InLo
munugIng sLruLegy und perIormunce?
Moreover, cun-und sIouId-LIe InLeresLs oI
pubIIc-bourd members be beLLer uIIgned
wILI LIose oI execuLIves?
How both models add value
RespondenLs observed LIuL LIe dIIIerences
In LIe wuy pubIIc und PE bourds operuLe-und ure
expecLed Lo operuLe-urIse Irom dIIIerences In
ownersIIp sLrucLure und governunce expecLuLIons.
Becuuse pubIIc compunIes need Lo proLecL LIe
InLeresLs oI urm`s-IengLI sIureIoIders und ensure
LIe ow oI uccuruLe und equuI InIormuLIon Lo
LIe cupILuI murkeLs, governunce Issues sucI us
uudIL, compIIunce, remuneruLIon, und rIsk
munugemenL InevILubIy (und upproprIuLeIy) Ioom
mucI Iurger In LIe mInds oI pubIIc-bourd
members. Our reseurcI dId Indeed suggesL LIuL
pubIIc-compuny bourds scored IIgIer on
q
governunce und on munugemenL deveIopmenL.
However, respondenLs suw PE bourds us
more eIIecLIve overuII becuuse oI LIeIr sLronger
sLruLegIc IeudersIIp und more eIIecLIve
perIormunce oversIgIL, us weII us LIeIr munuge-
menL oI key sLukeIoIders (ExIIbIL 1).
Strategic leadership
n uImosL uII cuses, our respondenLs descrIbed PE
bourds us IeudIng LIe IormuIuLIon oI sLruLegy,
wILI uII dIrecLors workIng LogeLIer Lo sIupe IL und
dehne LIe resuILIng prIorILIes. Key eIemenLs
oI LIe sLruLegIc pIun ure IIkeIy Lo Iuve been IuId
ouL durIng LIe due-dIIIgence process. PrIvuLe-
equILy bourds ure oILen LIe source oI sLruLegIc
InILIuLIves und Ideus (Ior exumpIe, on M&A) und
ussume LIe roIe oI sLImuIuLIng LIe execuLIve
Leum Lo LIInk more broudIy und creuLIveIy ubouL
opporLunILIes. TIe roIe oI LIe execuLIve-
munugemenL Leum Is Lo ImpIemenL LIIs pIun und
reporL buck on LIe progress.
By conLrusL, LIougI mosL pubIIc compunIes sLuLe
LIuL LIe bourd`s responsIbIIILy IncIudes overseeIng
sLruLegy, LIe reuIILy Is LIuL LIe execuLIve Leum
LypIcuIIy Lukes LIe Ieud In proposIng und
deveIopIng IL, und LIe bourd`s roIe Is Lo cIuIIenge
und sIupe munugemenL`s proposuIs. None oI
our InLervIewees suId LIuL LIeIr pubIIc bourds Ied
sLruLegy: ;o percenL descrIbed LIe bourd us
uccompunyIng munugemenL In dehnIng IL, wIIIe
o percenL suId LIuL LIe bourd pIuyed onIy u
IoIIowIng roIe. ew respondenLs suw LIese bourds
us ucLIveIy und eIIecLIveIy sIupIng sLruLegy.
Performance management
nLervIewees uIso beIIeved LIuL PE bourds
were Iur more ucLIve In munugIng perIormunce
LIun were LIeIr pubIIc counLerpurLs: Indeed
LIe nuLure und InLensILy oI LIe perIormunce-
munugemenL cuILure Is perIups LIe mosL sLrIkIng
dIIIerence beLween LIe Lwo envIronmenLs.
PrIvuLe-equILy bourds Iuve wIuL one respondenL
descrIbed us u reIenLIess Iocus on vuIue creuLIon
Ievers, und LIIs Iocus Ieuds LIem Lo IdenLIIy
crILIcuI InILIuLIves und Lo decIde wIIcI key perIor-
munce IndIcuLors (KPs) Lo monILor. TIese
KPs noL onIy ure dehned more expIIcILIy LIun
LIey ure In pubIIc compunIes buL uIso Iocus
mucI more sLrongIy on cusI meLrIcs und speed oI
deIIvery. HuvIng seL LIese KPs, PE bourds
monILor LIem mucI more InLensIveIy-revIewIng
progress In greuL deLuII, IocusIng InLenLIy on
one or Lwo ureus uL eucI meeLIng, und InLervenIng
In cuses oI underperIormunce. TIIs perIormunce-
munugemenL Iocus Is LIe bourd`s reuI rcison
d'etre, one respondenL commenLed.
n conLrusL, pubIIc bourds were descrIbed us
mucI Iess enguged In deLuII: LIeIr scruLIny wus
seen uL besL us beIng on u IIgIer IeveI (more
mucro LIun mIcro, one InLervIewee suId) und uL
worsL us superhcIuI. Moreover, pubIIc bourds
Iocus mucI Iess on IundumenLuI vuIue creuLIon
Ievers und mucI more on meeLIng quurLerIy
prohL LurgeLs und murkeL expecLuLIons. GIven LIe
ImporLunce oI ensurIng LIuL sIureIoIders
geL un uccuruLe pIcLure oI u busIness`s sIorL-Lerm
perIormunce prospecLs, LIIs empIusIs Is
perIups undersLundubIe. BuL wIuL IL produces Is
u bourd Iocused more on budgeLury conLroI,
LIe deIIvery oI sIorL-Lerm uccounLIng prohLs, und
uvoIdIng surprIses Ior InvesLors.
Management development
and succession
PrIvuLe-equILy bourds scored Iess weII on LIeIr
deveIopmenL oI Iumun cupILuI-boLI ubsoIuLeIy
und reIuLIve Lo pubIIc bourds. PE bourds do
Iocus InLenseIy on LIe quuIILy oI LIe Lop-execuLIve
Leum, In purLIcuIur LIe CEO und LIe CO, und
ure quIck Lo repIuce underperIormers. BuL sucI
bourds InvesL IILLIe or no LIme expIorIng
brouder und Ionger-Lerm Issues, sucI us LIe
Governance and risk
q6 McKInsey on Inunce Anthology 2011
sLrengLI oI LIe munugemenL Leum, successIon
pIuns, und deveIopIng munugemenL.
TIeIr InLeresL In munugemenL deveIopmenL Is
IrusLruLIngIy nurrow, one InLervIewee suId.
PubIIc bourds, by compurIson, were seen us more
commILLed Lo und eIIecLIve Ior peopIe Issues. SucI
bourds InsIsL on LIorougI munugemenL-revIew
processes, dIscuss noL onIy LIe Lop Leum buL uIso
ILs poLenLIuI successors, debuLe LIe key cupu-
bIIILIes needed Ior Iong-Lerm success, ure more
IIkeIy Lo cIuIIenge und Inuence munugemenL-
deveIopmenL processes, und pIuy u more ucLIve
roIe In dehnIng remuneruLIon poIIcIes und
pIuns. TIere ure weuknesses, Iowever: pubIIc
bourds cun be sIower Lo reucL wIen cIunge
Is needed, und LIeIr voIce on everyLIIng buL LIe
CEO successIon Lends Lo be more udvIsory
LIun dIrecLIve. RemuneruLIon dIscussIons ure
LIorougI, buL pubIIc bourds cun seem
more concerned ubouL LIe reucLIon oI exLernuI
sLukeIoIders Lo poLenLIuI pIuns LIun ubouL
LIeIr ImpucL on perIormunce. OveruII, Iowever,
pubIIc bourds ure more Iocused on peopIe,
LuckIe u brouder runge oI Issues, und work In
u more sopIIsLIcuLed wuy.
Stakeholder management
Our respondenLs IeIL LIuL PE bourds were
mucI more eIIecLIve uL munugIng sLukeIoIders,
IurgeIy us u resuIL oI sLrucLuruI dIIIerences
beLween LIe Lwo modeIs. PubIIc bourds operuLe
In u more compIex envIronmenL, munugIng u
brouder runge oI sLukeIoIders und deuIIng wILI
u dIspuruLe group oI InvesLors, IncIudIng Iurge
InsLILuLIons und smuII sIureIoIders, vuIue und
growLI InvesLors, und Iong-Lerm sLockIoIders
und sIorL-Lerm Iedge Iunds. TIese groups Iuve
dIIIerenL prIorILIes und demunds (und, In LIe
cuse oI sIorL-seIIIng Iedge Iunds, IundumenLuIIy
mIsuIIgned InLeresLs). TIe cIuIrmen und
CEOs oI pubIIc compunIes LIereIore Iuve Lo puL
u IoL oI eIIorL InLo communIcuLIng wILI
dIverse groups.
TIe cIuIIenge Ior PE bourds Is more sLruIgIL-
Iorwurd. TIeIr eIIecLIve sIureIoIders
(LIe InvesLors In PE Iunds) ure Iocked In Ior LIe
duruLIon oI LIe Iund. TIe sIureIoIders`
represenLuLIves (LIe PE Iouse) ure In eIIecL
u sIngIe bIoc (or u very smuII number oI
bIocs In u cIub deuI) und so ucL In uIIgnmenL.
urLIermore, LIese represenLuLIves ure
more enguged LIun bourd members In LIe pubIIc
worId ure-LIey ure IILeruIIy In LIe room
wILI execuLIves und ure mucI beLLer InIormed
ubouL busIness reuIILIes LIun ure InvesLors
In pubIIc compunIes. UnsurprIsIngIy, LIereIore,
LIe burden oI InvesLor munugemenL Is mucI
Iess onerous Ior PE bourds und LIe quuIILy oI
LIe dIuIogue mucI beLLer.
YeL PE bourds ure mucI Iess experIenced In
engugIng wILI brouder sLukeIoIders, sucI us LIe
medIu, unIons, und oLIer pressure groups.
TIIs InexperIence wus evIdenL In LIe InILIuI
response oI LIese bourds Lo LIe greuLer scruLIny
LIey uLLrucLed In zoo;. TIe WuIker ReporL
z

und LIe cIunges PE Iouses subsequenLIy mude Lo
Increuse LIe Irequency und Lrunspurency
oI LIeIr communIcuLIons do go some wuy In
uddressIng LIe sIorLcomIngs, buL pubIIc
bourds LypIcuIIy ure sLIII more sopIIsLIcuLed und
eIIecLIve In LIIs ureu.
Governance and risk management
PubIIc bourds eurned LIeIr besL scores In
governunce und rIsk munugemenL, u resuIL LIuL
reecLed LIe drIve Lo Improve governunce
sLundurds und conLroIs In LIe wuke oI LIe vurIous
scunduIs LIuL Ied Lo LIe Surbunes-OxIey
IegIsIuLIon und LIe InILIuLIves suggesLed In LIe
HIggs ReporL.
TIe LypIcuI bourd subcommILLees

(uudIL, nomInuLIon, remuneruLIon, und
q;
corporuLe socIuI responsIbIIILy) ure seen us
conducLIng u LIorougI, proIessIonuI scruLIny oI
LIe ugreed-upon ureus oI Iocus, wIIIe LIe overuII
bourd supervIses eIIecLIveIy und cun druw
on u broud runge oI InsIgILs und experIences Lo
IdenLIIy poLenLIuI rIsks. CompIIunce wILI LIe
UnILed KIngdom`s CombIned Code on CorporuLe
Governunce Is IIgI-un ImporLunL IucLor In
buIIdIng InvesLor conhdence.
YeL LIere ure ImporLunL underIyIng concerns.
UnsurprIsIngIy, muny respondenLs IeId LIuL some
eIemenLs oI governunce ure overengIneered und,
us u resuIL, consume mucI LIme wIIIe generuLIng
IILLIe vuIue. OI greuLer concern, perIups, muny
respondenLs IeIL LIuL, In empIusIzIng governunce,
pubIIc bourds Iud become Loo conservuLIve.
Bourds seek Lo IoIIow precedenL und uvoId conIcL
wILI InvesLors ruLIer LIun expIorIng wIuL
couId muxImIze vuIue, commenLed one respon-
denL. TIe Iocus Is on box-LIckIng und coverIng
LIe rIgIL InpuLs, noL deIIverIng LIe rIgIL ouLpuLs,
suId unoLIer.
PrIvuLe-equILy bourds scored Iower on governunce,
reecLIng LIeIr Iower IeveI oI empIusIs on IL
und LIeIr LypIcuIIy Iess sopIIsLIcuLed processes
Ior munugIng IL. n every cuse, governunce
eIIorLs Iocused on u nurrower seL oI ucLIvILIes,
LIougI uImosL uII PE bourds embruced LIe
need Ior u IormuI uudIL commILLee. nLeresLIngIy,
LIougI, PE bourds In generuI were seen us
IuvIng u deeper undersLundIng oI operuLIonuI busI-
ness rIsks und hnuncIuI rIsks. TIey were uIso
perceIved Lo be more Iocused on, und skIIIed In,
rIsk munugemenL us opposed Lo rIsk uvoIdunce.
Sources of difference?
SInce our respondenLs IeIL LIuL PE bourds were
LypIcuIIy more eIIecLIve LIun pubIIc ones were
Exhibit 2 Private-equity boards lead on value creation, while public
boards excel at governance and risk management.
McKinsey on Finance
PE Directors
Exhibit 2 of 2
Source: nLervIews wILI ubouL zo UK-bused dIrecLors wIo Iuve served, over LIe pusL yeurs, on LIe bourds oI boLI prIvuLe und
pubIIc compunIes (TSE 1oo or TSE zo busInesses und prIvuLe-equILy owned), mosL wILI un enLerprIse vuIue oI >oo mIIIIon
Top 3 board priorities, number of respondents
Boards of private-equity
portfolio companies
Boards of public limited
companies (PLCs)
Value creation 18 5
External relations 4 5
Exit strategy 11 0
100-day plan 5 0
5 9
Strategic initiatives
(including M&A)
9 0
Governance,
compliance, and risk
0 7
Organization design
and succession
Governance and risk
q8 McKInsey on Inunce Anthology 2011
In uddIng vuIue, we sougIL Lo Ieurn wIy.
TIe commenLs oI LIe respondenLs suggesL Lwo key
dIIIerences. IrsL, nonexecuLIve dIrecLors oI
pubIIc compunIes ure more Iocused on rIsk
uvoIdunce LIun on vuIue creuLIon (ExIIbIL z). TIIs
uLLILude Isn`L necessurIIy IIIogIcuI: sucI
dIrecLors ure noL hnuncIuIIy rewurded by u
compuny`s success, und LIey muy Iose
LIeIr Iurd-eurned repuLuLIons II InvesLors
ure dIsuppoInLed.
Second, our respondenLs noLed u greuLer IeveI oI
engugemenL by nonexecuLIve dIrecLors uL
PE-bucked compunIes. TIe survey suggesLed LIuL
PE dIrecLors spend, on uveruge, neurIy LIree
LImes us muny duys on LIeIr roIes us do LIose uL
pubIIc compunIes (q versus 1q). Even In
LIe bIgger TSE 1oo compunIes, LIe uveruge
commILmenL Is onIy z duys u yeur. RespondenLs
uIso observed dIIIerences In LIe wuy non-
execuLIve dIrecLors InvesL LIeIr LIme. n boLI
modeIs oI ownersIIp, LIey spend uround
1 Lo zo duys u yeur on IormuI sessIons, sucI us
bourd und commILLee meeLIngs. However,
PE nonexecuLIves devoLe un uddILIonuI Lo qo
duys Lo Iunds-on, InIormuI InLerucLIons
(sucI us heId vIsILs, ud Ioc meeLIngs wILI execu-
LIves, pIone cuIIs, und e-muIIs), compured
wILI onIy Lo duys u yeur Ior nonexecuLIve
dIrecLors uL pubIIc compunIes.
1
We InLervIewed dIrecLors wIo Iud, over LIe pusL hve yeurs,
served on LIe bourds boLI oI TSE 1oo or TSE zo busInesses
und PE-owned compunIes wILI u LypIcuI vuIue oI more LIun
oo mIIIIon. WIIIe LIe number oI InLervIewees muy seem smuII,
IL Is probubIy u Iurge proporLIon oI LIe IImILed popuIuLIon oI
sucI dIrecLors.
z
See DuvId WuIker, Guidelines jor Disclosure cnd Trcnspcrenc
in Pritcte Equit, WuIker WorkIng Group, zoo;.

See Derek HIggs, Retieu on the Role cnd Ejjectiteness
oj Non-Executite Directors, UK DepurLmenL oI Trude und
ndusLry, zoo.
qq
HedgIng Is IoL. SIIILs In suppIy-und-demund
dynumIcs und gIobuI hnuncIuI LurmoII Iuve creuLed
unprecedenLed voIuLIIILy In commodILy prIces In
recenL yeurs. MeunwIIIe, execuLIves uL compunIes
LIuL buy, seII, or produce commodILIes Iuve
Iuced equuIIy drumuLIc swIngs In prohLubIIILy.
Muny Iuve sLepped up LIeIr use oI IedgIng
Lo uLLempL Lo munuge LIIs voIuLIIILy und, In some
InsLunces, Lo uvoId sILuuLIons LIuL couId puL
u compuny`s survIvuI In jeopurdy.
WIen done weII, LIe hnuncIuI, sLruLegIc, und oper-
uLIonuI benehLs oI IedgIng cun go beyond
mereIy uvoIdIng hnuncIuI dIsLress, by openIng up
opLIons Lo preserve und creuLe vuIue us weII.
BuL done poorIy, IedgIng In commodILIes oILen
overwIeIms LIe IogIc beIInd IL und cun
ucLuuIIy desLroy more vuIue LIun wus orIgInuIIy
uL rIsk. PerIups IndIvIduuI busIness unILs
Iedge opposILe sIdes oI LIe sume rIsk, or munugers
expend Loo mucI eIIorL IedgIng rIsks LIuL ure
Bryan Fisher and Ankush Kumar
The right way to hedge
Deciding how and what to hedge requires a company-wide look at the total
costs and benefits.
Number 36,
Summer 2010
Governance and risk
o McKInsey on Inunce Anthology 2011
ImmuLerIuI Lo u compuny`s IeuILI. Munugers cun
uIso underesLImuLe LIe IuII cosLs oI IedgIng
or overIook nuLuruI Iedges In deIerence Lo cosLIy
hnuncIuI ones. No quesLIon, IedgIng cun enLuII
compIex cuIcuIuLIons und dIIhcuIL Lrude-oIIs. BuL
In our experIence, keepIng In mInd u Iew
sImpIe poInLers cun IeIp nIp probIems eurIy und
muke IedgIng sLruLegIes more eIIecLIve.
Hedge net economic exposure
Too muny IedgIng progrums LurgeL LIe nomInuI
rIsks oI sIIoed busInesses ruLIer LIun u
compuny`s neL economIc exposure-uggreguLed
rIsk ucross LIe broud enLerprIse LIuL uIso
IncIudes LIe IndIrecL rIsks.
1
TIIs sIIoed upproucI
Is u probIem, especIuIIy In Iurge muILIbusIness
orgunIzuLIons: munugers oI busIness unILs
or dIvIsIons Iocus on LIeIr own rIsks wILIouL con-
sIderIng rIsks und IedgIng ucLIvILIes eIsewIere
In LIe compuny.
AL u Iurge InLernuLIonuI IndusLrIuI compuny, Ior
exumpIe, one busIness unIL decIded Lo Iedge
ILs IoreIgn-excIunge exposure Irom LIe suIe oI
$;oo mIIIIon In goods Lo BruzII, InudverLenLIy
IncreusIng LIe compuny`s neL exposure Lo ucLu-
uLIons In IoreIgn currency. TIe unIL`s munugers
Iudn`L known LIuL u second busIness unIL wus uL
LIe sume LIme sourcIng ubouL $oo mIIIIon
oI goods Irom BruzII, so InsLeud oI LIe compuny`s
nuLuruI $zoo mIIIIon exposure, IL ended up
wILI u neL exposure oI $oo mIIIIon-u sIgnIhcunL
rIsk Ior LIIs compuny.
EIsewIere, LIe purcIusIng munuger oI u Iurge
cIemIcuI compuny used LIe hnuncIuI murkeLs Lo
Iedge ILs dIrecL nuLuruI-gus cosLs-wIIcI
umounLed Lo more LIun $1 bIIIIon, or IuII oI ILs
InpuL cosLs Ior LIe yeur. However, LIe com-
puny`s suIes conLrucLs were sLrucLured so LIuL
nuLuruI-gus prIces were LreuLed us u puss-
LIrougI (Ior exumpIe, wILI un Index-bused prIcIng
mecIunIsm). TIe compuny`s nuLuruI posILIon
Iud IILLIe exposure Lo gus prIce movemenLs, sInce
prIce ucLuuLIons were udjusLed, or Iedged, In
ILs suIes conLrucLs. By uddIng u hnuncIuI Iedge Lo
ILs InpuL cosLs, LIe compuny wus sIgnIhcunLIy
IncreusIng ILs exposure Lo nuLuruI-gus prIces-
essenLIuIIy IockIng In un InpuL prIce Ior gus wILI u
ouLIng suIes prIce. I LIe oversIgIL Iud gone
unnoLIced, u zo percenL decreuse In gus prIces
wouId Iuve wIped ouL uII oI LIe compuny`s
projecLed eurnIngs.
Keep In mInd LIuL neL economIc exposure IncIudes
IndIrecL rIsks, wIIcI In some cuses uccounL
Ior LIe buIk oI u compuny`s LoLuI rIsk exposure.
z

CompunIes cun be exposed Lo IndIrecL rIsks
LIrougI boLI busIness prucLIces (sucI us conLrucL-
Ing Lerms wILI cusLomers) und murkeL IucLors
(Ior InsLunce, cIunges In LIe compeLILIve envIron-
menL). WIen u snowmobIIe munuIucLurer In
Cunudu Iedged LIe IoreIgn-excIunge exposure oI
ILs suppIy cosLs, denomInuLed In CunudIun doIIurs,
Ior exumpIe, LIe Iedge successIuIIy proLecLed
IL Irom cosL Increuses wIen LIe CunudIun doIIur
rose uguInsL LIe US doIIur. However, LIe cosLs
Ior LIe compuny`s US compeLILors were In deprecI-
uLIng US doIIurs. TIe snowmobIIe muker`s
neL economIc exposure Lo u rIsIng CunudIun doIIur
LIereIore cume noL jusL Irom IIgIer munuIuc-
LurIng cosLs buL uIso Irom Iower suIes us CunudIun
cusLomers rusIed Lo buy cIeuper snowmobIIes
Irom compeLILors In LIe UnILed SLuLes.
n some cuses, u compuny`s neL economIc
exposure cun be Iower LIun ILs uppurenL nomInuI
exposure. An oII rehnery, Ior exumpIe, Iuces
u Iurge nomInuI exposure Lo crude-oII cosLs, wIIcI
muke up ubouL 8 percenL oI LIe cosL oI ILs ouL-
puL, sucI us gusoIIne und dIeseI. YeL LIe compuny`s
Lrue economIc exposure Is mucI Iower, sInce
LIe rehnerIes ucross LIe IndusLry IurgeIy Iuce LIe
sume crude prIce exposure (wILI some mInor
1
dIIIerences Ior conhguruLIon) und LIey LypIcuIIy
puss cIunges In crude oII prIces LIrougI Lo
cusLomers. So In prucLIce, eucI rehnery`s Lrue
economIc exposure Is u smuII IrucLIon oI
ILs nomInuI exposure becuuse oI LIe IndusLry
sLrucLure und compeLILIve envIronmenL.
To IdenLIIy u compuny`s Lrue economIc exposure,
sLurL by deLermInIng LIe nuLuruI oIIseLs ucross
busInesses Lo ensure LIuL IedgIng ucLIvILIes don`L
ucLuuIIy Increuse IL. TypIcuIIy, LIe crILIcuI Lusk
oI IdenLIIyIng und uggreguLIng exposure Lo rIsk
on u compuny-wIde busIs InvoIves compIIIng
u gIobuI rIsk book (sImIIur Lo LIose used by
hnuncIuI und oLIer LrudIng InsLILuLIons) Lo see LIe
bIg pIcLure-LIe dIIIerenL eIemenLs oI rIsk-on
u consIsLenL busIs.
Calculate total costs and benefits
Muny rIsk munugers underesLImuLe LIe Lrue
cosL oI IedgIng, LypIcuIIy IocusIng onIy on LIe
dIrecL LrunsucLIonuI cosLs, sucI us bId-usk
spreuds und broker Iees. TIese componenLs ure
oILen onIy u smuII porLIon oI LoLuI Iedge
cosLs (ExIIbIL 1), IeuvIng ouL IndIrecL ones, wIIcI
cun be LIe IurgesL porLIon oI LIe LoLuI. As
u resuIL, LIe cosL oI muny IedgIng progrums Iur
exceeds LIeIr benehL.
Two kInds oI IndIrecL cosLs ure worLI dIscussIng:
LIe opporLunILy cosL oI IoIdIng murgIn cupILuI
und IosL upsIde. IrsL, wIen u compuny enLers InLo
some hnuncIuI-IedgIng urrungemenLs, IL oILen
musL IoId uddILIonuI cupILuI on ILs buIunce sIeeL
uguInsL poLenLIuI IuLure obIIguLIons. TIIs
requIremenL LIes up sIgnIhcunL cupILuI LIuL mIgIL
Iuve been beLLer uppIIed Lo oLIer projecLs,
creuLIng un opporLunILy cosL LIuL munugers oILen
overIook. A nuLuruI-gus producer LIuL Iedges
ILs enLIre unnuuI producLIon ouLpuL, vuIued uL
$ bIIIIon In suIes, Ior exumpIe, wouId be requIred
Lo IoId or posL cupILuI oI uround $1 bIIIIon,
sInce gus prIces cun ucLuuLe up Lo o Lo percenL
In u gIven yeur. AL u 6 percenL InLeresL ruLe,
LIe cosL oI IoIdIng or posLIng murgIn cupILuI
LrunsIuLes Lo $6o mIIIIon per yeur.
Exhibit 1 Direct costs account for only a fraction
of the total cost of hedging.
McKinsey on Finance #36
Hedging
Exhibit 1 of 2
Example: A gas producer hedged 3 years of its gas production
with a forward contract on a nancial exchange
Estimated costs of hedging, % of total
value of revenues or costs hedged
Description
4.110.4 Total
Direct costs 0.10.4
t Bidask spread
t Marketing/origination fees
Opportunity cost
of margin capital
3.07.0
t Opportunity cost of margin capital required to withstand signicant
price moves (in this case, a two-sigma event5% likelihood)
t Counterparty risk for in-the-money positions
Net asymmetric
upside lost
1.03.0
t The asymmetric exposure to varying gas prices makes the
protected downside less than the lost upside
Governance and risk
z McKInsey on Inunce Anthology 2011
AnoLIer IndIrecL cosL Is IosL upsIde. WIen LIe
probubIIILy LIuL prIces wIII move IuvorubIy (rIse,
Ior exumpIe) Is IIgIer LIun LIe probubIIILy
LIuL LIeyÌI move unIuvorubIy (IuII, Ior exumpIe),
IedgIng Lo Iock In currenL prIces cun cosL more
In Iorgone upsIde LIun LIe vuIue oI LIe downsIde
proLecLIon. TIIs cosL depends on un orgunIzu-
LIon`s vIew oI commodILy prIce oors und ceIIIngs.
A Iurge IndependenL nuLuruI-gus producer,
Ior exumpIe, wus evuIuuLIng u Iedge Ior ILs produc-
LIon durIng LIe comIng Lwo yeurs. TIe prIce oI
nuLuruI gus In LIe IuLures murkeLs wus $.o per
mIIIIon BrILIsI LIermuI unILs (BTUs). TIe
compuny`s IundumenLuI perspecLIve wus LIuL gus
prIces In LIe nexL Lwo yeurs wouId sLuy wILIIn
u runge oI $.oo Lo $8.oo per mIIIIon BTUs. By
IedgIng producLIon uL $.o per mIIIIon BTUs,
LIe compuny proLecLed ILseII Irom onIy u
$o.o decIIne In prIces und guve up u poLenLIuI
upsIde oI $z.o II prIces rose Lo $8.oo.
Hedge only what matters
CompunIes sIouId Iedge onIy exposures LIuL
pose u muLerIuI rIsk Lo LIeIr hnuncIuI IeuILI or
LIreuLen LIeIr sLruLegIc pIuns. YeL Loo oILen
we hnd LIuL compunIes (under pressure Irom LIe
cupILuI murkeLs) or IndIvIduuI busIness unILs
(under pressure Irom munugemenL Lo provIde
eurnIngs cerLuInLy) udopL IedgIng progrums
LIuL creuLe IILLIe or no vuIue Ior sIureIoIders. An
InLegruLed uIumInum compuny, Ior exumpIe,
Iedged ILs exposure Lo crude oII und nuLuruI gus
Ior yeurs, even LIougI LIey Iud u very IImILed
ImpucL on ILs overuII murgIns. YeL IL dId noL Iedge
ILs exposure Lo uIumInum, wIIcI drove more LIun
; percenL oI murgIn voIuLIIILy. urge congIom-
eruLes ure purLIcuIurIy suscepLIbIe Lo LIIs probIem
wIen IndIvIduuI busIness unILs Iedge Lo proLecL
LIeIr perIormunce uguInsL rIsks LIuL ure ImmuLerIuI
uL u porLIoIIo IeveI. HedgIng LIese smuIIer
exposures uIIecLs u compuny`s rIsk prohIe onIy
Exhibit 2 Companies should develop a prole of probable cash ows
one that reects a company-wide calculation of risk exposures and
sources of cash.
McKinsey on Finance #36
<Article slug>
Exhibit < > of < >
Cash ow distribution and cash needs
Probability
Interest
and
principal
Dividend
Avoid
distress
Provide
reliability
Protect
investments/
growth
Keep
strategic
exibility
Strategic
capital
expenditure
R&D and
marketing
Maintenance
capital
expenditures
Project
capital
expenditures
High
Low
Probability of meeting
cash obligations (eg,
interest, dividends)
Distribution of potential cash
ows to meet these cash
obligations
murgInuIIy-und Isn`L worLI LIe munugemenL

LIme und Iocus LIey requIre.
To deLermIne wIeLIer exposure Lo u gIven rIsk
Is muLerIuI, IL Is ImporLunL Lo undersLund wIeLIer
u compuny`s cusI ows ure udequuLe Ior ILs cusI
needs. MosL munugers buse LIeIr ussessmenLs oI
cusI ows on scenurIos wILIouL consIderIng
Iow IIkeIy LIose scenurIos ure. TIIs upproucI
wouId IeIp munugers evuIuuLe u compuny`s
hnuncIuI resIIIence II LIose scenurIos cume Lo
puss, buL IL doesn`L deLermIne Iow muLerIuI
cerLuIn rIsks ure Lo LIe hnuncIuI IeuILI oI LIe
compuny or Iow suscepLIbIe IL Is Lo hnun-
cIuI dIsLress. TIuL ussessmenL wouId requIre
munugers Lo deveIop u prohIe oI probubIe
cusI ows-u prohIe LIuL reecLs u compuny-wIde
cuIcuIuLIon oI rIsk exposures und sources oI cusI.
Munugers sIouId LIen compure LIe compuny`s
cusI needs (sLurLIng wILI LIe IeusL dIscreLIonury
und movIng Lo LIe mosL dIscreLIonury) wILI
LIe cusI ow prohIe Lo quunLIIy LIe IIkeIIIood
oI u cusI sIorLIuII. TIey sIouId uIso be sure
Lo conducL LIIs unuIysIs uL LIe porLIoIIo IeveI Lo
uccounL Ior LIe dIversIhcuLIon oI rIsks ucross
dIIIerenL busIness IInes (ExIIbIL z).
A IIgI probubIIILy oI u cusI sIorLIuII gIven
nondIscreLIonury cusI requIremenLs, sucI us
debL obIIguLIons or muInLenunce cupILuI
expendILures, IndIcuLes u IIgI rIsk oI hnuncIuI
dIsLress. CompunIes In LIIs posILIon sIouId
Luke uggressIve sLeps, IncIudIng IedgIng, Lo
mILIguLe rIsk. I, on LIe oLIer Iund, u compuny
hnds LIuL IL cun hnunce ILs sLruLegIc pIuns
wILI u IIgI degree oI cerLuInLy even wILIouL
IedgIng, IL sIouId uvoId (or unwInd) un
expensIve IedgIng progrum.
Look beyond financial hedges
An eIIecLIve rIsk-munugemenL progrum oILen
IncIudes u combInuLIon oI hnuncIuI Iedges und
nonhnuncIuI Ievers Lo uIIevIuLe rIsk. YeL Iew
compunIes IuIIy expIore uILernuLIves Lo hnuncIuI
IedgIng, wIIcI IncIude commercIuI or operu-
LIonuI LucLIcs LIuL cun reduce rIsks more eIIecLIveIy
und InexpensIveIy. Among LIem: conLrucLIng
decIsIons LIuL puss rIsk LIrougI Lo u counLerpurLy;
sLruLegIc moves, sucI us verLIcuI InLegruLIon;
und operuLIonuI cIunges, sucI us revIsIng producL
specIhcuLIons, sIuLLIng down munuIucLurIng
IucIIILIes wIen InpuL cosLs peuk, or IoIdIng
uddILIonuI cusI reserves. CompunIes sIouId LesL
LIe eIIecLIveness oI dIIIerenL rIsk mILIguLIon
sLruLegIes by quunLILuLIveIy compurIng LIe LoLuI
cosL oI eucI upproucI wILI LIe benehLs.
TIe compIexILy oI duy-Lo-duy IedgIng In
commodILIes cun eusIIy overwIeIm ILs IogIc und
vuIue. To uvoId sucI probIems, u broud sLru-
LegIc perspecLIve und u commonsense unuIysIs ure
oILen good pIuces Lo sLurL.
1
See ErIc umurre und MurLIn PergIer, RIsk: SeeIng
uround LIe corners, McKinse on Iincnce, Number ,
AuLumn zooq, pp. z-;.
z
ndIrecL rIsks urIse us u resuIL oI cIunges In compeLILors` cosL
sLrucLures, dIsrupLIon In LIe suppIy cIuIn, dIsrupLIon
oI dIsLrIbuLIon cIunneIs, und sIIILs In cusLomer beIuvIor.
Governance and risk
q McKInsey on Inunce Anthology 2011
Excerpt from
Risk: Seeing around the corners
Number 33,
Autumn 2009
Clearly, companies must look beyond immediate, obvious risks and learn to evaluate aftereffects
that could destabilize whole value chains, including all direct as well as indirect risks in several areas:
Competitors. Often the most important area to investigate is the way risks might change a companys
cost position versus its competitors or substitute products. Companies are particularly vulnerable
when their currency exposures, supply bases, or cost structures differ from those of their rivals. In fact, all
differences in business models create the potential for a competitive risk exposure, favorable or
unfavorable. The point isnt that a company should imitate its competitors but rather that it should think
about the risks it implicitly assumes when its strategy departs from theirs.
Supply chains. Classic examples of risk cascading through supply chains include disruptions in the
availability of parts or raw materials, changes in the cost structures of suppliers, and shifts in logistics
costs. When the price of oil reached $150 a barrel in 2008, for example, many offshore suppliers
became substantially less cost competitive in the US market. Consider the case of steel. Since Chinese
imports were the marginal price setters in the United States, prices for steel rose 20 percent there
as the cost of shipping it from China rose by nearly $100 a ton. The fact that logistics costs depend
signicantly on oil prices is hardly surprising, but few companies that buy substantial amounts
of steel considered their second-order oil price exposure through the supply chain.
Distribution channels. Indirect risks can also lurk in distribution channels, and effects may include an
inability to reach end customers, changed distribution costs, or even radically redened business models.
For example, the bankruptcy and liquidation of the major US big-box consumer electronics retailer
Circuit City, in 2008, had a cascading impact on the industry. Most directly, electronics manufacturers
held some $600 million in unpaid receivables that were suddenly at risk. The bankruptcy also
created indirect risks for these companies, in the form of price pressures and bargain-hunting behavior as
liquidators sold off discounted merchandise right in the middle of the peak Christmas buying season.
Customer response. Often, the most complex knock-on effects are the responses from customers,
because those responses can be so diverse and involve so many factors. One typical cascading effect is
a shift in buying patterns, as in the case of the Canadians who went shopping in the United States
with their stronger currency. Another is changed demand levels, such as the impact of higher fuel prices
on the auto market: as the price of gasoline increased in recent years, there was a clear shift from
large SUVs to compact cars, with hybrids rapidly becoming serious contenders.
Eric Lamarre and Martin Pergler
Excerpt from
Emerging markets arent as risky as you think
Number 7,
Spring 2003
Marc H. Goedhart and Peter Haden
No question, emerging-market investments are exposed to additional risks, including accelerated ination,
exchange rate changes, adverse repatriation and scal measures, and macroeconomic and political
distress. These elements clearly call for a different approach to investment decisions.
However, while individual country risks may be high, they actually have low correlations with each other.
As a result, the overall performance of an emerging-market portfolio can be quite stable if invest-
ments are spread out over several countries. At one international consumer goods company, for example,
returns on invested capital for the combined portfolio of emerging-market businesses have been
as stable as those for developed markets in North America and Europe over the last 20 years.
1
We found
similarly low correlations of GDP growth across emerging-market economies and the United States
and Europe over the last 15 years (exhibit). These ndings, we believe, also hold for other sectors.
Country-specic risks can also affect different businesses differently. For one parent company, sustaining
its emerging-market businesses during a crisis not only demonstrated that it could counter country
specic risk but also strengthened its position as local funding for competitors dried up. For this company,
sales growth, when measured in a stable currency, tended to pick up strongly after a crisis, a pattern
that played out consistently through all the crises it encountered in emerging markets.
Return on invested capital (ROIC) for international consumer goods company; index: combined-portfolio ROIC
for developed markets = 100 in 1981
Smoothing out the risks
McKinsey on Finance
Emerging Markets
Exhibit 1 of 3
600
500
400
300
200
100
0
100
ROIC
1
for combined portfolios ROIC
1
for selected individual emerging markets
1
Expressed In sLubIe currency prIor Lo IndexIng und udjusLed Ior IocuI uccounLIng dIIIerences; combIned porLIoIIo IncIudes
uddILIonuI counLrIes noL reIIecLed In exIIbIL.
1981 1985 1989 1993 1997 2001
600
500
400
300
200
100
0
100
1981 1985 1989
Emerging
markets
Developed
markets
1993 1997 2001
Country D
Country E
Country A
Country B
Country C
Governance and risk
6
;
In this section:
Robert N. Palter, Werner Rehm, and Jonathan Shih
Communicating with
the right investors
Executives spend too much time talking with investors who dont matter.
Heres how to identify those who do.
Number 27,
Spring 2008
Features
57 Communicating with the right investors (Spring 2008)
64 Do fundamentalsor emotionsdrive the stock market? (Spring 2005)
Excerpts from
60 Inside a hedge fund: An interview with the managing partner of
Maverick Capital (Spring 2006)
62 Numbers investors can trust (Summer 2003)
63 The misguided practice of earnings guidance (Spring 2006)
69 The truth about growth and value stocks (Winter 2007)
Muny execuLIves spend Loo mucI LIme communI-
cuLIng wILI InvesLors LIey wouId be beLLer oII Ignor-
Ing. CEOs und COs, In purLIcuIur, devoLe un
InordInuLe umounL oI LIme Lo one-on-one meeLIngs
wILI InvesLors, InvesLmenL conIerences, und oLIer
sIureIoIder communIcuLIons,
1
oILen wILIouL IuvIng
u cIeur pIcLure oI wIIcI InvesLors reuIIy counL.
TIe reuson, In purL, Is LIuL Loo muny compunIes
segmenL InvesLors usIng LrudILIonuI meLIods
LIuL yIeId onIy u sIuIIow undersLundIng oI LIeIr
moLIves und beIuvIor; Ior exumpIe, we repeuLedIy
run ucross InvesLor reIuLIons groups LIuL Lry
Lo posILIon InvesLors us growLI or vuIue InvesLors-
mIrrorIng LIe cIussIc upproucI LIuL InvesLors
use Lo segmenL compunIes. TIe expecLuLIon Is LIuL
growLI InvesLors wIII puy more, so II u compuny
cun persuude LIem Lo buy ILs sLock, ILs sIure prIce
wIII rIse. TIuL expecLuLIon Is IuIse: muny
growLI InvesLors buy uILer un Increuse In sIure
Exhibit When intrinsic investors trade, they trade more per
day than other investors do.
McKinsey on 27
Investor Communications
Exhibit 2 of 2
1
ncIudes onIy duys wIen InvesLor Lruded.
Annual trading
activity per
segment, $ trillion
Investor
segment
Annual trading
activity per investor
in segment, $ billion
Annual trading
activity per investor
in segment per
investment, $ million
Trading activity per
investor in segment
per investment per
day,
1
$ million
Trading
oriented
11 88 277 1
Mechanical 6 6 17 2
Intrinsic 6 72 79109 3
prIces. More ImporLunL, LrudILIonuI segmenLu-
LIon upproucIes reveuI IILLIe ubouL LIe wuy
InvesLors decIde Lo buy und seII sIures. How Iong
does un InvesLor LypIcuIIy IoId onLo u posILIon,
Ior exumpIe? How concenLruLed Is LIe InvesLor`s
porLIoIIo? WIIcI hnuncIuI und operuLIonuI
duLu ure mosL IeIpIuI Ior LIe InvesLor? We beIIeve
LIuL LIe unswers Lo LIese und sImIIur
quesLIons provIde beLLer InsIgILs Ior cIussI-
IyIng InvesLors.
Once u compuny segmenLs InvesLors uIong LIe
rIgIL IInes, IL cun quIckIy IdenLIIy LIose wIo
muLLer mosL. TIese ImporLunL InvesLors, wIom
we cuII InLrInsIc InvesLors, buse LIeIr decI-
sIons on u deep undersLundIng oI u compuny`s
sLruLegy, ILs currenL perIormunce, und ILs
poLenLIuI Lo creuLe Iong-Lerm vuIue. TIey ure uIso
more IIkeIy LIun oLIer InvesLors Lo supporL
munugemenL LIrougI sIorL-Lerm voIuLIIILy.
ExecuLIves wIo reucI ouL Lo InLrInsIc InvesLors,
IeuvIng oLIers Lo LIe InvesLor reIuLIons
depurLmenL,
z
wIII devoLe Iess LIme Lo InvesLor
reIuLIons und communIcuLe u cIeurer, more
Iocused messuge. TIe resuIL sIouId be u beLLer
uIIgnmenL beLween u compuny`s InLrInsIc
vuIue und ILs murkeL vuIue, one oI LIe core gouIs oI
InvesLor reIuLIons.

A better segmentation
No execuLIve wouId LuIk Lo ImporLunL cusLomers
wILIouL undersLundIng Iow LIey muke
purcIuse decIsIons, yeL muny rouLIneIy LuIk Lo
InvesLors wILIouL undersLundIng LIeIr
InvesLmenL crILerIu. Our unuIysIs oI LypIcuI
IoIdIng perIods, InvesLmenL porLIoIIo
concenLruLIons, LIe number oI proIessIonuIs
InvoIved In decIsIons, und uveruge LrudIng
voIumes-us weII us LIe IeveI oI deLuII InvesLors
requIre wIen LIey underLuke reseurcI
on u compuny-suggesLs LIuL InvesLors cun be
dIsLrIbuLed umong LIree broud cuLegorIes.
Intrinsic investors
nLrInsIc InvesLors Luke u posILIon In u compuny
onIy uILer rIgorous due dIIIgence oI ILs
InLrInsIc ubIIILy Lo creuLe Iong-Lerm vuIue. TIIs
scruLIny LypIcuIIy Lukes more LIun u monLI.
q
We esLImuLe LIuL LIese InvesLors IoId zo percenL
oI US usseLs und conLrIbuLe 1o percenL oI LIe
LrudIng voIume In LIe US murkeL.
n InLervIews wILI more LIun zo InLrInsIc
InvesLors, we Iound LIuL LIey Iuve concenLruLed
porLIoIIos-eucI posILIon, on uveruge, mukes
up z Lo percenL oI LIeIr porLIoIIos und perIups
us mucI us 1o percenL; LIe uveruge posILIon
oI oLIer InvesLors Is Iess LIun 1 percenL. nLrInsIc
InvesLors uIso IoId Iew posILIons per unuIysL
(Irom Iour Lo Len compunIes) und IoId sIures Ior
severuI yeurs. Once LIey Iuve InvesLed, LIese
proIessIonuIs supporL LIe currenL munugemenL
und sLruLegy LIrougI sIorL-Lerm voIuLIIILy.
n vIew oI uII LIe eIIorL InLrInsIc InvesLors expend,
execuLIves cun expecL Lo Iuve LIeIr IuII
uLLenLIon wIIIe reucIIng ouL Lo LIem, Ior LIey
Luke LIe LIme Lo IIsLen, Lo unuIyze, und Lo
usk InsIgILIuI quesLIons.
TIese InvesLors uIso Iuve u Iurge ImpucL on
LIe wuy u compuny`s InLrInsIc vuIue IInes up wILI
ILs murkeL vuIue-un eIIecL LIuL occurs
mecIunIcuIIy becuuse wIen LIey Lrude, LIey Lrude
In IIgI voIumes (exIIbIL). TIey uIso Iuve u
psycIoIogIcuI eIIecL on LIe murkeL becuuse LIeIr
repuLuLIon Ior very weII-LImed Lrudes mugnIhes
LIeIr Inuence on oLIer InvesLors. One IndIcuLIon
oI LIeIr Inuence: LIere ure enLIre Web sILes
(sucI us Guruocus.com, SLockpIckr.com, und
MIIuIs.com) LIuL IoIIow LIe porLIoIIos oI
weII-known InLrInsIc InvesLors.
Mechanical investors
MecIunIcuI InvesLors, IncIudIng compuLer-run
Index Iunds und InvesLors wIo use compuLer
modeIs Lo drIve LIeIr Lrudes, muke decIsIons bused
on sLrIcL crILerIu or ruIes. We uIso IncIude
In LIIs cuLegory LIe so-cuIIed cIoseL Index Iunds.
TIese ure Iurge InsLILuLIonuI InvesLors wIose
porLIoIIos resembIe LIose oI un Index Iund becuuse
oI LIeIr sIze, even LIougI LIey don`L posILIon
LIemseIves In LIuL wuy.
q

We esLImuLe LIuL uround z percenL oI LIe
LoLuI equILy In LIe UnILed SLuLes sILs In pureIy
mecIunIcuI InvesLmenL Iunds oI uII kInds.
Becuuse LIeIr upproucI oIIers no reuI room Ior
quuIILuLIve decIsIon crILerIu, sucI us LIe
sLrengLI oI u munugemenL Leum or u sLruLegy,
InvesLor reIuLIons cun`L Inuence LIem Lo
IncIude u compuny`s sIures In un Index Iund.
SImIIurIy, LIese InvesLors` quunLILuLIve crILerIu,
sucI us buyIng sLocks wILI Iow prIce-Lo-
equILy ruLIos or LIe sIures oI compunIes beIow
u cerLuIn sIze, ure bused on muLIemuLIcuI
modeIs oI greuLer or Iesser sopIIsLIcuLIon, noL
on InsIgILs ubouL IundumenLuI sLruLegy und
vuIue creuLIon.
n LIe cuse oI cIoseL Index Iunds, eucI InvesLmenL
proIessIonuI IundIes, on uveruge, 1oo Lo
1o posILIons, mukIng IL ImpossIbIe Lo do In-depLI
reseurcI LIuL couId be Inuenced by meeLIngs
wILI un InvesLmenL LurgeL`s munugemenL. n purL,
LIe IIgI number oI posILIons per proIessIonuI
reecLs LIe IucL LIuL mosL cIoseL Index Iunds ure
purL oI Iurger InvesLmenL Iouses LIuL sepu-
ruLe LIe roIes oI Iund munuger und reseurcIer.
TIe munugers oI InLrInsIc InvesLors, by
conLrusL, know every compuny In LIeIr porLIoIIos
In depLI.
Traders
TIe InvesLmenL proIessIonuIs In LIe Lruder
group seek sIorL-Lerm hnuncIuI guIn by beLLIng on
news ILems, sucI us LIe possIbIIILy LIuL u com-
puny`s quurLerIy eurnIngs per sIure (EPS) wIII be
ubove or beIow LIe consensus vIew or, In LIe
cuse oI u drug muker, recenL reporLs LIuL u cIInIcuI
LrIuI Ius gone budIy. Truders conLroI ubouL
percenL oI US equILy IoIdIngs. SucI InvesLors
don`L reuIIy wunL Lo undersLund compunIes
Excerpt from
Inside a hedge fund
Number 19,
Spring 2006
First and foremost, were trying to understand
the business. How sustainable is growth?
How sustainable are returns on capital? How
intelligently is it deploying that capital?
Our goal is to know more about every one of
the companies in which we invest than
any noninsider does. On average, we hold
fewer than ve positions per investment
professionala ratio that is far lower than most
hedge funds and even large mutual-fund
complexes. And our sector heads, who on
average have over 15 years of investment
experience, have typically spent their entire
careers focused on just one industry,
allowing them to develop long-term relationships
not only with the senior management of
most of the signicant companies but also with
employees several levels below.
Lee Ainslie
Managing partner of
Maverick Capital
on u deep IeveI-LIey jusL seek beLLer InIormuLIon
Ior mukIng Lrudes. NoL LIuL Lruders don`L
undersLund compunIes or IndusLrIes; on LIe con-
Lrury, LIese InvesLors IoIIow LIe news ubouL
LIem cIoseIy und oILen upproucI compunIes
dIrecLIy, seekIng nuunces or InsIgILs LIuL couId
muLLer greuLIy In LIe sIorL Lerm. TIe uveruge
InvesLmenL proIessIonuI In LIIs segmenL Ius zo or
more posILIons Lo IoIIow, Iowever, und Lrudes
In und ouL oI LIem quIckIy Lo cupLure smuII guIns
over sIorL perIods-us sIorL us u Iew duys or
even Iours. ExecuLIves LIereIore Iuve no reuson
Lo spend LIme wILI Lruders.
Focused communications
MosL InvesLor reIuLIons depurLmenLs couId creuLe
LIe kInd oI segmenLuLIon we descrIbe. TIey
sIouId uIso consIder severuI uddILIonuI Iuyers oI
InIormuLIon, sucI us wIeLIer un InvesLor
does (or pIuns Lo) IoId sIures In u compuny or
Ius uIreudy InvesLed eIsewIere In ILs secLor.
A LIorougI segmenLuLIon LIuL IdenLIhes sopIIsLI-
cuLed InLrInsIc InvesLors wIII uIIow compunIes Lo
munuge LIeIr InvesLor reIuLIons more successIuIIy.
Dont oversimplify your message
nLrInsIc InvesLors Iuve spenL consIderubIe eIIorL
Lo undersLund your busIness, so don`L boII down
u dIscussIon oI sLruLegy und perIormunce Lo
u Len-second sound bILe Ior LIe press or Lruders.
MunugemenL sIouId uIso be open ubouL LIe
reIevunL deLuIIs oI LIe compuny`s currenL
perIormunce und Iow IL reIuLes Lo sLruLegy. Suys
one porLIoIIo munuger, don`L wunL InsIde
InIormuLIon. BuL do wunL munugemenL Lo Iook
me In LIe eye wIen LIey LuIk ubouL LIeIr
perIormunce. I LIey uvoId u dIscussIon or
expIunuLIon, we wIII noL InvesL, no muLLer Iow
uLLrucLIve LIe numbers Iook.
Interpret feedback in the right context
MosL compunIes ugree LIuL IL Is useIuI Lo
undersLund LIe vIews oI InvesLors wIIIe deveIop-
Ing sLruLegIes und InvesLor communIcuLIons.
YeL munugemenL oILen reIIes on sImpIe summurIes
oI InLervIews wILI InvesLors und seII-sIde unuIysLs
ubouL everyLIIng Irom sLruLegy Lo quurLerIy
eurnIngs Lo sIure repurcIuses. TIIs upproucI
gIves munugemenL no wuy oI IInkIng LIe
vIews oI InvesLors Lo LIeIr ImporLunce Ior LIe
compuny or Lo LIeIr InvesLmenL sLruLegIes.
A segmenLed upproucI, wIIcI cIurIhes eucI
InvesLor`s gouIs und needs, IeLs execu-
LIves InLerpreL Ieedbuck In conLexL und weIgI
messuges uccordIngIy.
61
Prioritize managements time
A CEO or CO sIouId devoLe LIme Lo
communIcuLIng onIy wILI LIe mosL ImporLunL und
knowIedgeubIe InLrInsIc InvesLors LIuL Iuve
proIessIonuIs specIuIIzIng In LIe compuny`s secLor.
Moreover, u CEO sIouId LIInk LwIce beIore
uLLendIng conIerences II equILy unuIysLs Iuve
urrunged LIe guesL IIsLs, unIess munuge-
menL regurds LIose guesLs us InLrInsIc InvesLors.
WIen u compuny Iocuses ILs communIcu-
LIons on LIem, IL muy weII Iuve more ImpucL In
u sIorLer umounL oI LIme.
n our experIence, InLrInsIc InvesLors LIInk
LIuL execuLIves sIouId spend no more LIun ubouL
1o percenL oI LIeIr LIme on InvesLor-reIuLed
ucLIvILIes, so munugemenL sIouId be ucLIveIy
engugIng wILI 1 Lo zo InvesLors uL mosL.
TIe InvesLor reIuLIons depurLmenL ougIL Lo
IdenLIIy LIe mosL ImporLunL ones, revIew
LIe IIsL reguIurIy, und proLecL munugemenL Irom
LIe LeIepIone cuIIs oI unuIysLs und mecIunIcuI
InvesLors, wIo ure noL u IIgI prIorILy. ExecuLIves
sIouId LuIk Lo equILy unuIysLs onIy II LIeIr
reporLs ure ImporLunL cIunneIs Ior InLerpreLIng
compIIcuLed news; oLIerwIse, InvesLor
reIuLIons cun gIve LIem uny reIevunL duLu LIey
requIre, II uvuIIubIe.
MurkeLIng execuLIves rouLIneIy segmenL cusLomers
by LIe decIsIon processes LIose cusLomers use
und LuIIor LIe corporuLe Imuge und ud cumpuIgns
Lo LIe mosL ImporLunL ones. CompunIes
couId benehL Irom u sImIIur kInd oI unuIyLIc rIgor
In LIeIr InvesLor reIuLIons.
1
ncIudIng u wIde runge oI communIcuLIons ucLIvILIes,
sucI us unnuuI sIureIoIder meeLIngs, conIerences wILI seII-sIde
unuIysLs, quurLerIy eurnIngs cuIIs, und murkeL upduLes.
z
TIIs urLIcIe deuIs onIy wILI InsLILuLIonuI InvesLors, sInce
munugemenL usuuIIy spends LIe mosL LIme wILI LIem.
We uIso excIude ucLIvIsL InvesLors, us LIey represenL u dIIIerenL
InvesLor reIuLIons Issue Ior munugemenL.

I LIIs gouI sounds counLerInLuILIve, consIder LIe uILernuLIves.
CIeurIy, undervuIuuLIon Isn`L desIrubIe. An overvuIuuLIon
Is goIng Lo be correcLed sooner or IuLer, und LIe correcLIon wIII,
umong oLIer LIIngs, dIsLress bourd members und empIoyees
wILI worLIIess sLock opLIons Issued wIen LIe sIures
were overvuIued.
q
or more on cIoseL Index Iunds, see MurLIjn Cremers und
AnLLI PeLujIsL, How ucLIve Is your Iund munuger? A new meusure
LIuL predIcLs perIormunce, AA CIIcugo MeeLIngs Puper,
Junuury 1, zoo;.
6z McKInsey on Inunce Anthology 2011
Excerpt from
Numbers investors can trust
Number 8,
Summer 2003
Tim Koller
Financial statements should be organized with more detail and with an aim to clearly separating operating
from nonoperating items. Its not easy. In fact, current accounting rules exhibit something less than
common sense in dening operating versus nonoperating or nonrecurring items. As a start, however,
company income statements should close the biggest gaps in the current system by separately
identifying the following items.
Nonrecurring pension expense adjustments. These often have more to do with the performance of
the pension fund than the operating performance of the company. Investors would benet from being able
to assess a companys operating performance compared to peers over time separately from its skills
at managing its pension assets.
Gains and losses from assets sales that are not recurring. Large companies like to bury gains from asset
sales in operating results because it makes their operating performance look better, often arguing that
the impact is immaterial. But investors should be the ones who decide what is material. Companies should
also separate out gains from losses. Now companies sometimes sell assets to create gains to offset
losses from asset sales, and some top-ranked multinationals are well known for doing this on a regular basis.
This is a perverse incentive that would go away if companies were required to disclose gains and losses.
In a more useful income statement, complex or nonrecurring items such as pension expenses, stock
options, changes in restructuring reserves, and asset gains or losses would be separately disclosed,
regardless of materiality. Similarly, balance sheets should separate assets and liabilities that are used in the
operations of the business from other assets and liabilities, such as excess cash not needed to fund
the operations, or investments in unrelated activities.
A more useful approach to reporting would also include a focus on business units. Todays large companies
are complex, with multiple business units that rarely have the same growth potential and protability.
Sophisticated investors will try to value each business unit separately or build up consolidated forecasts
from the sum of the individual business units. Yet many companies report only the minimum required
information and often not enough for investors to understand the underlying health of the business units.
Nearly always, business unit results are relegated to the footnotes at the back of the annual report,
though a good case can be made that business unit reporting is in fact more important than the
consolidated results and should be the focus of corporate reporting. At a minimum, companies should
produce a clear operating-income statement.
6
Excerpt from
The misguided practice of earnings guidance
Number 19,
Spring 2006
Peggy Hsieh, Tim Koller, and S. R. Rajan
Most companies view the quarterly ritual of issuing earnings guidance as a necessary, if sometimes
onerous, part of investor relations. The benets, they hope, are improved communications with
nancial markets, lower share price volatility, and higher valuations. At the least, companies expect
frequent earnings guidance to boost their stocks liquidity.
Yet our analysis of companies across all sectors and an in-depth examination of two mature represen-
tative industriesconsumer packaged goods (CPG) and pharmaceuticalsfound no evidence to support
those expectations. The ndings fell into three categories:
Valuations. Contrary to what some companies believe, frequent guidance does not result in
superior valuations in the marketplace; indeed, guidance appears to have no signicant relationship
with valuationsregardless of the year, the industry, or the size of the company in question.
Volatility. When a company begins to issue earnings guidance, its share price volatility is as likely to
increase as to decrease compared with that of companies that dont issue guidance.
Liquidity. When companies begin issuing quarterly earnings guidance, they experience increases
in trading volumes relative to companies that dont provide it. However, the relative increase in trading
volumeswhich is more prevalent for companies with revenues in excess of $2 billionwears off
the following year.
With scant evidence of any shareholder benets to be gained from providing frequent earnings
guidance but clear evidence of increased costs, managers should consider whether there is a better way
to communicate with analysts and investors.
We believe there is. Instead of providing frequent earnings guidance, companies can help the market to
understand their business, the underlying value drivers, the expected business climate, and their
strategyin short, to understand their long-term health as well as their short-term performance. Analysts
and investors would then be better equipped to forecast the nancial performance of these companies
and to reach conclusions about their value.
6q McKInsey on Inunce Anthology 2011
TIere`s never been u beLLer LIme Lo be u beIuv-
IorIsL. DurIng Iour decudes, LIe ucudemIc LIeory
LIuL hnuncIuI murkeLs uccuruLeIy reecL u
sLock`s underIyIng vuIue wus uII buL unussuIIubIe.
BuL IuLeIy, LIe vIew LIuL InvesLors cun Iun-
dumenLuIIy cIunge u murkeL`s course LIrougI
IrruLIonuI decIsIons Ius been movIng InLo
LIe muInsLreum.
WILI LIe exuberunce oI LIe IIgI-LecI sLock bubbIe
und LIe crusI oI LIe IuLe 1qqos sLIII IresI In
InvesLors` memorIes, udIerenLs oI LIe beIuvIorIsL
scIooI ure hndIng IL eusIer LIun ever Lo spreud
LIe beIIeI LIuL murkeLs cun be someLIIng Iess LIun
eIhcIenL In ImmedIuLeIy dIsLIIIIng new InIor-
muLIon und LIuL InvesLors, drIven by emoLIon, cun
Indeed Ieud murkeLs uwry. Some beIuvIorIsLs
wouId even usserL LIuL sLock murkeLs Ieud IIves oI
LIeIr own, deLucIed Irom economIc growLI
und busIness prohLubIIILy. A number oI hnunce
scIoIurs und prucLILIoners Iuve urgued LIuL
sLock murkeLs ure noL eIhcIenL-LIuL Is, LIuL LIey
Marc H. Goedhart, Tim Koller, and David Wessels
Do fundamentals
or emotionsdrive the
stock market?
Emotions can drive market behavior in a few short-lived situations. But fundamentals still rule. Number 15,
Spring 2005
6
don`L necessurIIy reecL economIc IundumenLuIs.
1

AccordIng Lo LIIs poInL oI vIew, sIgnIhcunL und
IusLIng devIuLIons Irom LIe InLrInsIc vuIue oI u com-
puny`s sIure prIce occur In murkeL vuIuuLIons.
TIe urgumenL Is more LIun ucudemIc. n LIe
1q8os, LIe rIse oI sLock murkeL Index Iunds, wIIcI
now IoId some $1 LrIIIIon In usseLs, wus cuused
In Iurge purL by LIe convIcLIon umong InvesLors
LIuL eIhcIenL-murkeL LIeorIes were vuIuubIe.
And currenL debuLes In LIe UnILed SLuLes und eIse-
wIere ubouL prIvuLIzIng SocIuI SecurILy und
oLIer reLIremenL sysLems muy IInge on
ussumpLIons ubouL Iow InvesLors ure IIkeIy Lo
IundIe LIeIr reLIremenL opLIons.
We ugree LIuL beIuvIoruI hnunce oIIers some
vuIuubIe InsIgILs-cIIeI umong LIem LIe Ideu LIuL
murkeLs ure noL uIwuys rIgIL, sInce ruLIonuI
InvesLors cun`L uIwuys correcL Ior mIsprIcIng by
IrruLIonuI ones. BuL Ior munugers, LIe crILIcuI
quesLIon Is Iow oILen LIese devIuLIons urIse und
wIeLIer LIey ure so IrequenL und sIgnIhcunL
LIuL LIey sIouId uIIecL LIe process oI hnuncIuI
decIsIon mukIng. n IucL, sIgnIhcunL devIu-
LIons Irom InLrInsIc vuIue ure rure, und murkeLs
usuuIIy reverL rupIdIy Lo sIure prIces commen-
suruLe wILI economIc IundumenLuIs. TIereIore,
munugers sIouId conLInue Lo use LIe LrIed-
und-Lrue unuIysIs oI u compuny`s dIscounLed cusI
ow Lo muke LIeIr vuIuuLIon decIsIons.
When markets deviate
BeIuvIoruI-hnunce LIeory IoIds LIuL murkeLs
mIgIL IuII Lo reecL economIc IundumenLuIs under
LIree condILIons. WIen uII LIree uppIy, LIe
LIeory predIcLs LIuL prIcIng bIuses In hnuncIuI
murkeLs cun be boLI sIgnIhcunL und persIsLenL.
Irrational behavior
nvesLors beIuve IrruLIonuIIy wIen LIey don`L
correcLIy process uII LIe uvuIIubIe InIormuLIon
wIIIe IormIng LIeIr expecLuLIons oI u compuny`s
IuLure perIormunce. Some InvesLors, Ior exumpIe,
uLLucI Loo mucI ImporLunce Lo recenL evenLs
und resuILs, un error LIuL Ieuds LIem Lo overprIce
compunIes wILI sLrong recenL perIormunce.
OLIers ure excessIveIy conservuLIve und under-
prIce sLocks oI compunIes LIuL Iuve reIeused
posILIve news.
Systematic patterns of behavior
Even II IndIvIduuI InvesLors decIded Lo buy or seII
wILIouL consuILIng economIc IundumenLuIs, LIe
ImpucL on sIure prIces wouId sLIII be IImILed. OnIy
wIen LIeIr IrruLIonuI beIuvIor Is uIso sysLemuLIc
(LIuL Is, wIen Iurge groups oI InvesLors sIure
purLIcuIur puLLerns oI beIuvIor) sIouId persIsLenL
prIce devIuLIons occur. Hence beIuvIoruI-hnunce
LIeory urgues LIuL puLLerns oI overconhdence,
overreucLIon, und overrepresenLuLIon ure common
Lo muny InvesLors und LIuL sucI groups cun be
Iurge enougI Lo prevenL u compuny`s sIure prIce
Irom reecLIng underIyIng economIc
IundumenLuIs-uL IeusL Ior some sLocks, some
oI LIe LIme.
Limits to arbitrage in financial markets
WIen InvesLors ussume LIuL u compuny`s recenL
sLrong perIormunce uIone Is un IndIcuLIon
oI IuLure perIormunce, LIey muy sLurL bIddIng
Ior sIures und drIve up LIe prIce. Some
InvesLors mIgIL expecL u compuny LIuL surprIses
LIe murkeL In one quurLer Lo go on exceedIng
expecLuLIons. As Iong us enougI oLIer InvesLors
noLIce LIIs myopIc overprIcIng und respond
by LukIng sIorL posILIons, LIe sIure prIce wIII IuII
In IIne wILI ILs underIyIng IndIcuLors.
TIIs sorL oI urbILruge doesn`L uIwuys occur,
Iowever. n prucLIce, LIe cosLs, compIexILy, und
rIsks InvoIved In seLLIng up u sIorL posILIon
cun be Loo IIgI Ior IndIvIduuI InvesLors. I, Ior
exumpIe, LIe sIure prIce doesn`L reLurn Lo
ILs IundumenLuI vuIue wIIIe LIey cun sLIII IoId
on Lo u sIorL posILIon-LIe so-cuIIed noIse-
Lruder rIsk-LIey muy Iuve Lo seII LIeIr IoIdIngs
uL u Ioss.
Persistent mispricing in carve-outs and
dual-listed companies
Two weII-documenLed Lypes oI murkeL devIuLIon-
LIe mIsprIcIng oI curve-ouLs und oI duuI-
IIsLed compunIes-ure used Lo supporL beIuvIoruI-
hnunce LIeory. TIe cIussIc exumpIe Is LIe
prIcIng oI Com und PuIm uILer LIe IuLLer`s
curve-ouL In MurcI zooo.
n unLIcIpuLIon oI u IuII spIn-oII wILIIn nIne
monLIs, Com ouLed percenL oI ILs PuIm
subsIdIury. AImosL ImmedIuLeIy, PuIm`s murkeL
cupILuIIzuLIon wus IIgIer LIun LIe enLIre
murkeL vuIue oI Com, ImpIyIng LIuL Com`s oLIer
busInesses Iud u neguLIve vuIue. GIven LIe sIze
und prohLubIIILy oI LIe resL oI Com`s busInesses,
LIIs resuIL wouId cIeurIy IndIcuLe mIsprIcIng.
WIy dId ruLIonuI InvesLors IuII Lo expIoIL LIe
unomuIy by goIng sIorL on PuIm`s sIures und Iong
on Com`s? TIe reuson wus LIuL LIe number
oI uvuIIubIe PuIm sIures wus exLremeIy smuII uILer
LIe curve-ouL: Com sLIII IeId q percenL
oI LIem. As u resuIL, IL wus exLremeIy dIIhcuIL
Lo esLubIIsI u sIorL posILIon, wIIcI
wouId Iuve requIred borrowIng sIures Irom
u PuIm sIureIoIder.
DurIng LIe monLIs IoIIowIng LIe curve-ouL,
LIe mIsprIcIng gruduuIIy becume Iess pronounced
us LIe suppIy oI sIures LIrougI sIorL suIes
Increused sLeudIIy. YeL wIIIe muny InvesLors und
unuIysLs knew ubouL LIe prIce dIIIerence,
IL persIsLed Ior Lwo monLIs-unLII LIe nLernuI
Revenue ServIce IormuIIy upproved LIe
curve-ouL`s Lux-Iree sLuLus In eurIy Muy zooz.
AL LIuL poInL, u sIgnIhcunL purL oI LIe uncerLuInLy
uround LIe spIn-oII wus removed und
LIe prIce dIscrepuncy dIsuppeured. TIIs correcLIon
suggesLs LIuL uL IeusL purL oI LIe mIsprIcIng wus
cuused by LIe rIsk LIuL LIe spIn-oII wouIdn`L occur.
AddILIonuI cuses oI mIsprIcIng beLween purenL
compunIes und LIeIr curved-ouL subsIdIurIes ure
weII documenLed.
z
n generuI, LIese cuses
InvoIve dIIhcuILIes seLLIng up sIorL posILIons Lo
expIoIL LIe prIce dIIIerences, wIIcI persIsL
unLII LIe spIn-oII Lukes pIuce or Is ubundoned. n
uII cuses, LIe mIsprIcIng wus correcLed wILIIn
severuI monLIs.
A second cIussIc exumpIe oI InvesLors devIuLIng
Irom IundumenLuIs Is LIe prIce dIspurILy beLween
LIe sIures oI LIe sume compuny Lruded on Lwo
dIIIerenL excIunges. Does LIIs IndIcL LIe murkeL
Ior mIsprIcIng? We don`L LIInk so. n recenL
yeurs, LIe prIce dIIIerences Ior RoyuI DuLcIJSIeII
und oLIer LwIn-sIure sLocks Iuve uII become
smuIIer. urLIermore, some oI LIese sIure
sLrucLures (und prIce dIIIerences) dIsuppeured
becuuse LIe corporuLIons IormuIIy merged,
u deveIopmenL LIuL underIInes LIe sIgnIhcunce oI
noIse-Lruder rIsk: us soon us u IormuI duLe wus
seL Ior dehnILIve prIce convergence, urbILrugeurs
sLepped In Lo correcL uny dIscrepuncy.
TIIs puLLern provIdes uddILIonuI evIdence LIuL
mIsprIcIng occurs onIy under specIuI
cIrcumsLunces-und Is by no meuns u common
or Iong-IusLIng pIenomenon.
Markets and fundamentals:
The bubble of the 1990s
Do murkeLs reecL economIc IundumenLuIs? We
beIIeve so. ong-Lerm reLurns on cupILuI und
growLI Iuve been remurkubIy consIsLenL Ior LIe
pusL yeurs, In spILe oI some deep recessIons
und perIods oI very sLrong economIc growLI. TIe
medIun reLurn on equILy Ior uII US compu-
nIes Ius been u very sLubIe 1z Lo 1 percenL, und
Iong-Lerm GDP growLI Ior LIe US economy In reuI
6;
Lerms Ius been ubouL percenL u yeur sInce
1qq.
We uIso esLImuLe LIuL LIe InuLIon-udjusLed

cosL oI equILy sInce 1q6 Ius been IuIrIy sLubIe,
uL ubouL ; percenL.
q

We used LIIs InIormuLIon Lo esLImuLe LIe InLrInsIc
PJE ruLIos Ior LIe US und UK sLock murkeLs und
LIen compured LIem wILI LIe ucLuuI vuIues.
TIIs
unuIysIs Ius Ied us Lo LIree ImporLunL concIu-
sIons. TIe hrsL Is LIuL US und UK sLock murkeLs,
by und Iurge, Iuve been IuIrIy prIced, Iover-
Ing neur LIeIr InLrInsIc PJE ruLIos. TIIs hgure wus
LypIcuIIy uround 1, wILI LIe excepLIon oI LIe
IIgI-InuLIon yeurs oI LIe IuLe 1q;os und eurIy
1q8os, wIen IL wus cIoser Lo 1o (exIIbIL).
Second, LIe IuLe 1q;os und IuLe 1qqos produced
sIgnIhcunL devIuLIons Irom InLrInsIc vuIuuLIons. n
LIe IuLe 1q;os, wIen InvesLors were obsessed
wILI IIgI sIorL-Lerm InuLIon ruLes, LIe murkeL
wus probubIy undervuIued; Iong-Lerm reuI
GDP growLI und reLurns on equILy IndIcuLe
LIuL IL sIouIdn`L Iuve boLLomed ouL uL PJE
IeveIs oI uround ;. TIe oLIer weII-known devIuLIon
occurred In LIe IuLe 1qqos, wIen LIe murkeL
reucIed u PJE ruLIo oI uround o-u IeveI LIuL
couIdn`L be jusLIhed by percenL Iong-Lerm
reuI GDP growLI or by 1 percenL reLurns on
book equILy.
TIIrd, wIen sucI devIuLIons occurred, LIe sLock
murkeL reLurned Lo ILs InLrInsIc-vuIuuLIon
IeveI wILIIn ubouL LIree yeurs. TIus, uILIougI
vuIuuLIons Iuve been wrong Irom LIme
Lo LIme-even Ior LIe sLock murkeL us u wIoIe-
evenLuuIIy LIey Iuve IuIIen buck In IIne
wILI economIc IundumenLuIs.
Focus on intrinsic value
WIuL ure LIe ImpIIcuLIons Ior corporuLe munugers?
PurudoxIcuIIy, we beIIeve LIuL sucI murkeL
devIuLIons muke IL even more ImporLunL Ior LIe
execuLIves oI u compuny Lo undersLund
LIe InLrInsIc vuIue oI ILs sIures. TIIs knowIedge
uIIows IL Lo expIoIL uny devIuLIons, II und
wIen LIey occur, Lo LIme LIe ImpIemenLuLIon oI
sLruLegIc decIsIons more successIuIIy. Here
ure some exumpIes oI Iow corporuLe munugers
cun Luke udvunLuge oI murkeL devIuLIons:
IssuIng uddILIonuI sIure cupILuI wIen
LIe sLock murkeL uLLucIes Loo IIgI u vuIue Lo
LIe compuny`s sIures reIuLIve Lo LIeIr
InLrInsIc vuIue
Exhibit Trends for P/E ratios reveal some uctuation followed
by a return to intrinsic valuation levels.
McKinsey on Finance
Behavior
Exhibit 2 of 2
1
WeIgILed uveruge PJE oI consLILuenL compunIes.
Source: SLundurd & Poor`s; McKInsey unuIysIs
1980 2002 1990 1999
P/E for S&P 500 overall
1
9 15 30 19
All other companies 9 15 23 16
30 largest companies 9 15 46 20
P/ E ratio for listed companies in United States
repurcIusIng sIures wIen LIe murkeL under-
prIces LIem reIuLIve Lo LIeIr InLrInsIc vuIue
puyIng Ior ucquIsILIons wILI sIures InsLeud oI
cusI wIen LIe murkeL overprIces LIem reIuLIve
Lo LIeIr InLrInsIc vuIue
dIvesLIng purLIcuIur busInesses uL LImes
wIen LrudIng und LrunsucLIon muILIpIes ure
IIgIer LIun cun be jusLIhed by underIy-
Ing IundumenLuIs
Beur Lwo LIIngs In mInd. IrsL, we don`L
recommend LIuL compunIes buse decIsIons Lo
Issue or repurcIuse LIeIr sIures, Lo dIvesL or
ucquIre busInesses, or Lo seLLIe LrunsucLIons wILI
cusI or sIures soIeIy on un ussumed dIIIerence
beLween LIe murkeL und InLrInsIc vuIue oI LIeIr
sIures. nsLeud, LIese decIsIons musL be
grounded In u sLrong busIness sLruLegy drIven
by LIe gouI oI creuLIng sIureIoIder vuIue.
MurkeL devIuLIons ure more reIevunL us LucLIcuI
consIderuLIons wIen compunIes LIme und
execuLe sucI decIsIons-Ior exumpIe, wIen Lo
Issue uddILIonuI cupILuI or Iow Lo puy Ior
u purLIcuIur LrunsucLIon.
Second, munugers sIouId be wury oI unuIyses
cIuImIng Lo IIgIIIgIL murkeL devIuLIons. MosL oI
LIe uIIeged cuses LIuL we Iuve come ucross In
our cIIenL experIence proved Lo be InsIgnIhcunL or
even nonexIsLenL, so LIe evIdence sIouId be
compeIIIng. urLIermore, LIe devIuLIons sIouId
be sIgnIhcunL In boLI sIze und duruLIon, gIven
LIe cupILuI und LIme needed Lo Luke udvunLuge oI
LIe Lypes oI opporLunILIes IIsLed prevIousIy.
ProvIded LIuL u compuny`s sIure prIce evenLuuIIy
reLurns Lo ILs InLrInsIc vuIue In LIe Iong run,
munugers wouId benehL Irom usIng u dIscounLed-
cusI-ow upproucI Ior sLruLegIc decIsIons.
WIuL sIouId muLLer Is LIe Iong-Lerm beIuvIor oI
LIe sIure prIce oI u compuny, noL wIeLIer IL
Is undervuIued by or 1o percenL uL uny gIven
LIme. or sLruLegIc busIness decIsIons, LIe
evIdence sLrongIy suggesLs LIuL LIe murkeL
reecLs InLrInsIc vuIue.
1
or un overvIew oI beIuvIoruI hnunce, see Juy R. RILLer,
BeIuvIoruI hnunce, Pccijc-csin Iincnce 1ourncl,
zoo, VoIume 11, Number q, pp. qzq-;; und NIcIoIus BurberIs
und RIcIurd H. TIuIer, A survey oI beIuvIoruI hnunce, In
Hcndbool oj the Economics oj Iincnce: Iincncicl Mcrlets cnd
Asset Pricin, G. M. ConsLunLInIdes eL uI. (eds.), New York:
EIsevIer NorLI-HoIIund, zoo, pp. 1oq-1z.
z
Owen A. umonL und RIcIurd H. TIuIer, Cun LIe murkeL
udd und subLrucL? MIsprIcIng In LecI sLock curve-ouLs,
1ourncl oj Politiccl Econom, zoo, VoIume 111, Number z,
pp. zz;-68; und Murk . MILcIeII, Todd C. PuIvIno, und
ErIk SLuIIord, ImILed urbILruge In equILy murkeLs, 1ourncl oj
Iincnce, zooz, VoIume ;, Number z, pp. 1-8q.

US corporuLe eurnIngs us u percenLuge oI GDP Iuve
been remurkubIy consLunL over LIe pusL yeurs, uL uround
6 percenL.
q
Murc H. GoedIurL, TImoLIy M. KoIIer, und Zune D. WIIIIums,
TIe reuI cosL oI equILy, McKinse on Iincnce, Number ,
AuLumn zooz, pp. 11-.

Murc H. GoedIurL, TImoLIy M. KoIIer, und Zune D. WIIIIums,
IvIng wILI Iower murkeL expecLuLIons, McKinse on
Iincnce, Number 8, Summer zoo, pp. ;-11.
6q
Excerpt from
The truth about growth and value stocks
Number 22,
Winter 2007
Whats in a name? In the vernacular of equity markets, the words growth and value convey the specic
characteristics of stock categories that are deeply embedded in the investment strategies of investors
and fund managers. Leading US market indexes, such as the S&P 500, the Russell 1000, and the Dow
Jones Wilshire 2500, all divide themselves into growth- and value-style indexes.
Its not illogical to assume that having the label growth or value attached to a companys shares can
actually drive prices up or push them lower. In our experience, many executives have expended
considerable effort plotting to attract more growth investors, believing that an inux of growth investors
leads to higher valuations of a stock. Some executives even turn this assumption into a rationale
for using a high share price to defend risky acquisition programsfor example, in deference to presumed
shareholder expectations of growth.
The trouble is that such thinking is wrong in both cases. Although growth stocks are indeed valued at
a higher level than value stocks on average, as measured by market-to-book ratios (M/Bs), their revenue
growth rates are virtually indistinguishable from those of value stocks (exhibit). The growth indexs
10.1 percent median compounded revenue growth rate for 2002 to 2005 is not statistically different from
the 8.7 percent median of the value index. Thus, the probability that a company designated as
a growth stock will deliver a given growth rate is virtually indistinguishable from the probability that a value
company will do so.
Companies that show up on growth indexes actually dont grow
appreciably faster than those that show up on value indexes.
Growth stocks
Exhibit 1 of 2
1
S&P ooJBurru GrowLI ndex und S&P ooJBurru VuIue ndex us oI Dec zoo.
z
ExcIudIng goodwIII; does noL IncIude IInuncIuI-secLor sLocks; -yeur uveruge udjusLs Ior unnuuI voIuLIIILy.
Growth rate, 3-year average, 200205,
2
%
Median value = 8.7% Median growth = 10.1%
3 1 1 3 5 7 9 11 13 15 17 19 21 23 25 >25
8
10
12
14
6
4
2
0
Value stocks
Growth stocks
Frequency of growth
and value stocks exhibiting
given growth rate,
1
%
;o
The CFO
;1
In this section:
Bertil E. Chappuis, Aimee Kim, and Paul J. Roche
There are a few critical tasks that all finance chiefs must tackle in their
first hundred days.
Number 27,
Spring 2008
Features
71 Starting up as CFO (Spring 2008)
Excerpts from
72 Toward a leaner finance department (Spring 2006)
75 Organizing for value (Summer 2008)
Starting up as CFO
n recenL yeurs, COs Iuve ussumed IncreusIngIy
compIex, sLruLegIc roIes Iocused on drIvIng LIe
creuLIon oI vuIue ucross LIe enLIre busIness. GrowIng
sIureIoIder expecLuLIons und ucLIvIsm, more
InLense M&A, mounLIng reguIuLory scruLIny over
corporuLe conducL und compIIunce, und evoIv-
Ing expecLuLIons Ior LIe hnunce IuncLIon Iuve puL
COs In LIe mIddIe oI muny corporuLe decIsIons-
und mude LIem more dIrecLIy uccounLubIe
Ior LIe perIormunce oI compunIes.
NoL onIy Is LIe job more compIIcuLed, buL u IoL oI
COs ure new uL IL-Lurnover In zoo6 Ior orLune
oo compunIes wus esLImuLed uL 1 percenL.
1

CompoundIng LIe pressures, compunIes ure uIso
more IIkeIy Lo reucI ouLsIde LIe orgunIzuLIon
Lo recruIL new COs, wIo muy LIereIore Iuve Lo
Ieurn u new IndusLry us weII us u new roIe.
To sIow Iow IL Is cIungIng-und Iow Lo work
LIrougI LIe evoIvIng expecLuLIons-we surveyed
;z McKInsey on Inunce Anthology 2011
Excerpt from
Toward a leaner finance department
Number 19,
Spring 2006
Richard Dobbs, Herbert Pohl, and Florian Wolff
Three ideas from the lean-manufacturing world are particularly helpful in eliminating waste and improving
efciency in the nance function:
Focusing on external customers. Many nance departments can implement a more efciency-minded
approach by making the external customers of their companies the ultimate referee of which activities add
value and which create waste. By contrast, the nance function typically relies on some internal entity to
determine which reports are necessaryan approach that often unwittingly produces waste.
Exploiting chain reactions. The value of introducing a more efciency-focused mind-set isnt always
evident from just one step in the processin fact, the payoff from a single step may be rather
disappointing. The real power is cumulative, for a single initiative frequently exposes deeper problems
that, once addressed, lead to a more comprehensive solution.
Drilling down to root causes. No matter what problem an organization faces, the nance functions
default answer is often to add a new system or data warehouse to deal with complexity and
increase efciency. While such moves may indeed help companies deal with difcult situations, they
seldom tackle the real issues.
16q COs oI muny dIIIerenL Lenures
z
und
InLervIewed zo oI LIem. rom LIese sources, us
weII us our yeurs oI experIence workIng wILI
experIenced COs, we Iuve dIsLIIIed Iessons LIuL
sIed IIgIL on wIuL IL Lukes Lo succeed. We
empIusIze LIe InILIuI LrunsILIon perIod: LIe hrsL
LIree Lo sIx monLIs.
Early priorities
NewIy uppoInLed COs ure InvurIubIy InLeresLed,
oILen unxIousIy, In mukIng LIeIr murk. WIere
LIey sIouId Iocus vurIes Irom compuny Lo compuny.
n some, enLerprIse-wIde sLruLegIc und
LrunsIormuLIonuI InILIuLIves (sucI us vuIue-bused
munugemenL, corporuLe-cenLer sLruLegy, or
porLIoIIo opLImIzuLIon) requIre consIderubIe CO
InvoIvemenL. n oLIers, duy-Lo-duy busIness needs
cun be more demundIng und LIme sensILIve-
especIuIIy In LIe Surbunes-OxIey envIronmenL-
creuLIng sIgnIhcunL dIsLrucLIons unIess LIey
ure cureIuIIy munuged. WIen COs InIerIL un
orgunIzuLIon under sLress, LIey muy Iuve
no cIoIce buL Lo Ieud u Lurnuround, wIIcI requIres
Iurge umounLs oI LIme Lo cuL cosLs und
reussure InvesLors.
YeL some ucLIvILIes sIouId muke uImosL every
CO`s sIorL IIsL oI prIorILIes. GeLLIng LIem dehned
In u compuny-specIhc wuy Is u crILIcuI sLep In
buIuncIng eIIorLs Lo ucIIeve LecInIcuI exceIIence
In LIe hnunce IuncLIon wILI sLruLegIc InILIuLIves
Lo creuLe vuIue.
;
Conduct a value creation audit
TIe mosL crILIcuI ucLIvILy durIng u CO`s hrsL
Iundred duys, uccordIng Lo more LIun percenL
oI our survey respondenLs, Is undersLundIng
wIuL drIves LIeIr compuny`s busIness. TIese
drIvers IncIude LIe wuy u compuny mukes money,
ILs murgIn udvunLuge, ILs reLurns on InvesLed
cupILuI (ROC), und LIe reusons Ior LIem. AL LIe
sume LIme, LIe CO musL uIso consIder
poLenLIuI wuys Lo Improve LIese drIvers, sucI us
sources oI growLI, operuLIonuI ImprovemenLs,
und cIunges In LIe busIness modeI, us weII us Iow
mucI LIe compuny mIgIL guIn Irom uII oI LIem.
To deveIop LIuL undersLundIng, severuI COs we
InLervIewed conducLed u sLruLegy und vuIue
uudIL soon uILer ussumIng LIe posILIon. TIey evuIu-
uLed LIeIr compunIes Irom un InvesLor`s
perspecLIve Lo undersLund Iow LIe cupILuI murkeLs
wouId vuIue LIe reIuLIve ImpucL oI revenue
versus IIgIer murgIns or cupILuI eIhcIency und
ussessed wIeLIer eIIorLs Lo udjusL prIces,
cuL cosLs, und LIe IIke wouId creuLe vuIue, und II
so Iow mucI.
AILIougI LIIs kInd oI eIIorL wouId cIeurIy be u
prIorILy Ior exLernuI IIres, IL cun uIso be useIuI Ior
InLernuI ones. As u CO promoLed InLernuIIy
uL one IIgI-LecI compuny expIuIned, WIen wus
LIe CO oI u busIness unIL, never worrIed
ubouL corporuLe LuxuLIon. never LIougIL ubouL
porLIoIIo-IeveI rIsk exposure In Lerms oI producLs
und geogrupIIes. WIen becume corporuLe
CO, Iud Lo Ieurn ubouL busIness drIvers LIuL
ure Iess ImporLunL Lo IndIvIduuI busIness
unIL perIormunce.
TIe cIoIce oI InIormuLIon sources Ior geLLIng up Lo
speed on busIness drIvers cun vury. As COs
The CFO
Exhibit 1 The majority of CFOs in our survey wished theyd had
even more time with business unit heads.
McKinsey on Finance
CFO 100 days survey
Exhibit 1 of 3
If you could change the amount of time you spent with each of the
following individuals or groups during your rst 100 days as CFO, what
changes would you make?
Business unit heads 61 35
Former CFO 10 52 15 23
External investors or analysts 26 46 11 17
2 1
Finance staff 43 48 9
CEO 43 52 5
Board of directors 36 56 4 5
Executive committee 38 52 8
Less time Dont know No change More time
2
1
0
% of respondents,
1
n = 164
1
Igures muy noL sum Lo 1oo%, becuuse oI roundIng.
;q McKInsey on Inunce Anthology 2011
conducLed LIeIr vuIue uudIL, LIey LypIcuIIy sLurLed
by musLerIng exIsLIng InIormuLIon, usuuIIy
by meeLIng wILI busIness unIL Ieuds, wIo noL onIy
sIured LIe specIhcs oI producL IInes or murkeLs
buL ure uIso ImporLunL becuuse LIey use LIe
hnunce IuncLIon`s servIces. ndeed, u mujorILy oI
COs In our survey, und purLIcuIurIy LIose In
prIvuLe compunIes, wIsIed LIuL LIey Iud spenL
even more LIme wILI LIIs group (ExIIbIL 1).
SucI meeLIngs uIIow COs Lo sLurL buIIdIng reIu-
LIonsIIps wILI LIese key sLukeIoIders oI LIe
hnunce IuncLIon und Lo undersLund LIeIr needs.
OLIer COs Iook Ior exLernuI perspecLIves
on LIeIr compunIes und on LIe murkeLpIuce by
LuIkIng Lo cusLomers, InvesLors, or proIessIonuI
servIce provIders. TIe CO uL one pIurmu
compuny reporLed spendIng IIs hrsL monLI on
LIe job rIdIng uround wILI u suIes rep und
meeLIng up wILI our key cusLomers. L`s umuzIng
Iow mucI ucLuuIIy Ieurned Irom LIese
dIscussIons. TIIs wus InIormuLIon LIuL no one
InsIde LIe compuny couId Iuve LoId me.
Lead the leaders
ExperIenced COs noL onIy undersLund und Lry Lo
drIve LIe CEO`s ugendu buL uIso know LIey
musL IeIp Lo sIupe IL. COs oILen begIn uIIgnIng
LIemseIves wILI LIe CEO und bourd members
weII beIore LukIng oIhce. DurIng LIe recruILIng
process, mosL COs we InLervIewed receIved
very expIIcIL guIdunce Irom LIem ubouL LIe Issues
LIey consIdered ImporLunL, us weII us wIere
Exhibit 2 Many CFOs received very explicit guidance from their CEOs
on the key issues of concern.
What was expected of CFOs
Being an active member of
senior-management team
Contributing to companys
performance
Improving quality of nance
organization
Challenging companys strategy
Bringing in a capital markets
perspective
Other
88
40
7
3
84
34
68
74
52
29
29
14
70
80
Ensuring efciency of nance
organization
By CEO (n = 128)
By nance staff (n = 35)
% of responses
1
from respondents who said CEO and nancial staff
gave explicit guidance on expectations,

n = 163
1
RespondenLs couId seIecL more LIun 1 unswer.
McKinsey on Finance
CFO 100 days survey
Exhibit 2 of 3
;
Excerpt from
Organizing for value
Number 28,
Summer 2008
Massimo Giordano and Felix Wenger
The CFO
LIe CO wouId Iuve Lo ussume u IeudersIIp roIe.
SImIIurIy, neurIy Iour-hILIs oI LIe COs In
our survey reporLed LIuL LIe CEO expIuIned wIuL
wus expecLed Irom LIem-purLIcuIurIy LIuL
LIey serve us ucLIve members oI LIe senIor-
munugemenL Leum, conLrIbuLe Lo LIe compuny`s
perIormunce, und muke LIe hnunce orgunI-
zuLIon eIhcIenL (ExIIbIL z). WIen one new CO
usked LIe CEO wIuL Ie expecLed uL LIe
one-yeur murk, LIe response wus, WIen you`re
ubIe Lo hnIsI my senLences, youÌI know
you`re on LIe rIgIL Lruck.
BuIIdIng LIuL kInd oI uIIgnmenL Is u cIuIIenge
Ior COs, wIo musL Iuve u cerLuIn uILImuLe
Independence us LIe voIce oI LIe sIureIoIder. TIuL
meuns LIey musL ImmedIuLeIy begIn Lo sIupe
LIe CEO`s ugendu uround LIeIr own Iocus on vuIue
creuLIon. Among LIe COs we InLervIewed,
LIose wIo Iud conducLed u vuIue uudIL couId
ImmedIuLeIy pILcI LIeIr InsIgILs Lo LIe CEO
und LIe bourd-LIus guInIng credIbIIILy und sLurL-
Ing Lo sIupe LIe dIuIogue. n some cuses, IucLs
LIuL surIuced durIng LIe process enubIed COs Lo
cIuIIenge busIness unIL orLIodoxIes. WIuL`s
more, LIe CO Is In u unIque posILIon Lo puL
numbers uguInsL u compuny`s sLruLegIc opLIons
In u wuy LIuL Iends u sIurp edge Lo decIsIon
mukIng. TIe CO uL u IIgI-LecI compuny, Ior
exumpIe, creuLed u pIun LIuL IdenLIhed
severuI key Issues Ior LIe Iong-Lerm IeuILI oI
LIe busIness, IncIudIng Iow Iurge enLerprIses
couId use ILs producL more eIhcIenLIy.
TIIs CO LIen prodded suIes und servIce Lo
deveIop u new sLruLegy und Leum Lo drIve
LIe producL`s udopLIon.
To pIuy LIese roIes, u CO musL esLubIIsI
LrusL wILI LIe bourd und LIe CEO, uvoIdIng uny
uppeurunce oI conIcL wILI LIem wIIIe
cIuIIengIng LIeIr decIsIons und LIe compuny`s
dIrecLIon II necessury. MuInLuInIng LIe rIgIL
buIunce Is un urL, noL u scIence. As LIe CO uL u
IeudIng soILwure compuny LoId us, L`s Impor-
LunL Lo be uIwuys uIIgned wILI LIe CEO und uIso Lo
be ubIe Lo IucLuuIIy cuII LIe buIIs und sLrIkes
us you see LIem. WIen you cunnoL buIunce LIe
Lwo, you need Lo hnd u new roIe.
Strengthen the core
To guIn LIe LIme Ior ugendu-sIupIng prIorILIes,
COs musL Iuve u weII-IuncLIonIng hnunce group
beIInd LIem; oLIerwIse, LIey won`L Iuve LIe
credIbIIILy und Iurd duLu Lo muke LIe dIIhcuIL
One way companies can compensate for
the blunt tools of traditional planning is to take
a ner-grained perspective on businesses
within large divisions. By identifying and dening
smaller units built around activities that
create value by serving related customer needs,
executives can better assess and manage
performance by focusing on growth and value
creation. These units, which we call value
cells, offer managers a more detailed, more
tangible way of gauging business value
and economic activity, allow CEOs to spend
more time on in-depth strategy discus-
sions, and make possible more nely tuned
responses to the demands of balancing
growth and short-term earnings. In our
experience, a company of above $10 billion
market capitalization should probably
be managed at the level of 20 to 50 value
cells, rather than the more typical three
to ve divisions.
;6 McKInsey on Inunce Anthology 2011
urgumenLs. Muny new COs hnd LIuL dIspuruLe T
sysLems, IIgIIy munuuI processes, un unskIIIed
hnunce sLuII, or unwIeIdy orgunIzuLIonuI sLrucLures
Iumper LIeIr ubIIILy Lo do unyLIIng beyond
cIosIng LIe quurLer on LIme. n order Lo sLrengLIen
LIe core Leum, durIng LIe hrsL Iundred duys
ubouL LIree-quurLers oI LIe new COs we
surveyed InILIuLed (or deveIoped u pIun Lo InILIuLe)
IundumenLuI cIunges In LIe IuncLIon`s core
ucLIvILIes (ExIIbIL ).
SeveruI oI our COs IuuncIed u rIgorous Iook
uL LIe hnunce orgunIzuLIon und operuLIons LIey
Iud jusL Luken over, und muny experIenced
COs suId LIey wIsIed LIey Iud done so. n LIese
revIews, LIe COs ussessed LIe reporLIng
sLrucLure; evuIuuLed LIe hL und cupubIIILIes oI LIe
hnunce execuLIves LIey Iud InIerILed; vuII-
duLed LIe hnunce orgunIzuLIon`s cosL bencImurks;
und IdenLIhed uny gups In LIe eIIecLIveness or
eIhcIency oI key sysLems, processes, und reporLs.
TIe resuILs oI sucI u revIew cun IeIp COs
guuge Iow mucI energy LIey wIII need Lo InvesL In
LIe hnunce orgunIzuLIon durIng LIeIr InILIuI
6 Lo 1z monLIs In oIhce-und Lo hx uny probIems
LIey hnd.
TrunsILIons oIIer u rure opporLunILy: LIe
orgunIzuLIon Is usuuIIy open Lo cIunge. More LIun
IuII oI our respondenLs mude uL IeusL moderuLe
uILeruLIons In LIe core hnunce Leum eurIy In LIeIr
Lenure. As one CO oI u gIobuI soILwure com-
puny puL IL, I LIere Is u burnIng pIuLIorm,
LIen you need Lo hnd IL und LuckIe IL. I you know
you wIII need Lo muke peopIe cIunges, muke
LIem us IusL us you cun. WuILIng onIy geLs you InLo
more LroubIe.
Manage performance actively
COs cun pIuy u crILIcuI roIe In enIuncIng
LIe perIormunce dIuIogue oI LIe corporuLe cenLer,
LIe busIness unILs, und corporuLe IuncLIons.
TIey Iuve u number oI LooIs uL LIeIr dIsposuI,
IncIudIng dusIbourds, perIormunce LurgeLs,
enIunced pIunnIng processes, LIe corporuLe
revIew cuIendur, und even LIeIr own
Exhibit 3 New CFOs often initiate fundamental
changes to core activities.
1
RespondenLs couId seIecL more LIun 1 unswer; LIose wIo unswered none oI LIese ure noL sIown.
In which of the given areas did you initiate (or develop
a plan to initiate) fundamental changes during your rst
100 days as CFO?
Financial planning, budgeting, analysis 79
Management reporting,
performance management
73
Finance IT systems 34
Tax, group capital structure, treasury,
including risk management
32
53
Financial accounting, reporting
(including audit, compliance)
% of responses,
1
n = 164
McKinsey on Finance
CFO 100 days survey
Exhibit 3 of 3
;;
reIuLIonsIIps wILI LIe Ieuders oI busIness unILs
und IuncLIons.
Among LIe COs we InLervIewed, some use
LIese LooIs, us weII us IucLs und InsIgILs derIved
Irom LIe CO`s unIque uccess Lo InIormuLIon
ubouL LIe busIness, Lo cIuIIenge oLIer execuLIves.
A number oI InLervIewees Luke u dIIIerenL
upproucI, Iowever, expIoILIng wIuL LIey cuII LIe
rIyLIm oI LIe busIness by usIng LIe corporuLe-
pIunnIng cuIendur Lo sIupe LIe perIormunce
dIuIogue LIrougI dIscussIons, LIeIr own ugendus,
und meLrIcs. SLIII oLIer COs, we Iuve
observed, exerL Inuence LIrougI LIeIr personuI
credIbIIILy uL perIormunce revIews.
WIIIe no consensus emerged Irom our dIscus-
sIons, LIe more experIenced COs sLressed
LIe ImporLunce oI IeurnIng ubouL u compuny`s
currenL perIormunce dIuIogues eurIy on,
undersLundIng wIere ILs perIormunce musL be
Improved, und deveIopIng u Iong-Lerm
sLruLegy Lo Inuence eIIorLs Lo do so. SucI u
sLruLegy mIgIL use LIe CO`s ubIIILy Lo
enguge wILI oLIer senIor execuLIves, us weII us
cIunged sysLems und processes LIuL couId spur
perIormunce und creuLe uccounLubIIILy.
First steps
GIven LIe mugnILude oI wIuL COs muy
be requIred Lo do, IL Is no surprIse LIuL LIe hrsL
1oo Lo zoo duys cun be LuxIng. YeL LIose wIo
Iuve pussed LIrougI LIIs LrunsILIon suggesL
severuI useIuI LucLIcs. Some wouId be uppIIcubIe
Lo uny mujor corporuLe IeudersIIp roIe buL
ure neverLIeIess IIgIIy reIevunL Ior new COs-
In purLIcuIur, LIose wIo come Irom
IuncLIonuI roIes.
Get a mentor
AILIougI u mujorILy oI LIe COs we InLervIewed
suId LIuL LIeIr eurIy duys on LIe job were
suLIsIucLory, LIe LrunsILIon wusn`L wILIouL specIhc
cIuIIenges. A common compIuInL we Ieur ubouL
Is LIe Iuck oI menLors-un Issue LIuL uIso cume up
In our recenL survey resuILs, wIIcI sIowed LIuL
z percenL oI LIe respondIng COs dIdn`L Iuve one.
orLy-sIx percenL oI LIe respondenLs suId LIuL
LIe CEO Iud menLored LIem, buL LIe reIuLIonsIIp
uppeured Lo be quILe dIIIerenL Irom LIe LrudILIonuI
menLorsIIp modeI, becuuse muny COs IeIL
uncomIorLubIe LeIIIng LIe boss everyLIIng ubouL
LIe cIuIIenges LIey Iuced. As one CO puL
IL durIng un InLervIew, beIng u CO Is probubIy
one oI LIe IoneIIesL jobs ouL LIere. Muny oI
The CFO
;8 McKInsey on Inunce Anthology 2011
LIe COs we spoke wILI menLIoned LIe vuIue
oI IuvIng one or Lwo menLors ouLsIde LIe compuny
Lo serve us u soundIng bourd. We uIso know
COs wIo Iuve joIned IIgI-vuIue roundLubIes
und oLIer sucI Iorums Lo buIId neLworks
und sIure Ideus.
Listen first . . . then act
GIven LIe decIInIng uveruge Lenure In oIhce
oI corporuLe Ieuders, und LIe IIgI Lurnover umong
COs In purLIcuIur, hnunce execuLIves
oILen IeeI pressure Lo muke LIeIr murk sooner
ruLIer LIun IuLer. TIIs pressure creuLes
u poLenLIuIIy unIeuILIy bIus Lowurd ucLIng wILI
IncompIeLe-or, worse, InuccuruLe-InIormuLIon.
WIIIe we beIIeve sLrongIy LIuL COs sIouId
be uggressIve und ucLIon orIenLed, LIey musL use
LIeIr energy und enLIusIusm eIIecLIveIy. As
one CO reecLed In IIndsIgIL, wouId Iuve
spenL even more LIme IIsLenIng und Iess
LIme doIng. PeopIe do unLIcIpuLe cIunge Irom
u new CO, buL LIey uIso respecL you more
II you Luke LIe LIme Lo IIsLen und Ieurn und geL
IL rIgIL wIen you ucL.
Make a few themes your priorityconsistently
SuppIemenL your duy-Lo-duy ucLIvILIes
wILI no more LIun LIree Lo Iour mujor cIunge
InILIuLIves, und Iocus on LIem consIsLenLIy.
To muke cIunge Iuppen, you wIII Iuve Lo repeuL
your messuge over und over-InLernuIIy, Lo LIe
hnunce sLuII, und exLernuIIy, Lo oLIer sLukeIoIders.
CommunIcuLe your cIunges by sLressIng broud
LIemes LIuL, over LIme, couId encompuss newIy
IdenLIhed Issues und ucLIons. One eIemenL
oI your ugendu, Ior exumpIe, mIgIL be LIe broud
LIeme oI ImprovIng LIe eIhcIency oI hnun-
cIuI operuLIons ruLIer LIun jusL LIe nurrow one
oI oIIsIorIng.
Invest time up front to gain credibility
GuInIng credIbIIILy eurIy on Is u common
cIuIIenge-purLIcuIurIy, uccordIng Lo our survey,
Ior u CO IIred Irom ouLsIde u compuny. n
some cuses, IL`s suIhcIenL Lo InvesL enougI LIme
Lo know LIe numbers coId, us weII us LIe
compuny`s producLs, murkeLs, und pIuns. n oLIer
cuses, guInIng credIbIIILy muy Iorce you Lo
udjusL your mInd-seL IundumenLuIIy.
TIe COs we InLervIewed LoId us LIuL IL`s Iurd
Lo wIn supporL und respecL Irom oLIer corporuLe
oIhcers wILIouL mukIng u conscIous eIIorL Lo
LIInk IIke u CO. CIeurIy, one wILI LIe menLuIILy
oI u Ieud conLroIIer, Iocused on compIIunce
und conLroI, Isn`L IIkeIy Lo muke LIe kInd oI rIsky
buL LIougILIuI decIsIons needed Lo IeIp
u compuny grow. CIuIIengIng u busIness pIun und
u sLruLegy Isn`L uIwuys ubouL reducIng InvesL-
menLs und squeezIng IncremenLuI murgIns. TIe
CO Ius un opporLunILy Lo uppIy u hnunce
Iens Lo munugemenL`s upproucI und Lo ensure LIuL
Inunce execuLIves oILen IeeI pressure Lo muke
LIeIr murk sooner ruLIer LIun IuLer. TIIs
pressure creuLes u poLenLIuIIy unIeuILIy bIus
Lowurd ucLIng wILI IncompIeLe-or, worse,
InuccuruLe-InIormuLIon.
;q
1
InuncIuI OIIIcers` Turnover, zoo; SLudy, RusseII
ReynoIds AssocIuLes.
z
We surveyed 16q currenL or Iormer COs ucross
IndusLrIes, geogrupIIes, revenue cuLegorIes, und ownersIIp
sLrucLures. or more oI our concIusIons, see TIe
CO`s IIrsL Iundred duys: A McKInsey GIobuI Survey,
mckInseyquurLerIy.com, December zoo;.
u compuny LIorougIIy exumInes uII possIbIe
wuys oI ucceIeruLIng und muxImIzIng LIe cupLure
oI vuIue.
As un IncreusIng number oI execuLIves become
new COs, LIeIr ubIIILy Lo guIn un undersLundIng
oI wIere vuIue Is creuLed und Lo deveIop
u sLruLegy Ior InuencIng boLI execuLIves und
ongoIng perIormunce munugemenL wIII
sIupe LIeIr IuLure IegucIes. WIIIe duy-Lo-duy
operuLIons cun quIckIy ubsorb LIe LIme oI
uny new CO, conLInued Iocus on LIese Issues und
LIe underIyIng quuIILy oI LIe hnunce operuLIon
dehnes worId cIuss COs.
The CFO
Viral Acharya is a professor of nance at New York
Universitys Leonard N. Stern School of Business.
Patrick Beitel (Patrick_Beitel@McKinsey.com) is
a partner in McKinseys Frankfurt ofce.
Nidhi Chadda is an alumnus of the New York ofce.
Bertil Chappuis (Bertil_Chappuis@McKinsey.com)
is a partner in the Silicon Valley ofce.
Richard Dobbs (Richard_Dobbs@McKinsey.com)
is a director of the McKinsey Global Institute and
a partner in the Seoul ofce.
Bryan Fisher (Bryan_Fisher@McKinsey.com) is
a partner in the Houston ofce.
Massimo Giordano (Massimo_Giordano@
McKinsey.com) is a partner in the Milan ofce.
Marc Goedhart (Marc_Goedhart@McKinsey.com) is
a senior expert in the Amsterdam ofce.
Peter Haden (Peter_Haden@McKinsey.com) is
a partner in the Amsterdam ofce.
Neil Harper is an alumnus of the New York ofce.
Peggy Hsieh is an alumnus of the New York ofce.
Bill Huyett (Bill_Huyett@McKinsey.com) is
a partner in the Boston ofce.
Bin Jiang (Bin_Jiang@McKinsey.com) is
a consultant in the New York ofce.
Conor Kehoe (Conor_Kehoe@McKinsey.com) is
a partner in the London ofce.
Aimee Kim (Aimee_Kim@McKinsey.com) is
a partner in the Seoul ofce.
Tim Koller (Tim_Koller@McKinsey.com) is a partner
in the New York ofce.
Ankush Kumar (Ankush_Kumar@McKinsey.com) is
a partner in the Houston ofce.
Eric Lamarre (Eric_Lamarre@McKinsey.com) is
a partner in the Montral ofce.
Nick Lawler is an alumnus of the New York ofce.
Rob McNish (Rob_McNish@McKinsey.com) is
a partner in the Washington, DC, ofce.
Jean-Hugues Monier (Jean-Hugues_Monier@
McKinsey.com) is a partner in the New York ofce.
Robert Palter (Robert_Palter@McKinsey.com) is
a partner in the Toronto ofce.
Martin Pergler (Martin_Pergler@McKinsey.com) is
a consultant in the Singapore ofce.
Herbert Pohl (Herbert_Pohl@McKinsey.com) is
a partner in the Dubai ofce.
S. R. Rajan is an alumnus of the New York ofce.
Werner Rehm (Werner_Rehm@McKinsey.com) is
a senior expert in the New York ofce.
Michael Reyner is an alumnus of the London ofce.
Paul Roche (Paul_Roche@McKinsey.com) is
a partner in the Silicon Valley ofce.
Michael Shelton is an alumnus of the
Chicago ofce.
Jonathan Shih is an alumnus of the New
York ofce.
Robert Uhlaner (Robert_Uhlaner@McKinsey.com) is
a partner in the San Francisco ofce.
Felix Wenger (Felix_Wenger@McKinsey.com) is
a partner in the Zurich ofce.
David Wessels is an alumnus of the New
York ofce.
Andy West (Andy_West@McKinsey.com) is
a partner in the Boston ofce.
Florian Wolff is an alumnus of the Munich ofce.
Contributors
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MoF Issue 40 Summer 11

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MoF Issue 40 Summer 11

Enviado por

Direitos autorais:

Formatos disponíveis

The enduring value of fundamentals

n LIIs Issue, you`II hnd TIe CEO`s guIde Lo

InuIIy, execuLIves sIouIdn`L worry LIuL

TIe decIsIon geLs more compIIcuLed II LIe cusI

Capital structures long-term impact

Iound LIuL uImosL IuII

Compound unnuuI growLI ruLe.

Robert T. Uhlaner and Andrew S. West

TIe LypIcuI bourd subcommILLees

murgInuIIy-und Isn`L worLI LIe munugemenL

We uIso esLImuLe LIuL LIe InuLIon-udjusLed

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