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The CEO’s Guide to Corporate Finance

Four principles can help you make great financial decisions – even when the CFO’s not in the room.

by Richard Dobbs, Bill Huyett, and Tim Koller, McKinsey

The problem

Only improving cash flows will create value.

Strategic decisions can be complicated by competing, often spurious notions of what creates value. Even executives with solid instincts can be seduced by the allure of financial engineering, high leverage, or the idea that well-established rules of economics no longer apply.

Why it matters 

Such misconceptions can undermine strategic decision-making and slow down economies.

What you should do about it

Test decisions such as whether to undertake acquisitions, make divestitures, invest in projects, or increase executive compensation against four enduring principles of corporate finance. Doing so will often require managers to adopt new practices, such as justifying mergers on the basis of their impact on cash flows rather than on earnings per share, holding regular business exit reviews, focusing on enterprise-wide risks that may lurk within individual projects, and indexing executive compensation to the growth and market performance of peer companies.