Value: The Four Cornerstones of Corporate Finance

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Managing for Value

The most difficult part of creating value and applying the four cornerstones is getting the right balance between delivering near-term profits and return on capital, and continuing to invest for long-term value creation.1 Configuring the management approaches of the company to reflect this balance is the chief executive's responsibility.

Large companies are complex in their many businesses, markets, stakeholders, and layers of management—and this tends to bias decisions toward short-term profits because they are the most visible measure of performance. One large company we know owes its heritage of success to nurturing small business units with patience, knowing that some of them will become large, successful businesses. But recently we found that the company doesn't have as many small units to nurture anymore, a casualty of its newfound desire to boost current earnings.

We've seen several large companies in industries ranging from consumer products to health care to banking set explicit targets for growing earnings faster than revenues. This can be construed as a clear and bold performance aspiration, and it usually works for a couple of years in an already healthy business. However, it overlooks the fact that the only way to continually grow earnings faster than revenues is to cut necessary costs for growing the business, or to not invest in new markets that will have low or negative margins for several years. Companies that adopt such a bold but unsustainable ...