Value: The Four Cornerstones of Corporate Finance

Preface

Most executives have figured out how to create value for shareholders. Through experience, observation, and intuition, they've developed a wealth of personal wisdom that, with some luck, typically takes them in the right direction.

But let's face it: that wisdom doesn't always prevail. Indeed, the run-up to the financial crisis of 2008 is but one example of how easily finance myths, fads, and misconceptions overwhelm wisdom, even in the most sophisticated organizations.

Executives don't have it easy. It's tough to hold steady when shareholders expect absurdly high returns during periods of relative alignment between companies' share prices and underlying economic value. It's even tougher to stick with fundamentals as peers' profits skyrocket in seemingly irrational ways, as they did in 2008, or when share prices reach unprecedented and unsustainable levels, as they did during the Internet-bubble era.

During such periods, seductive new economic theories emerge. These theories catch the attention of journalists, traders, boards, investors, and executives—even though they're blatantly at odds with the tenets of finance that have held true for more than 100 years.

These episodes of wishful thinking have only reinforced the immutable principles of value creation. These four principles, which we call the cornerstones of corporate finance, start with the axiom that companies exist to meet customer needs in a way that translates into reliable returns to investors. Together, the ...