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Number 41, Autumn 2011
Perspectives on Corporate Finance and Strategy
McKinsey on Finance
A bias against investment?
18
Governance since the economic crisis: McKinsey Global Survey results
22
Google’s CFO on growth, capital structure, and leadership
7
Finding the courage to shrink
2
The savvy executive’s guide to buying back shares
14
McKinsey on Finance is a quarterly
publication written by experts and
practitioners in McKinsey & Company’s
corporate finance 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
corporatefinance.mckinsey.com, where
selected articles are also available
in audio format. A series of McKinsey on
Finance podcasts is also available
on iTunes.
Editorial Contact: McKinsey_on_
To request permission to republish an
article, send an e-mail to
Editorial Board: David Cogman,
Ryan Davies, Marc Goedhart,
Bill Huyett, Bill Javetski, Tim Koller,
Dan Lovallo, Werner Rehm,
Dennis Swinford
Editor: Dennis Swinford
Art Direction: Veronica Belsuzarri
Design and Layout: Jake Godziejewicz
Managing Editor: Drew Holzfeind
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Editorial Production: Kelsey Bjelland,
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Circulation: Diane Black
External Relations: Katherine Boas
Illustrations by Ken Orvidas
Copyright © 2011 McKinsey & Company.
All rights reserved.
This publication is not intended
to be used as the basis for trading in
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undertaking any other complex or
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No part of this publication may
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without the prior written consent of
McKinsey & Company.
1
2Finding the courage
to shrink
Spinning off businesses
can have real advantages
in creating value—if
executives understand how.
7Google’s CFO
on growth, capital
structure,
and leadership
Patrick Pichette describes
the attitudes and
behavior that Google
hopes will keep it
growing like a start-up.
14The savvy executive’s
guide to buying
back shares
Timing share repurchases
is tricky. The most
shareholder-friendly
approach: don’t try.
22Governance since the
economic crisis:
McKinsey Global Survey
results
Corporate directors
know what they should be
doing. But they haven’t
raised their game since
2008 and must strengthen
their capabilities
and spend more time on
board work.
18A bias against
investment?
Companies should be
investing to improve their
performance and set the
stage for growth. They’re
not. A survey of executives
suggests behavioral bias
is a culprit.
McKinsey on Finance
Number 41, Autumn 2011
2
It takes courage to break up a company. CEOs
and boards of directors often fear that investors will
view asset divestitures as admissions of failed
strategy—that having certain businesses under the
same corporate umbrella never made sense.
Many worry that shedding assets will cost a com-
pany the benefits of scale, cut into the advantages
of analyst coverage, or even damage employee
morale. Spin-offs in particular draw scrutiny because
they shrink the size of the parent company but,
unlike sales, don’t generate cash to reinvest.
We don’t believe these arguments hold up. What’s
more, they may lead executives to pass up value-
creating opportunities. A fundamental principle of
Bill Huyett and
Tim Koller
Finding the courage to shrink
corporate finance holds that a business creates
the most value for shareholders and the economy
as a whole when it is owned by the best—or, at least,
a better—owner.1 So it makes sense that com-
panies should continually reallocate their resources
as circumstances change. Moreover, the benefits
of being part of a large company come at a cost; in
fact, many spun-off companies can make sub-
stantial cuts in overhead costs once they are inde-
pendent. Investors typically don’t care about a
company being too small once it reaches a threshold
of about $500 million in market capitalization.2
And in our experience, executives and employees
of spun-off companies often feel liberated and
quite happy to be on their own.
Spinning off businesses can have real advantages in creating value—if executives
understand how.
3
So it’s a good sign that there’s been something of a
revival in spin-off activity this year. According
to Bloomberg, as of August 25, 174 companies had
announced spin-offs of all sizes—quickly
approaching the previous global record of 230, in
2006. Among the notable deals: Kraft Foods’s
spin-off of its North American grocery unit and
ConocoPhillips’s spin-offs of its downstream
businesses.
The trick to executing a spin-off strategy—and
to overcoming predictable objections to it—is to
understand where the value is created. Markets
typically respond favorably to spin-offs, but savvy
managers understand that such deals create
value not from some mechanical market reaction
but from the sharpened strategic vision that
comes with restructuring or the tax advantages
relative to a sale.
Spin-offs: A brief history
Company breakups through spin-offs date back at
least a hundred years. Many of the earliest and
best-known ones were mandated by courts to split
up monopolies, including the 1911 breakup of
Standard Oil into 34 separate companies, as well
as the 1984 breakup of AT&T into 8 companies.
After the AT&T breakup, spin-offs became a
more common way for companies to change their
strategic direction. American Express, for
example, spun off Lehman Brothers in 1994, ending
its strategy of becoming a financial supermarket.
In 1993, as the historical links between chemical
and pharmaceutical businesses became less
relevant, the British chemical company Imperial
Chemical Industries3 (ICI) spun off its pharma-
ceutical business as Zeneca.4 Recent spin-offs have
reflected similar shifts. In 2008, when the
integration of the production and delivery of media
content didn’t lead to the anticipated benefits,
Time Warner announced that it would spin off its
cable television business.
Some of the major conglomerates built in the
1960s and ’70s used spin-offs to break themselves
up. ITT, one of the best-known conglomerates
of that era, used a double spin-off in 1995 to split
itself into three companies, ITT Sheraton
(now part of Starwood Hotels and Resorts), Hartford
Financial Services, and the remaining industrial
businesses, which kept the ITT name. In January
2011, ITT announced that it was further
splitting up into three companies: ITT Corporation
(industrial process and flow control), Zylem
(water and waste water), and ITT Exelis (defense).
In an even more extreme example, the com-
pany that was Dun & Bradstreet in 1995 has spun
out businesses four times (1996, 1998, 1999, and
2000) and now exists as seven different companies.
Understanding the benefits
One common misperception about spin-offs is that
they are quick fixes for low valuations. Managers
see the typically favorable response that markets
have to a spin-off announcement as confir-
mation that a spin-off itself mechanically illuminates
value that investors previously overlooked. But
that belief is misleading.
Such assumptions rest errantly on a “sum
of the parts” calculation. For each of a company’s
businesses, analysts add up an assumed
earnings multiple based on the multiples of industry
peers. If they find that the sum of the parts
is greater than the market value of the company
as currently traded, they assume the market
hasn’t valued the business properly.
4 McKinsey on Finance Number 41, Autumn 2011
Unfortunately, these analyses often are flawed—
usually because the selected peers are not
actually comparable in industry, performance,
or both. Once truly comparable businesses
are identified, the undervaluation typically dis-
appears (exhibit).
The real reason spin-offs are so valuable is tied to
expected performance: increased valuations
reflect the market’s expectation that performance
will improve at both the parent company and
the spun-off business once each has the freedom
to change its strategies, people, and organi-
zation. Indeed, of the 85 spin-offs associated with
a major restructuring5 of a company globally
since 1992, spun-off businesses nearly doubled their
growth rates and increased their operating profit
margins by a median of 1.6 percent over five years.
Among parent companies, profit margins
increased 11 percent in the first year after the spin-
off and an additional 3.5 percent by the fifth
year.6 Also, one academic study concluded that
spin-offs improve the allocation of capital,
because researchers observed changes in strategy
among spun-off businesses.7 They found that
higher-profit businesses tended to increase
their investment spending, while lower-profit ones
tended to cut it.
This ability to change strategic direction is
the biggest source of performance improvements.
Consider, for example, Bristol-Myers Squibb,
which spun off its Zimmer orthopedic-devices
business in 2001 with an initial market value
Exhibit
Disguised example of large company with multiple business units
Unit A
Unit B
Enterprise value
Debt
Equity
Current market value
In the first analysis, Unit C’s multiple was based on a diverse set of peers.
Unit C
13×
11×
20×
12×
10×
10×
36
10
10
33
9
5
9
11
100
56
(10)
46
47
(10)
37
$39 billon
19
–
24
Assumed earnings multiplier
Assumed estimate of value, $ billion
Revised estimate of value, $ billion
Difference, %Revised earnings multiplier
A ‘sum of the parts’ valuation can lead to misleading conclusions if not carefully conducted.
MoF 2011Spin-offsExhibit
Deeper analysis narrowed the sample to include only companies with comparable performance in growth and returns on capital.
5Finding the courage to shrink
of $5.4 billion. Under Bristol-Myers Squibb, Zimmer
relied on pricing to drive revenue growth. The
separation allowed Zimmer to invest in developing
new technologies, launch new products, and
grow in new geographies. The company also more
aggressively reduced costs by, for example,
improving the efficiency of its manufacturing plants.
Another source of improvement is eliminating
conflicts and potential conflicts between the parent
and the spun-off company. The pharmaceutical
company Merck, for example, spun off Medco, its
pharmacy benefits manager, in 2003, with an
initial market value of $6.6 billion. Because the
parent company was an important supplier to
Medco, there were long-standing questions about
whether Medco gave preference to Merck drugs
over those of other pharmaceutical companies. The
separation eliminated that concern in Medco’s
negotiations with customers and helped Medco
accelerate its growth by shifting clients
to generic drugs and a mail-order pharmacy.
Spun-off companies may also attract more desirable
management talent. In 2007, Tyco International
split itself into three companies: Covidien, Tyco
Electronics, and the original Tyco International.
Shortly after the spin-off, then-CFO Chris Coughlin
described the advantages, reporting that the
health care business, Covidien, had made significant
strides in attracting new talent that would
probably not have been attracted to the old Tyco.8
In a health care company with a clearly defined
strategy, employees and prospective employees
could see themselves advancing professionally
while remaining in health care and playing a sig-
nificant role in the business.
Sell or spin?
When executives decide to dispose of a business
unit because their company is no longer a
better owner of it, their first inclination is usually
to sell it outright. Yet spinning off these units
may have tax advantages over selling them. In fact,
most early spin-offs were completed by UK- or
US-based companies partly because the tax laws
of those two countries treated most spin-offs as
tax-free transactions. Several continental-European
countries changed their tax laws, beginning in
the late 1990s, to facilitate spin-offs. Since the
1998 breakup of Dutch telecommunications
company KPN and TNT Post, more continental-
European businesses have used spin-offs to
break up their companies.
Tax benefits can make a spin-off preferable even
if a potential buyer is willing to pay a sizable
premium. In the United States today, for example,
a company must pay income tax of 35 percent
on any gain from the sale of a business, but a spin-off
can be structured as a tax-free transaction.
Consider a hypothetical example. ParentCo has
decided to divest one of its business units,
which—if spun off—would have a market capitali-
zation of $1 billion. It also has a $1.3 billion
offer from another company to buy the unit outright,
reflecting a typical acquisition premium. Since
ParentCo’s book value for the unit is $300 million,
the outright sale would carry a tax liability
of $350 million on a $1 billion gain on the sale,
reducing after-tax proceeds to $950 million,
less than the unit’s expected market capitalization.
From a shareholder value perspective, taxes
alone should make ParentCo seriously consider a
spin-off rather than a sale.
Three factors determine the breakeven point:
the tax rate, the premium from the sale, and the
tax book value of the business relative to the
sale price. Because of the tax dynamics, companies
are more likely to spin off highly profitable
6 McKinsey on Finance Number 41, Autumn 2011
businesses and sell less profitable ones. The ratio
of the tax book value to the selling price is a
good proxy for how profitable a business is. A highly
profitable business may have a tax basis that is
only 10 percent of the selling price. To break even
between selling and spinning off, the company
would need to receive a 46 percent premium on the
sale. On the other hand, a low-profit business
with a tax book value of 80 percent of the
selling price would need to receive only an 8 per-
cent premium to break even.9
In many cases, understanding the shareholder
benefits that spinning off assets can have should
provide executives with the dose of courage
they may need to overcome resistance to this type
of value-creating divestiture.
The authors wish to acknowledge the contributions of Katherine Boas and Mauricio Jaramillo.
Bill Huyett ([email protected]) is a partner in McKinsey’s Boston office, and Tim Koller (Tim_Koller@
McKinsey.com) is a partner in the New York office. Copyright © 2011 McKinsey & Company. All rights reserved.
1 See Richard Dobbs, Bill Huyett, and Tim Koller, “Are you still the best owner of your assets?” mckinseyquarterly.com, November 2009.
2 See Robert S. McNish and Michael W. Palys, “Does scale matter to capital markets?” mckinseyquarterly.com, August 2005.
3 ICI was subsequently acquired in 2008 by Dutch chemicals conglomerate AkzoNobel.
4 Zeneca later merged with Astra in 1999 to form AstraZeneca.5 All told, we identified 919 spin-offs of all sizes since 1992.
For 85 of these deals, the spun-off business was worth more than 20 percent of the combined companies’ value and had a market capitalization of at least $1 billion.
6 For 59 large spin-offs between 1990 and 2010, where the per-formance of the companies could be measured five years later.
7 Robert H. Gertner, Eric A. Powers, and David S. Scharfstein, “Learning about internal capital markets from corporate spinoffs,” The Journal of Finance, 2002, Volume 57, Number 6, pp. 2479–506.
8 See Laura Corb and Tim Koller, “When to break up a conglomerate: An interview with Tyco International’s CFO,” mckinseyquarterly.com, October 2007.
9 Investors don’t pay taxes on the value of the shares they receive in a spin-off until they sell those shares. But they may be immediately liable to taxes on any dividends they receive if a company distributes them from the proceeds of a sale.
7
When it comes to playing the classic role of the
no-nonsense chief financial officer, Patrick Pichette
has his own personal interpretation. As Google’s
CFO, he may oversee $36 billion in cash reserves
at one of the world’s most recognized companies,
but he still flies coach class, rides a beat-up bicycle
to work, and responds directly to e-mails from
fellow “Googlers” every day. “It takes a little more
time,” he says. “But it crushes the idea of
bureaucracy—and that’s the way it should be.”
An alumnus of Bell Canada and McKinsey and a
Rhodes Scholar with a master’s degree in philosophy,
politics, and economics from Oxford University,
Pichette is no less direct about the business side of
things. He calls acquisitions an “accelerator”
for growth and scoffs at the idea of business units
James Manyika
Google’s CFO on growth, capital structure, and leadership
because they force people into “ownership” positions
that hinder creative flexibility. Pichette is also a
passionate advocate of sustaining Google’s start-up
culture—even as the company now generates
$30 billion a year in revenue.
Clad in a rugby shirt and jeans in his office at
Google’s Mountain View, California, headquarters,
he recently sat down with McKinsey’s James
Manyika to lay out some of his thinking on growth,
strategy, and the financial side of Google’s business.
McKinsey on Finance: How do you think
about growth?
Patrick Pichette: As [Google executive
chairman Eric Schmidt] once said, “If we’re not
Patrick Pichette describes the attitudes and behavior that Google hopes will keep it
growing like a start-up.
8 McKinsey on Finance Number 41, Autumn 2011
building a product that at least a billion people
will use, we’re wasting our time. How can you be a
company that wants to change the world if you
don’t have at least a billion people using your stuff?”
The corollary of that is if you have a product
that a billion people want, he’ll also say, “Give me
a billion users, I’ll show you how to monetize.”
And, by the way, computer science is the key linchpin
to actually delivering that. Once you understand
those three things, Google’s initiatives completely
make sense: Android, Chrome, Chrome OS,
Google Wallet, and of course search.1
The challenge is in the planning. How do I feed the
winners and hold back on the ones who aren’t
performing the way they should? They shift a lot.
McKinsey on Finance: How do you do that?
Patrick Pichette: We have a quarterly review
process that examines every core product area
and every core engineering area against three
beacons. First, what did it do in the last 90
days and what will it do in the next 90 days? Because
in those 180 days, there’s a lot to deliver—for
example, in the amount of code that has to ship out
and the number of users and whether it’s going
viral or not. We track these things continuously,
but it’s worth taking a look at—in some cases
weekly, in some cases monthly, but at least every
90 days, given where we are.
The second beacon is what’s your trajectory? Do
the financial models and operating metrics
for a couple of years out suggest a trajectory that is
gaining or losing momentum? In some cases,
are you going to need more capital expenditures
because you’ll need more data? If you have a
fantastic success, then you need more capacity—
Google Instant, for example, sometimes generates
answers to user queries before they’ve finished
typing. That requires a lot of computing power.
Then the third beacon is what’s your strategic
positioning in the context of a fast-changing land-
scape? If a competitor buys another company,
what does that mean? Or if we ourselves decide to
move on something this quarter, what does
that mean for everything else that we have?
These beacons are very tactical and short
term, with financial and operational metrics always
running, and always viewed in the context of
a shifting strategic landscape. For example, if we
9
thought product growth would be X but now
it’s three-quarters of X, we retune our resources
accordingly. So if we had planned to hire a
sales force of 200 in the expectation that a product
would be ready to ship, we might delay hiring
them for an additional 90 days to give engineering
time to run through all the testing. And we
have those kinds of conversations in most areas
of the company every quarter. It takes about
a week, a week and a half—and if we need to, we
shift resources.
McKinsey on Finance: In many companies,
those allocation decisions are pretty sticky,
and reallocating that quickly is hard to do. What
makes it happen here?
Patrick Pichette: We don’t have business units.
Once a company has business units, managers
tend to take ownership of these units’ resources.
Managers have a plan, and the natural instinct
is to say, “Those resources are mine and I have to
fight to keep them.”
At Google, we’re more relaxed. We trust each
other. When we sit down to do these allocation
reviews, we’re all one team with our Google
hats on, and the question is what’s winning. In that
context, it’s so much easier. People will say,
“The guys next door are really on fire. They should
get the next 15 engineers.”
That kind of mind-set gives people the confidence
that when they’re on fire and things are going
great for them, they’ll get the capital and engineers
they need too. In a fast-moving environment,
that’s the way it should be.
McKinsey on Finance: Coming back to your
perspectives on growth, how does M&A fit in?
Patrick Pichette: The best way to portray M&A
is as an accelerator. The reason we purchased
On2 Technologies,2 for example, was to get a video
codec to enable more innovation from developers
straight into HTML5 for Chrome. A video codec
makes it possible to open-source applications
from any developer because it gives developers
another standard to develop on. Codecs matter
because enabling the ecosystem around products
like Android, for example, gives users and
developers an incentive to push related innovations.
So for M&A, the mind-set is to comb the world
constantly, given our agenda of development.
If we find a piece that fits what we’re going to do in
8 to 12 months—for example, we have a team
of 6 and we know we need a team of 15—then M&A
is an accelerator because it fits into a very clear
plan of what we’re trying to achieve.
You’ll find that the vast majority of the acquisitions
that we do are in fact those types of acquisitions.
Yes, on occasion we will do small investments in
really innovative spaces, but they’re really
small. That’s not where I spend my time. There’s
no need for me to spend my time on projects
that are really experimental, like cars that drive
themselves.
McKinsey on Finance: So how do you think
about projects in their early stages, before the
business model is clear—how do you prepare for
these large, hopefully growing markets?
Patrick Pichette: In a way, though, we do know
these business models—and what we know is
independent of how that knowledge is monetized.
Take Android, for example. What we know
is that anyone with a smartphone searches a ton
more than somebody without a smartphone.
Google’s CFO on growth, capital structure, and leadership
10 McKinsey on Finance Number 41, Autumn 2011
Career highlights
Google (2008–present)
Senior vice president
and CFO
Bell Canada
Enterprises (2001–08)
President of operations,
Bell Canada (2004–08)
Executive vice president
(2003–04)
CFO (2002–03)
Executive vice president of
planning and performance
management (2001–02)
Call-Net Enterprises
(1994–96)
Vice president and CFO
McKinsey & Company
(1989–94, 1996–2000)
Principal (1996–2000)
Associate (1989–94)
When they search, they also get ads on which we
make money. I don’t even need a sales force.
I just need people to adopt the Android standard.
Now I’ve got this multiplication of devices out
there in the world, and the minute that users are
accustomed to getting directions, they use
Google Maps. They do searches; they get an answer,
and they just press click to call. Search and
search advertising, which are the bread and butter
of the company, allow us to bring forward what
would have been a glacial pace of adoption for many
services, with just a few hundred engineers—
not 10,000—and no capital, because these
services are running on the capital base. Just on
that basis, we already have a home run.
The great thing about Google is that it’s not a
capital-intensive business. We don’t have to make
a bet of $19 billion that is plunked somewhere
and then wait and see what happens. That’s the
beauty of innovation; you can do trial and error
so many times or launch and iterate or release in
beta. If something sticks, then you keep it going.
Patrick Pichette
Education
Graduated with a BA in
business administration in
1987 from Université
du Québec à Montréal
(UQAM)
Earned an MA in
philosophy, politics, and
economics in 1989 from
Oxford University
Fast facts
Board member, director,
chairman of audit
committee, and member
of leadership development
and compensation
committee at Amyris
Biotechnologies since
2010
Director and member of
audit committee at
Alaska Communications
Systems Holdings
since 2004
Advisory board member
of Engineers Without
Borders (Canada)
11Google’s CFO on growth, capital structure, and leadership
McKinsey on Finance: On that point, to what
extent do considerations about capital structure
factor into your thinking?
Patrick Pichette: Capital structure matters
a lot, and degrees of freedom matter immensely.
The debate that I hear a lot is do you have too
much cash? Do you not have enough cash? My
answer is always the same: look at how much
change has occurred in the digital space in just the
last 48 months—48 months ago, who knew
about Netflix or Facebook? Look at the degrees of
freedom needed to continue to lead in this space.
Yes, there are rumors of bubbles, but setting those
aside, there’s a company that we all know very
well that bought another company that we know
very well for $8.5 billion a few days ago. Not
$150 million, but $8.5 billion. Make the case, for
one minute, that it would have been strategic
for us to make that acquisition instead. We would
have needed more than $8.5 billion because
that’s what the acquirer was willing to pay. If the
acquisition had been really strategic for
us, we would have needed to be able to pounce.
If we could predict the strategic flexibility we’ll
need in such an uncertain environment, we could
optimize the balance sheet perfectly. But consider
the constraints: leverage, dividends, and so
on. Then call me the next day and say, “Hey, I need
something. I’m inventing X.” But I can’t help—
I don’t have the flexibility—and end up giving up
what could be the most important asset the
company needs in order to change over the next
ten years. We believe there’s an opportunity
cost of not having that flexibility.
Now, if we were in some other industry we’d
probably have a completely different conversation.
Your industry is really what drives your degrees
of freedom, and because those degrees of freedom
are so wide in the digital space, the cost of
not having flexibility can be absolutely crucial.
McKinsey on Finance: So how does that factor
into the way you think about investor
relations? What’s your philosophy about what
and how to communicate with investors?
Patrick Pichette: One of the most important
documents in the history of Google is the
original founders’ letter. It’s a seminal document
because [Google cofounders Larry Page and Sergey
Brin] and Eric are still here—and the funda-
“Your industry is really what drives your degrees of freedom, and because those degrees of freedom are so wide in the digital space, the cost of not having flexibility can be absolutely crucial.”
12 McKinsey on Finance Number 41, Autumn 2011
mental premise that actually led the company to
success has not changed. These are visionary
and incredibly smart men. They see the future in a
way that you and I have a tough time seeing.
They see the world with their own time frames,
and they are willing to invest at that pace.
Think of Android. Android was a very small project
five years ago. Larry and Sergey said, “Yes,
that’s going to work.” But read the press articles
four years ago; everyone was asking, “What
is that? Another distraction from Google.” Yet
look at the resounding success.
It’s really about finding the right audience and
the right investors. It’s important to have investors
match your risk profile and your company
philosophy. So a short-term hedge fund manager
using a formula that says, “If trigger X happens,
then I do Y”—that’s probably not a good match for
us. But thoughtful, long-term investors who
are actually patient because they believe the digital
economy is going to change? Those investors
have already been served very well, and it’s a
good match.
McKinsey on Finance: Is the right investor in
this case somebody who buys into growth or
a particular kind of growth? You could argue that
many other growth profiles don’t look like yours.
So unless your investors focus on growth driven by
disruptions and innovations, they probably
should go elsewhere.
Patrick Pichette: Absolutely, but there is already
a proven foundation. Many people argue that
search and search monetization are yesterday’s
story. But if you talk to Google engineers, our
view of the world is that search is completely nascent.
Think about where we’ve been: five years ago,
to do a search you typed one word; you hardly dared
type two. Then you looked at the results, and
maybe typed another word. Today, you type in
whole sentences, like “How do I get from this place
to that place in 40 minutes?” And if you don’t
get a good answer, you wonder what’s going on
with Google today. People have that much
faith in Google to get it right.
Today, every day, 15 percent of the queries we get
at Google are completely new—we’ve never
seen them before. Imagine that we could give the
perfect answer for each one. How much would
a person pay for the perfect answer? These are the
degrees of freedom available to Google to
continue to innovate—and we haven’t even talked
about local searches that people do on
their phones.
As an investor with us, you already have all the
growth opportunities of what has been a
proven model with a ton of upside because there’s
still so much innovation to come. Then you
have all the potential of our other investment areas,
like cloud computing. You’re buying two stories
in one, but it’s definitely a growth story.
McKinsey on Finance: Let’s shift gears a little
bit. Given everything you’ve just described,
how do you think about the people you hire in
finance—their capabilities, their profiles,
their backgrounds?
Patrick Pichette: I think there are two
elements to the answer. The first one is that Google
continues to attract and retain immensely high-
caliber talent. They’re the top 1 percent of the top
1 percent of the top 1 percent. The bar continues
to be incredibly high.
In consequence of that, their expectation is that
they’re going to have a job that’s immensely
interesting. We naturally attract people who want
Patrick Pichette: The tone at the top matters.
I spend a lot of time with Googlers—and I get
tons of questions. People write me directly, and
they know I’m going to answer back directly.
This is not a finance issue—all 25,000 of them are
like, “Hi, I’m Sam. I’m in the sales office in
Dublin and I’ve got a question for you.” That’s the
way the company should be. That’s what makes
Google special. It takes a little more time on my side,
but it crushes the concept of bureaucracy.
When I fly in North America, I fly economy, like
everybody. I bike to work—and my bike is
sufficiently beat-up that I don’t even have a lock
for it. Nobody is going to steal my bike. That’s
what a start-up would do. That’s what we do. If you
live these examples at the top, you don’t have
to feel like the police. People just know.
their financial forecasts to work—and they’re going
to work like mad to make sure that this only
takes one day of their week. Then they’re going to
spend the other four days of the week rein-
venting the business, doing crazy analyses that
are going to be deeply fact based, in order to
find key insights.
We naturally attract these people, and because
we have them I can close the books in three
days. I’m not spending 19 days closing the books.
All of my team is saying, “All right, we’re done.
Let’s go back to the cool stuff.”
McKinsey on Finance: You mentioned offline
earlier that part of your role is to serve as a
custodian of the culture. Part of that, of course,
is the talent you are bringing in. How else is
finance the custodian of the culture?
13Google’s CFO on growth, capital structure, and leadership
James Manyika ([email protected]) is a director of the McKinsey Global Institute and a partner in
McKinsey’s San Francisco office. Copyright © 2011 McKinsey & Company. All rights reserved.
1 In addition to the company’s well-known search function, Google initiatives include the Android smartphone software, the Chrome Web browser, the Chrome OS (operating system), and the Google Wallet online-payments system.
2 Google acquired On2 Technologies, a video compression technology company, in February 2010.
14
Managers, like investors, often gauge the
performance of share repurchases against that old
investment adage: buy low, sell high. If they
could consistently time repurchases to periods
when shares were undervalued, as some try
to do, they could reward loyal shareholders at the
expense of those who sell out.
Of course managers, like investors, can’t always do
what old adages suggest. Markets are volatile
and unpredictable, and what seem to be longer-
term trends can quickly reverse course. Over-
confidence can lead executives to buy back shares
even at the peak share price—and a bias for
caution can restrain them from buying shares
when prices are lowest. The result is that
Bin Jiang
and Tim Koller
The savvy executive’s guide to buying back shares
companies seldom consistently pick the right
time to buy back their shares at advantageous
prices.1 Indeed, for the years 2004 through
2010, our analysis finds that a majority of com-
panies repurchased shares when they and the
market were both doing well—and were reluctant
to repurchase shares when prices were low
relative to their intrinsic valuations. Few stopped
repurchases even as the market peaked in
2007. And when the market bottomed in 2009,
few companies were buying back shares.
One global technology company is a typical case
(Exhibit 1). After a large repurchase of shares
in 2004, the company accelerated its purchases as
profits and share prices increased. Just as prices
Timing share repurchases is tricky. The most shareholder-friendly approach: don’t try.
15
peaked, in 2007, it bought back the most shares
ever—more than five times as much as it had
in 2004. As the financial crisis developed in 2008,
managers reduced the level of the company’s
repurchases. It didn’t buy back any shares in 2009
or 2010, despite continued strong profits and
a bargain on share prices, which had dropped by
around 50 percent. In hindsight, it’s easy to
understand why the company stopped the buybacks
in 2009 and 2010, amid deep market uncertainty.
Nonetheless, the best time to buy is generally
when everyone is scared.
That buyback pattern is not unique. We looked at
the S&P 500 companies between 2004 and
2011, a period for which we have quarterly share
buyback data. It turns out that companies
don’t just tend to buy back more shares when the
underlying earnings are strong—they also
seem more willing to do so when their share prices
Exhibit 1
Amount of shares repurchased, $ billion
By end of fiscal year
Net income, $ billion
Closing price at end of quarter, $
Repurchase price (weighted average for quarter), $
$
Average share price, 2004–10 = $55.6
$ billion
One global technology company repurchased more shares at their peak price than at any other time.
MoF 2011Share repurchaseExhibit 1 of 2
Source: Standard & Poor’s; McKinsey analysis
2004
0.9
1.8
1.5
2.2
2.5
2.8
5.2
3.4
1.9
3.9
3.03.1
2005 2006 2007 2008 2009 2010
70
80
60
50
40
30
20
10
0
5.5
6.0
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
0.5
1.0
90
16 McKinsey on Finance Number 41, Autumn 2011
are high. The result is a cyclical pattern: companies
pay out disproportionately large amounts at
the top of a cycle and withhold repurchases at the
bottom.
Over longer-term periods, such as the up-and-down
market cycle from 1998 to 2005 or 2006 to
2010, share repurchases came at the expense of
long-term loyal shareholders by delivering
lower returns than they might otherwise have
received. We compared the actual repurchases
of S&P 500 companies from 2004 to 2010
with a modeled strategy of buying the same dollar
amount of shares each quarter, much as an
investor might regularly purchase shares as part of
an income-averaging approach or as a company
might think of a share repurchase as akin to a
regular dividend. We found that the latter strategy
significantly outperformed what actually
happened.2 For companies that repurchased 5 to
Exhibit 2
We modeled total returns to shareholders (TRS) for a strategy of buying the same dollar amount of shares each quarter and compared this model with companies’ actual TRS from share repurchases.
TRS for actual shares repurchased1 relative to model, %
Only 23% of companies achieved TRS above that of the model.
77% of companies earned less.
Number of companies,2 2004–10
Median TRS for actual share repurchases = –3.0%
Companies would have earned more if they had purchased an equal dollar amount of shares each quarter.
MoF 2011Share repurchaseExhibit 2 of 2
1 Where total shares were >25% of beginning shares outstanding. Based on S&P 500 members’ quarterly repurchases from 2004–10. Sample size of 135 excludes 5 companies with unusual circumstances.
2Grouped in weighted 3-year-average TRS cohorts based on compound annual growth rate for TRS for up to 3 years immediately after purchase.
12.5 and above 1
10.0 to 12.4 0
7.5 to 9.9 1
5.0 to 7.4 2
2.5 to 4.9 2
0 to 2.4 25
0 to –2.4 29
–2.5 to –4.9 26
–5.0 to –7.4 9
–7.5 to –9.9 12
–10.0 to –12.4 12
–12.5 and below 16
17The savvy executive’s guide to buying back shares
25 percent of their outstanding shares, the
median return of actual buybacks lagged behind
that of the modeled strategy by 4.5 percent.
For companies that bought back more than 25 per-
cent of their shares, the median return of
actual buybacks lags behind that of the alternative
approach by 3 percent. Only 31 percent of the
companies earned a positive return from buying
back shares—less than you would expect from
a random throw of the dice (Exhibit 2).
These findings suggest an easy fix: companies
should give up trying to time the market.
Long-term shareholders will be better off if
management would simply forecast total
excess cash and evenly distribute it each calendar
quarter as “dividends” in the form of share
repurchases. CFOs can approach such regular
buybacks in two ways. First, they can repurchase
shares as excess cash becomes available. This
is the easiest approach and the one least likely to
send adverse signals to investors around the
potential for excess cash or cash shortfalls. It is
probably right for most companies, even if it
generates lower returns.
Second, companies can evenly distribute
similarly sized repurchases over time. For those
willing to stand by their forecasts of future
cash flows, this dividend-like approach will probably
generate higher returns for shareholders.
Investors will, however, inevitably try to determine
exactly what management is thinking, given
the level of repurchases it sets. And it’s worth
bearing in mind that as with dividends,
investors may react negatively if repurchases
eventually decline, viewing this as a signal
of management’s pessimism.
Bin Jiang ([email protected]) is a consultant in McKinsey’s New York office, where Tim Koller (Tim_Koller@
McKinsey.com) is a partner. Copyright © 2011 McKinsey & Company. All rights reserved.
1 Some academic studies have concluded that companies do, in fact, time their share repurchases well. Those findings, however, are driven primarily by smaller companies that make a one-time decision to repurchase shares. Once smaller companies are excluded, the smart-timing effect disappears. Furthermore, most of those studies were done before large companies began to repurchase shares regularly as a substitute for dividends.
2 To test whether companies timed the repurchase of shares to the advantage of shareholders who didn’t sell, we first calculated the three-year return after each repurchase date. We compared a weighted average of these returns, using the dollar amount of each repurchase as weights to a weighted average return, as if companies had repurchased the same dollar amount of shares each quarter. The results were similar no matter which measure of returns we used.
18 McKinsey on Finance Number 41, Autumn 2011
One of the puzzles of the sluggish global economy
today is why companies aren’t investing more.
They certainly seem to have good reasons to: cor-
porate coffers are full, interest rates are low,
and a slack economy inevitably offers bargains. Yet
many companies seem to be holding back.
A number of factors are doubtless involved, ranging
from market volatility to fears of a double-dip
recession to uncertainty about economic policy.
One factor that might go unnoticed, however,
is the surprisingly strong role of decision biases in
the investment decision-making process—a
role that revealed itself in a recent McKinsey Global
Survey. Most executives, the survey found,
believe that their companies are too stingy, especially
for investments expensed immediately through
the income statement and not capitalized over the
longer term. Indeed, about two-thirds of the
respondents said that their companies underinvest
in product development, and more than half
that they underinvest in sales and marketing and
in financing start-ups for new products or new
markets (Exhibit 1). Bypassed opportunities aren’t
just a missed opportunity for individual
companies: the investment dearth hurts whole
economies and job creation efforts as well.
Such biases, left unchecked, amplify this conser-
vatism, the survey suggests. Executives who
believe that their companies are underinvesting
are also much more likely to have observed a
number of common decision biases in those com-
panies’ investment decision making. These
Tim Koller,
Dan Lovallo, and
Zane Williams
A bias against investment?
Companies should be investing to improve their performance and set the stage
for growth. They’re not. A survey of executives suggests behavioral bias is a culprit.
19
executives also display a remarkable degree of
loss aversion—they weight potential losses
significantly more than equivalent gains. The clear
implication is that even amid market volatility
and uncertainty, managers are right now probably
foregoing worthy opportunities, many of which
are in-house.
The survey respondents1 held a wide range
of positions in both public and private companies.
All had exposure to investment decision making
in their organizations. Nearly two-thirds of them
reported that their companies generated annual
revenues above $1 billion, and the findings are con-
sistent across industries, geographies, and
corporate roles.
More bias means less investment
The survey results were also consistent with earlier
findings that biases are common within the
investment decision-making process.2 More than
four-fifths of respondents reported that their
organizations suffer from at least one well-known
bias. More than two-fifths reported observing
three or more.
Generally, the most common biases that affect
decisions could be traced to the past experiences of
those who make or support a proposal. The
confirmation bias, for example, was the most
common one—decision makers focus their
analyses of opportunities on reasons to support a
proposal, not to reject it. Depending on the
Exhibit 1 Executives believe their companies should be investing more.
MoF 2011Decision biases Exhibit 1 of 3
Source: Feb 2011 McKinsey survey of >1,500 executives from 90 countries
Would your company maximize value creation by spending more or less than it currently does on each of the categories below?
% of respondents who answered “by spending more” or “much more,” n = 1,586
Spend much more Spend more
Product development 40 24
Acquisitions 26 17
21 11Non-IT-related capitalexpenditures
IT-related capital expenditures
36 23
Sales, marketing, and advertising
34 23
Costs to finance start-ups for new products or in new markets
30 23
20 McKinsey on Finance Number 41, Autumn 2011
proposal, this bias can result in decisions to under-
invest or not to invest at all just as easily as in
decisions to overinvest. Another common bias was
a tendency to use inappropriate analogies based
on experiences that aren’t applicable to the decision
at hand. A third was the “champion” bias—
managers defer more than is warranted to the person
making or supporting an investment proposal
than to merits of the proposal itself.
The presence of behavioral bias seems to have a
substantial effect on the performance of corporate
investments. Respondents who had reported
observing the fewest biases were also much more
likely to report that their companies’ major
investments since the global financial crisis began
had performed better than expected. By contrast,
those who reported observing the most biases were
more likely to report that their companies’
investments had performed worse than expected
(Exhibit 2).
The biases reported by respondents correlate
with the performance of investments—and appear
to constrain their overall level, as well. Indeed,
respondents reporting fewer biases were significantly
less likely than those reporting more to state
that their companies had forgone beneficial invest-
ments (Exhibit 3).
Wary executives
Executives also reported a high degree of
loss aversion in the investment decisions they’d
observed. They exhibited the same tendency
themselves, even when the value they expected
from an investment appeared strongly positive.
Exhibit 2 The more biases reported, the lower the perceived returns on a company’s investments.
MoF 2011Decision biases Exhibit 2 of 3
How would you characterize the returns on your company’s major investments since the global financial crisis started?
% of respondents
Number of biases observed by respondents within their companies
Higher than forecast
About the same as forecast
Lower than forecast
1 Figures do not sum to 100%, because of rounding.
Source: Feb 2011 McKinsey survey of >1,500 executives from 90 countries
0
18
54
211n =
28
11
25
50
202
24
2
25
47
397
28
3+
39
37
640
24
21
When asked to assess a hypothetical investment
scenario with a possible loss of $100 million and a
possible gain of $400 million, for example, most
respondents were willing to accept a risk of loss
only between 1 and 20 percent, although the
net present value would be positive up to a 75 per-
cent risk of loss. Such excessive loss aversion
probably explains why many companies fail to
pursue profitable investment opportunities.3
This degree of loss aversion is all the more surprising
because it apparently extends to much smaller
deals: respondents were just as averse to loss when
the size of an investment was $10 million and the
potential gain $40 million. Even if it made sense to
be so loss averse for larger deals, it still wouldn’t
make sense to be as averse to loss for smaller ones,
especially considering how much more frequently
smaller opportunities occur.
Executives may be limiting the investments of their
companies because of economic fundamentals
and policy uncertainties. But their decision making
is also tainted by biases and loss aversion that
harm performance and cause companies to miss
potentially value-creating opportunities.
Exhibit 3 Companies exhibiting a greater number of biases are more likely to pass up worthwhile investments.
MoF 2011Decision Biases Exhibit 3 of 3
Have you forgone investments that, in retrospect, would have helped?
% of respondents who answered yes, n = 1,586
Source: Feb 2011 McKinsey survey of >1,500 executives from 90 countries
Number of biases observed by respondents within their companies
0 1 2 3+
4451 52
58
Tim Koller ([email protected]) is a partner in McKinsey’s New York office, where Zane Williams
([email protected]) is a consultant; Dan Lovallo is a professor at the University of Sydney Business
School and an adviser to McKinsey. Copyright © 2011 McKinsey & Company. All rights reserved.
1 Including more than 1,500 executives, from 90 countries, who completed our February 2011 survey.
2 See Dan Lovallo and Olivier Sibony, “The case for behavioral strategy,” mckinseyquarterly.com, March 2010.
3 Loss aversion, a decision maker’s preference for avoiding losses over acquiring gains, is a central part of what’s commonly called risk aversion.
A bias against investment?
22 McKinsey on Finance Number 41, Autumn 2011
Corporate boards are under pressure to take
more responsibility for developing strategy and
overseeing business risk after the financial
crisis exposed many cases of inadequate gover-
nance.1 Yet according to the latest McKinsey
Quarterly survey on governance,2 directors report
that their boards have not increased the time
spent on company strategy since our previous survey,
conducted in February 2008—seven months
before the collapse of Lehman Brothers. Moreover,
44 percent of respondents say their boards simply
review and approve management’s proposed
strategies. Just one-quarter characterize their
boards’ overall performance as excellent or
very good; even so, the share of boards that formally
evaluate their directors has dropped over the
past three years.
In this survey, we asked directors how much time
their boards spend on different activities, how
well they understand the issues their companies
face, and what factors they think would be
most effective in improving board performance.
The picture that emerges is that boards have
taken to heart the new and higher demands placed
on them. But some directors say they feel ill
equipped to live up to these expectations because
of inadequate expertise about the business and
the lack of time they can commit to their board duties,
which they say is less than ideal for them to
cover all board-related topics in proper depth.
The most effective remedies, respondents say,
would be to spend more time overall on board work,
improve the mix of skills or backgrounds on the
Corporate directors know what they should be doing. But they haven’t raised
their game since 2008 and must strengthen their capabilities and spend more time
on board work.
Governance since the economic crisis: McKinsey Global Survey results
23
board, and have tougher and more constructive
boardroom discussions.
Developing strategy
In our 2008 survey, more respondents wanted
to increase the amount of time their boards
spent on strategy development and talent manage-
ment than on core governance and compliance,
execution, or performance management. Interest-
ingly, in this year’s survey, directors say their
boards are now spending roughly the same amount
of time on strategy (23 percent of board time,
versus 24 percent in 2008) and talent (10 percent,
versus 11 percent) that they were three years ago.
With the lack of progress, it’s not surprising that two
out of every three directors still say they want
to focus more on these two areas, with a slightly
lower share saying they would like to spend more
time on business risk management (Exhibit 1).
The amount of time spent on these areas differs
by overall board performance, and directors at
underperforming boards see a greater need
than others to do better: 78 percent of them want
to spend more time on strategy, compared
with 65 percent of directors who view their boards’
performance as excellent or very good and say
the same.
Understanding the company
It stands to reason that corporate directors need
to know their companies and their industries
very well if they are to challenge management on
strategic issues, yet that knowledge is often
Exhibit 1
Increase No change Reduce
% of respondents
1 Respondents who answered “other” are not shown.2Respondents who answered “don’t know” or “not applicable” are not shown.3For example, prioritizing key initiatives against strategy, approval of M&A transactions.
% of time board currently spends on issue1
Survey 2011Board governanceExhibit 1 of 6Exhibit title: Shifts in strategy and talent
How would you shift the amount of board time spent on each activity over the next 2–3 years based on the activity’s relative value to the company?2
Strategy, n = 1,535
23 70 25 4
22Execution,3
n = 1,52342 36 20
18Performance management,n = 1,509
47 35 17
14Core governance and compliance,n = 1,491
32 42 23
14Business risk management,n = 1,500
64 28 6
10Talent management,n = 1,469
67 24 6
Shifts in strategy and talent
24 McKinsey on Finance Number 41, Autumn 2011
lacking. The results indicate a need to better educate
boards on industry dynamics and how their
companies create value, among other core issues
where respondents say their boards’ knowledge
is incomplete (Exhibit 2). Only 21 percent of direc-
tors surveyed claim a complete understanding
of their companies’ current strategy.
Respondents on boards in the financial sector,
where many boards failed to prevent manage-
ment forays into risk-laden subprime mortgages
before the 2008 crisis, indicate that directors’
knowledge is below average on industry dynamics
(just 6 percent claim to have complete under-
standing) but slightly above average on company
risk (17 percent).
Half of all directors say the information they get is
too short-term. These responses resonate with
calls from governance oversight bodies for boards
to take a greater role in developing long-term
strategy. Directors who describe their boards’
overall performance as excellent or very good are
happier about the time frame of the information
they receive—though a third of those respondents
still say it is too short-term.
Improving board performance
Insufficient time spent on key issues (strategy,
risk, and talent) and inadequate knowledge (about
their companies and industries) are probably
two important reasons why just 26 percent of res-
pondents characterize their boards’ overall
performance as excellent or very good (Exhibit 3).
Directors at publicly owned companies—the
category that has been the most frequent target of
criticism and regulated governance reforms—
are more positive about their boards’ performance
than their peers at private-equity firms and
family-owned businesses. This is notable, since
companies in the latter two categories have
been widely perceived to enjoy superior governance
due to stronger owners and more active boards.
Exhibit 2% of respondents,1 n = 1,597
1 Respondents who answered “don’t know” are not shown; figures may not sum to 100%, because of rounding.
Board’s understanding of given issues
Survey 2011Board governanceExhibit 3 of 6Exhibit title: Knowledge is lacking
Your company’s financial position 36 50 14
Your company’s current strategy 21 58 22
How value is created in your company 16 58 26
Risks your company faces 14 54 32
Dynamics of your company’s industries 10 55 34
Complete understanding
Good understanding
Limited or no understanding
Knowledge is lacking
25
How can boards of all categories raise their
game? Among the survey’s options for improving
performance, the one selected by the most
respondents was to spend more time on company
matters, both at formal meetings and through
informal contact (Exhibit 4). Directors3 say that
on the whole, they are putting in 28 days’ worth of
work and should ideally spend 38 days to discharge
their responsibilities effectively; chairs put in
36 days and should ideally spend 47 days. More time
overall would presumably help directors cope
with core governance and compliance duties and
still be able to deal with strategy, risk, and
talent issues more thoroughly than before. It’s also
a logical expectation on the part of directors
that if they spend more time on company issues,
they will receive more compensation in return:
respondents report that they are being compensated
for roughly 25 days of work per year, or 11 percent
less time than they are actually spending.
Many directors also call for better people dynamics
that enable tough and constructive boardroom
discussions. This factor is the one where there is
the biggest difference between boards that
respondents say need to improve or improve signifi-
cantly (44 percent prioritize it) and boards
rated by their directors as excellent or very good
(26 percent highlight this need).
More effective director training was cited about
half as frequently by respondents as a factor
that could improve performance, but training and
director assessments are key parts of new codes
designed to professionalize boards, such as the UK
Corporate Governance Code.4 Indeed, other
results indicate considerable room for improvement
at most companies. One-third of boards never
evaluate individual directors, for example, and
among those that do, 42 percent of board members
view those evaluations as ineffective. Similarly,
Exhibit 3% of respondents,1 by company ownership
1 Respondents who answered “don’t know” are not shown; figures may not sum to 100%, because of rounding.
Quality of board’s overall performance
Survey 2011Board governanceExhibit 4 of 6Exhibit title: Room for improvement
Total, n = 1,597
Public shareholders, n = 330
Private-equity firm, n = 334
Family owned, n = 545
Excellent Very good
Good Needs significant improvement
Needs improvement
22 39 28 8
256 39 27
23 39 28 6
24 43 27 4
3
3
2
3
Room for improvement
Governance since the economic crisis: McKinsey Global Survey results
26 McKinsey on Finance Number 41, Autumn 2011
more than half of respondents report a need for
improvement in the training of new board members.
On the whole, board chairs report a slightly
rosier view. They tend to be more positive than
nonchairs on the effectiveness of training
programs, the frequency of director evaluations,
the effectiveness of information provided to
their boards, the extent of their boards’ role in
developing strategy, and overall performance.
Given the differences, these results emphasize that
many chairs may need to take a more honest
look at how their boards are performing and
what they need in order to perform at a much
higher level.
Looking ahead
• Most boards say they want to spend more time
on strategy development, risk, and talent
management, which may require meeting more
days per year and companies compensating
directors for their extra time spent. Boards could
also shift time in each category toward high-
impact areas—in strategy, for example,
Exhibit 4% of respondents,1 n = 625
1 A revised version of this question, with 3 additional answer choices, was asked as part of a short follow-up survey, which all respondents to the original survey were invited to take; respondents who answered “other,” “none,” or “don’t know” are not shown.
Survey 2011Board governanceExhibit 5 of 7Exhibit title: How to get better
Most effective factors for improving overall board performance
More time spent on company matters, both at formal meetings and through informal contact (assuming that appropriate compensation is given for the extra time)
48
More appropriate mix of skills/backgrounds among board members
47
Better people dynamics that enable tough, constructive boardroom discussions
45
Stronger incentives for directors to create shareholder value than those currently offered (eg, compensation in shares, a requirement to hold shares)
21
Access to company information that is timelier/of higher quality
32
More effective induction and better ongoing director assessment and training
More company-provided support (eg, a research staff) to support work on company matters
26
22
How to get better
27Governance since the economic crisis: McKinsey Global Survey results
The contributors to the development and analysis of this survey include Chinta Bhagat (Chinta_Bhagat@
McKinsey.com), a partner in McKinsey’s Singapore office; Martin Hirt ([email protected]), a partner in
the Greater China office; and Conor Kehoe ([email protected]), a partner in the London office.
The contributors would like to thank Bill Huyett and Eric Matson for their help with this work. Copyright © 2011
McKinsey & Company. All rights reserved.
toward long-term trends that could disrupt the
current business model.
• At many boards, there is plenty of room to
improve understanding of industry dynamics,
risk, and value creation. Enhanced training
of new directors and better information is one
way forward, but boards may also need
to shake up their composition by increasing the
number with a background in the company’s
industry, where board knowledge seems
particularly lacking.
• Many directors are calling for more constructive
board discussions. High-quality debates can
be fostered by methods such as challenging the
key assumptions behind management’s
proposals, exploring various biases that board
members bring to the table, and conducting
annual evaluations of individual directors to
assess the degree to which they contribute.
1 See, for example, “Corporate governance in financial institutions: Lessons to be drawn from the current financial crisis, best practices,” European Commission working paper, June 2010; and The Financial Crisis: Inquiry Report, US Financial Crisis Inquiry Commission, January 2011.
2 The online survey was in the field from April 5 to April 15, 2011, and received responses from 1,597 corporate directors, 31 per- cent of them chairs. We asked respondents to focus on the single board with which they are most familiar. Respondents represent 545 family-owned businesses, 334 firms owned by private-equity firms, and 330 publicly owned companies; the remainder work at other privately owned or government-owned firms. They represent the full range of regions, industries, and company sizes.
3 The original group of respondents was sent a follow-up survey with five questions—three of which asked about time spent on board work—that was in the field from June 6 to June 10, 2011, and received 625 responses.
4 Released in 2010 by the Financial Reporting Council, an independent UK regulator.
28
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Bill Huyett and Tim Koller
When big acquisitions pay off
Some are quietly creating value that
doesn’t make the headlines. Here’s how.
Ankur Agrawal, Cristina Ferrer,
and Andy West
Can Chinese companies live up
to investor expectations?
In a reversal of long-term trends, Chinese
companies now enjoy a valuation
premium over their peers in developed
markets. What’s changed?
David Cogman and Emma Wang
Paying back your shareholders
Successful companies inevitably
face that prospect. The question is how.
Bin Jiang and Tim Koller
Leasing: Changing accounting
rules shouldn’t mean changing
strategy
Recent proposals will mean more
transparency for investors—but won’t
change how companies operate
and create value.
Werner Rehm
How CFOs can keep strategic
decisions on track
The finance chief is often well
placed to guard against common
decision-making biases.
Bill Huyett and Tim Koller
The myth of smooth earnings
Many executives strive for stable earnings
growth, but research shows that
investors don’t worry about variability.
Bin Jiang and Tim Koller
How the growth of emerging
markets will strain global finance
Surging demand for capital, led by
developing economies, could put
upward pressure on interest rates and
crowd out some investment.
Richard Dobbs, Susan Lund, and
Andreas Schreiner
October 2011
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