Value: The Four Cornerstones of Corporate Finance
Tim Koller, Richard Dobbs, and Bill Huyett
John Wiley & Sons (2011)
How executives can make much better decisions – “even as markets, economies, and industries change around them”
All organizations need a solid foundation on which their executives can base their most important decisions about strategy, mergers and acquisitions, budgets, financial policy, and performance measurement – “even as markets, economies, and industries change around them”
This book was co-authored by three McKinsey & Company partners — Tim Koller, Richard Dobbs, and Bill Huyett — who bring decades of experience and a diversity of perspectives to their rigorous consideration of what they characterize as “the immutable principles of value creation. ” These principles are in the best interests not only of shareholders but of everyone else directly and indirectly involved in the given enterprise. This is a key point because, more so today than ever before, value addition or reduction can occur at any level and in any area of an organization’s operations.
The focus in the book is on the four cornerstones of finance, best revealed within the narrative, in context. (They are introduced and discussed briefly on Pages 4 and 5, then delineated thoroughly through Part One, Chapters 1-5.). These are among the passages that I found most valuable:
o Desegregating cash flow into revenue growth and ROIC (Pages 17-21)
o The best-owner life cycle (55-57)
o Summary of key points re five stock market eras, 1960-2009 (76-83)
o Why accounting treatment won’t change underlying value (114-116)
o Trends in return on capital (133-138)
o The logic for systematic divestitures (158-162)
o Why companies should retain at least some risks (189-195)
Most readers (I among them) agree with Koller, Dobbs, and Huyett that the most difficult part of creating value and, specifically, applying and then sustaining 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. [Not just in fixed assets, but investments that are expensed right away, such as new product development, new geographic markets, and people.] Configuring the management approaches of the company to reflect this balance is the chief executive’s responsibility.”
Tim Koller, Richard Dobbs, and Bill Huyett provide a wealth of information, insights, and counsel that will serve as “a catalyst and guide for improving how executives plan strategy, make decisions, solve problems, and meanwhile create the next generation of leaders. Ultimately, we hope that the collective impact of more companies embracing these [four] principles creates a more stable and productive economy.”