Capital Markets

It’s the Valuation, Stupid

Company managers do a bad job investing capital, and they don't plan to do any better, a new survey says.
Alan RappeportJune 6, 2007

Shareholders expect one thing above all else of management: that they maximize the use of the capital invested in the company. A new survey has bad news for investors: Most managers aren’t very confident about their ability to do so.

According to a poll by Deloitte Financial Advisory Services, 55 percent of executives doubt their company will be able to “optimize” returns on the capital they invest. Their reasons vary from the flood of projects they face to an inability to quantify which new projects will best mesh with existing ones. And that’s not to mention office politics, inefficiency, and other corporate woes.

And the news gets worse. Most managers don’t have any plan to improve that situation. Just 41 percent of the 595 executives queried said that they were looking to change their methods for picking projects to fund.

“The capital planning process is very complex,” says Charles Alsdorf, director of valuation services at Deloittte FAS. “It’s a challenge to take control over the chaos; to get a picture of all the moving parts.”

Alsdorf says he was surprised to discover a heavy reliance upon “qualitative” measures — such as group discussions and PowerPoint presentations — to make investment decisions. In fact, 28 percent of companies lean on such methods, rather than statistical tools, to pick projects.

Theorizing that executives would do a better job maximizing their capital if they took a more mathematical approach, Alsdorf suggests a “valuation framework” to measure risks, costs, and benefits of new strategies. “With a proper framework in place, boards and executives can pick the ‘winners’ from hundreds of projects,” he says.

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