mof issue 21

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McKinsey onFinance

Creating value: The debate over public vs.private ownership 1

A panel o executives explores why private equity has been

giving public ownership such a run or its money.

Shaping strategy from the boardroom 8

As companies turn their attention rom compliance to growth

and innovation, boards must ocus on strategy.

Successful mergers start at the top 12

A cohesive top-management team is essential or integrating

acquisitions successully.

When should CFOs take the helm? 17

CFOs can bring much-needed skills to the CEO role, but the

career path isnt always a direct one.

Perspectives on

Corporate Finance

and Strategy

Number 21,

Autumn 2006

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McKinsey on Finance is a quarterly publication written by experts and practitioners in

McKinsey & Companys Corporate Finance practice. This publication oers readers

insights into value-creating strategies and the translation o those strategies into company

perormance. This and archived issues oMcKinsey on Finance are available online at

www.corporatefnance.mckinsey.com.

Editorial Contact: [email protected]

To request permission to republish an article send an e-mail to

[email protected].

Editorial Board: James Ahn, Richard Dobbs, Marc Goedhart, Bill Javetski,

Timothy Koller, Robert McNish, Herbert Pohl, Dennis Swinord

Editor: Dennis Swinord

External Relations: Joanne Mason

Design Director: Donald Bergh

Design and Layout: Veronica Belsuzarri

Managing Editor: Sue Catapano

Editorial Production: Roger Draper, Karina Lacouture, Scott Le, Mary Reddy

Circulation: Susan Cocker

Cover illustration by Jon Krause

Copyright 2006 McKinsey & Company. All rights reserved.

This publication is not intended to be used as the basis or trading in the shares o any

company or or undertaking any other complex or signifcant fnancial transaction without

consulting appropriate proessional advisers. No part o this publication may be copied

or redistributed in any orm without the prior written consent o McKinsey & Company.

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Creating value:The debate over

public vs. private ownership

A panel of executives explores why private equity has been giving public

ownership such a run for its money.

Not so today. More than hal o all

CFOs say they would cut a project with a

positive net present value to hit a short-

term earnings target set by the market.1

Private equity rms are raising capital at

a record pace, acquiring businesses, and

in many cases creating tremendous value

or themselves and their investors. Andcorporate boards o directors, which are

meant to manage or the long term, are

getting sucked into short-term issues, such

as compliance. Family-controlled companies

(or those infuenced by amilies with a

substantial stake) have oten perormed

better than companies that are ully

publicly ownedparticularly in Asia.

At a McKinsey CFO orum in London

during the summer, a panel o experts

dug into the current trends in value creatio

varied approaches to ownership, and

the governance implications or both pub

and private companies. The panelists

were Kurt W. Bock, CFO at the publicly

listed German chemical companyBASF; Johannes P. Huth, managing directo

and head o European operations at

Kohlberg Kravis Roberts (KKR); David

Pitt-Watson, chie executive o Hermes

Focus Funds (Europes leading shareholde

activist und); and Lennart Sundn,

president and CEO o Sanitec, a private-

equity-owned company. The panel

What ails the public-company ownership model? For generations, public ownership was

unassailable as the right way to promote the best management o a companys short-te

perormance and long-term health. As a worldwide equity culture blossomed during

the second hal o the last century, the evidence appeared everywhere: mutually owned

companies demutualized, amily- or employee-owned businesses undertook IPOs, andgovernments privatized state-held enterprises to capture the long-term value created by t

capital market approach to governance.

1John R. Graham, Campbell R. Harvey,

and Shivaram Rajgopal, The economic

implications o corporate nancial reporting,

NBER working paper number 10550,

January 11, 2005 (http://papers.ssrn.com).

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McKinsey on Finance Autumn 2006

discussion was moderated by Richard

Dobbs, a partner in McKinseys London

ofce. What ollows is an abridged version

o the roundtable debate.

Richard Dobbs:Johannes, lets start

with you. How do private equity frms

create value?

Johannes Huth: There has really been a

change in how private equity frms have

generated value over the past 30 years. In

the 1980s private equity frms generatedvalue simply by being able to buy companies

relatively cheaply and later selling them

at a better price. In the 1990s a lot o value

was generated through what you could

broadly call fnancial engineering. Today

the markets are airly efciently priced,

and fnancial engineering is no longer a

dierentiating actor. Everyone can do it,

and everyone has the same tools.

So the way that private equity creates

value today is by undamentally changing

businesses and driving growth. We can

do that by making sure that management

is a signifcant participant in value creation

and by maintaining our ocus. I you

run a large conglomerate, there is always

one business that isnt a priority in terms

o capital allocation, but we can run every

one o our businesses as a priority and

dedicate the necessary capital to them. Were

probably also better at corporate governance

than a public company. When we acquire abusiness, we spend a lot o time on due

diligence so that when we sit on the board,

we have a detailed understanding o what

the company does. That enables us to be very

good sparring partners or the management

team in urther driving value.

Richard Dobbs:Lennart, you have

worked at a listed company in the past.

Johannes P. Huth is managing director and head

o European operations at Kohlberg Kravis Roberts. KKR

is one o the original US buyout frms and now operates

in Europe as well. The frm has taken the view that

the private equity model is a way o creating more value

than a quoted company does.

The panelists

Kurt W. Bock is CFO at the German-based chemical

company BASF. BASF itsel is publicly held, but a number

o its businesses have been sold to private equity

frms, and many o its major competitors are now private

equity owned.

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Creating value: The debate over public vs. private ownership

You are now the CEO at a private-equity-

owned company. What differences have

you seen between the two models as youve

moved from one to the other?

Lennart Sundn: The two models are

actually considerably dierent, but more so

around implementation than around

strategy. There really arent any shortcuts to

developing a business; you have to do what

is right in the industry. But how to go about

itdeveloping the business plan, deciding

on the value creation program, and makingdecisions while under waythese things

are quite dierent.

In a private equity context, or example,

we can make decisions very quickly.

We dont have to wait or the next planned

board meeting, we dont need to commu-

nicate anything to a wide range o investors,

and we dont need to tell competitors

anything i we dont want tojust a very

short communication between the owner

and management and its done. That mak

it a very competitive model compared

with larger public companies, where the

board may be coming in on a more

inrequent basis and a lot o time is spen

meeting all the requirements that listed

companies ace today.

Richard Dobbs:And what about long-

term value generation?

Lennart Sundn: Its true that private

equity unds are temporary owners o a

business; thats their model. But i we expe

to generate good value when we sell that

business either to the stock market or to

another acquirer, we have to remember th

those potential acquirers will only pay o

something that they believe will have val

in the long term. So i we havent invested

Lennart Sundn is president and CEO o Sanitec, a

leading European provider o bathroom products, wh

is currently owned by the private equity group EQT.

From 1977 until 1998, he worked in various positions

publicly held companies, including 21 years at Electro

and 5 years as president and CEO o Swedish Match.

David Pitt-Watson serves as chie executive o Hermes

Focus Funds, Europes largest shareholder activist und

manager and the worlds only one sponsored by a major

investment institution. Hermes invests in companies that

are grappling with issues concerning strategy, manage-

ment, governance, or capital structure. It works with the

board to ensure that change is implemented.

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in research and development, i we havent

invested in marketing, i we basically

have stripped a business o its uture growth

opportunities, we wont get paid or that

business when we sell it. The only way that

we can actually create something that will

have value is i we do invest in that uture

growth, and I really undamentally believe

in that.

Richard Dobbs:Kurt, many of the

players in your industry are private equity

owned, but you are listed. How do Lennart

and Johanness comments resonate with

your experience?

Kurt Bock: In the chemical industry, the

dierence between a private equity company

and a publicly quoted company is rather

small, at least in terms o managements

approach. The major dierence is that as a

large group with about 50 billion in annual

sales, we certainly look at the synergies

between our businesses, compared with

private equity, where they have separate

investments and they look at every separate

investment on its own. The consequence

or us is that whenever we realize that

a business no longer ts in our organization,

we sell it o. In that sense, we also eed

the private equity industry.

Richard Dobbs:So the relationship

between the public and private models has

become symbiotic, in a way?

Kurt Bock: At least in the sense o healthycompetition, yes. Private equity has helped

tremendously to make our industry more

disciplined, particularly around corporate

perormance and health. We in the chemical

industry were always talking about good

health and orgetting about good short-term

perormance. Only in the past ten years

has the industry aced up to the act that

it has to deliver more to its investors. In

BASFs case, we have restructured quite

dramatically and over the past three years

have earned a signicant premium on

cost o capital. Also, the time we spend

making dicult decisions has shortened

dramatically over the past ve to ten years.

Today managers realize that they either

get it done or theyre out.

We should remember, though, that private

equity companies can also mismanage a

business. Sometimes they do seem to

walk on water, and some investors today

are extremely comortable with private

equity investors. Some banks, or example,

really throw money at private equity

rms as i they know how to do this better

than anybody else. Thats a very strange

development when people who work in

private equity oten have a reputation or

being more capable o running a business

than people who have industry-specic

experience in management.

Richard Dobbs:Johannes, to follow up

on Kurts earlier point, do public market

investors look at business in the same way

as private equity investors?

Johannes Huth: No. The two are un-

damentally dierent. A public market

investor might reason that i one business is

trading at 10 times earnings and a similar

one is trading at 15, then the ormer is

undervalued and the investor should buy

the undervalued stock and then trade up.

Thats not the way private equity investorslook at a business. We look at the latter

business and reason that while its trading

at 15 times earnings, i we take out some

costs, maybe restructure something here,

sell something there, we can get this busi-

ness really at an implied value o 10 times,

and thats much better. So we look at

it, really, rom an industry perspective, and

I think thats why we are much closer to

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the way that some o the better-run com-

panies are. I you ask whats our role model,

it isnt Goldman Sachs. Its much more

like GE: we want to be a very good manager

o businesses.

Richard Dobbs:Let me just throw

out this question: what motivates the board

members of private companies compared

with public ones?

Lennart Sundn: I think it comes down

to the involvement o board members.

Family owners are very involved, and i they

have the multigenerational perspective,

they are oten ever more so. In a public

company, board members are a little more

come and go. There may be a ew replace-

ments every year, and there are always some

who are less inormed. And while in most

cases they make the eort to really be

inormed, they are inevitably a bit less into

the business than the others. In the private-

equity-owned rms that I have been

involved in, the board members are very,

very inormed and ollow the business

closely, partly because they oten have a

substantial stake in it.

Johannes Huth: Yes, I agree. In private

equity, the people who sit on the board are

the ones who have actually acquired the

business, and when you acquire a business

you tend to go through three to our

months o very intensive due diligence to

understand it better. So when you join

the board, youve already spent an extensiveand very intensive period o time learning

the business and working with the manage-

ment team to develop a business plan.

Youve talked to the CEO, yes, but youve

probably also gone two or three levels

down and visited a branch manager here or

gone to a oreign country and visited

the manager there. And, o course, we have

our remuneration tied directly to how a

business perorms, so we are very interest

in making sure it does well. Those mech

nisms are in place to make sure that you p

attentionbut they may not exist in the

larger public businesses.

Kurt Bock: I would add that its really

important or a board member to have a

intrinsic motivation to do the right

things. At BASF we support that by maki

compensation heavily dependent on the

companys success in the marketplace, so

that managers and employees alike are

highly motivated to make the company

better every single day, both rom a compa

and a personal point o view. Indeed, we

have the same compensation matrix acro

the entire company, so we have about

1,000 people who are members o our sto

option program. Even the bonus payment

or our workers in Germany is paid on

the same matrix as our board compensat

and this is all very transparent, so people

can really understand what they will get

we achieve a certain return on capital or

premium on the cost o capital.

Richard Dobbs:So, David, you have

been an investor in both private equity an

directly in public markets. Whats the

key difference between the two ownershi

models?

David Pitt-Watson: I think the point

Johannes made is key, actually, about th

way dierent owners behave. You can

have a public company that behaves as i iwere private; its extremely well run, its

nancing itsel properly, and yet its public

The dierence Johannes would note is

that with private equity, i youre not we

run the owner is going to be on top o

you immediately. Private equity investors

will make sure that youre running yours

correctly. They will identiy companies

that are really underperorming, see how

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they can be improved, invest in them, and

incentivize management to do the right thing.

As someone whos interested in the public

equity side, I would say, Gosh! I would

really like public equity companies to be

run that way. In contrast, I would observe

that what most public equity unds do, as

Johannes reminds us, is buy and sell shares

they dont actually take an awul lot o care

about how it is that they own companies.

And I would say, My goodness, we seem to

be losing an awul lot o value rom public

markets i a private equity rm can take over

a company at a premium, incentivize itsel,

and then turn around and make almost

as good a return in ve years time as you

would have made in public equity.

For public-company managers, the big issue

is that i youre running a company and

you have a bunch o so-called owners who

arent actually owners at alltheyre

tradershow do you respond to them? For

investors, the question is how they create

the advantages o private equity ownership

while maintaining public-company

ownership. Intriguingly, o course, the way

over this problem is to recognize that were

all getting our unds rom exactly the same

places; were all trying to make decent

returns with the savings o people who are

saving or their pensions, or their lie

insurance over 20, 30, 40 years. O course,

we have to be interested in the short term,

but actually we need to be paying our

pensions in 30 years. It seems to me that i

public equity managers could say, We

will do all the things that we would i we

were under private equityindeed we can

be much longer term than private equity can

possibly bethen that would be a better

model than the one that we have right now.

Too oten, companies in the current model

eel they have to respond to the short-term

pressures o share price and analysts.

Richard Dobbs:Kurt, does that

difference between owners and traders

show up differently among different types

of investors? Whats your experience,

especially with hedge funds?

Kurt Bock: Our experience so ar with

the hedge und managers has been positive

because most o them are really value

investors, who are undamentally interested

in the development o the company.

However, in one recent unsolicited takeover,

we came across very, very short-term

arbitrageurs or the rst time, and theyre

a totally dierent type o animal. They

clearly couldnt care less about our long-

term emphasis on innovation. When we

explained why our proposal to the targets

shareholders was better than the man-

agements proposal, they listened politely,

but they just wanted us to pay more money,

ull stop. With those people, you really

cant have an intelligent discussion about the

company. Those who care, they want to

be strategically convinced, and they want

management to deliver. So its all about

credibility, and credibility is the result o

years o hard work to deliver what you

promised, and that is important rom the

investors point o view.

Richard Dobbs:On another topic,

what do you each think about the way to

measure a businesss performance

and its health? How do you think about

balancing the two?

Lennart Sundn: In a highly leveraged

company, one would ollow dierent

indicators than in a listed company with

a normal balance sheet. On a daily or

monthly basis, you measure cash fow,

covenants, and the ulllment o initiatives,

or example. Then you ollow the growth

plans or the restructuring plans over a

couple o years to see how the company

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perorms on a monthly basisto see that

the company actually delivers on what

it has promised. Reporting on those things

is very tight in my present environment,

whereas the public reporting or a listed

company might just have a ew lines

mentioning that there are projects going on.

David Pitt-Watson: Like every other

investor, were trying to invest long-term

insurance and pension money, so we put

it in companies that we think will give us

a long-term return. Wed obviously like

them to be maximizing that return, which

underpins all sorts o amiliar nancial

disciplines. Were hugely prepared to take

on individual risks in companies because

we are investing in 3,000 o them. I

a risk looks sensible we would love to back

it, but we need to understand what the

risk is. We want people to be properly incen-

tivized to do the right thing. We want

clarity o strategy. We want, or example,

to know that a company is the best

owner o the businesses in its portolio, that

it is competitive in the market, and that

its organization is constantly being renewed

to ace new challenges. We want companies

to behave in a way that is sustainable

partly because they will attract regulation

i they dont, and partly because were

representing literally millions upon millions

o pensioners, and it makes very little sense

or us to be encouraging companies to

do unsustainable or unethical things. So

these are the sort o measures that we look

or. Frankly, we get very worried aboutcompanies that use ddleable accounting

measures like EPS as the basis or driving

themselves orward.

Richard Dobbs:Johannes, what kinds

performance indicators does KKR look f

Johannes Huth: Measurement systems

and perormance indicators are very

important, and we pay a lot o attention

to them when we actually enter a busines

This goes beyond the monthly P&L cash

fow and balance sheets, to include

the kinds o metrics that will give us som

visibility into the uture. That metric

could be understanding customer behavio

or it could be a measure o our own

perormance in a related area. For examp

we own a business that makes machinery

or plastics, and one o the things we look

at is how BASF does in sales o plastics,

because thats a leading indicator. I there

a lot more sold, customers will need more

machines; thereore we know roughly wh

to expect. We develop these measurement

as part o the acquisition process and the

implement them once we take ownership

Clearly, were very cash fow driven, rath

than earnings driven, because or the

rst ew years we have to repay the loans w

take on to buy a business. So we have

rolling daily cash fow orecasts in every

business, and with todays technology,

thats quite possible to implement in pret

much any business. Yet again and again

were amazed at how unsophisticated som

o the cash-fow-monitoring mechanisms

are, even in large businesses. MoF

Richard Dobbs ([email protected]) is a partner in McKinseys London office. Copyright 20

McKinsey & Company. All rights reserved.


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with boards we nd that too many simply

lack directors who have the industry exper-

tise to participate eectively in shaping

strategymuch less to reshape it on the fy

as the business climate changes. And in

the postscandal chill, even as the business

landscape has become more complex,

many boards have taken to playing deense.

Too many have blandly populated them-

selves with less capable people and denied

CEOs sucient say in selecting directors

who could oer crucial assistance in shaping

long-term strategy.

Building a boards strategic mind-set isnt

easy. The eort requires rethinking what

makes a director t to serve on a board, the

tenor o its deliberations, and the way it

interacts with management to help develop

a strategic vision, although that must

originate with the CEO. Progressive CEOs,

or their part, need the ability to articulate

a clear strategy and the personal condence

to build board teams that include experts

who may be ar more skilled in certain indus-

try and operational areas than the CEOs

themselves are.

No single approach will serve every

company well. In our experience, however,

several concrete steps can build a good

oundation.

Raise strategys profile in board work

Why is there no committee, no vehicle, that

could put strategy on the agenda o every

board meeting? We nd many boards withcommittees or political aairs or technol-

ogy but have yet to come across a single US

company that has one devoted to the

ormulation and review o strategy. Today

strategy isnt included in the job description

o any director.

Within the hierarchy o board activities,

strategy should be raised at least to the level

o accounting compliance. One way to

achieve this goal would be to make strate

a ormal subset o the regular work o

the nominations or governance committe

thereby ensuring that it gets discussed

regularly at board level. Moreover, CEOs

might use the establishment o such a

strategy council to appoint more strategica

minded directors to appropriate committe

roles. No doubt some old-guard CEOs w

ght the ormalization o strategy within

board unctions; that resistance should in

itsel serve as a warning to investors look

or boards that create the most value.

Populate boards more boldly

Boards must become less politically corre

and more strategically correct in popu-

lating their ranks. We nd that sitting CE

and board chairs oten make the most

capable directors, particularly or providi

strategic insights based on current marke

realities. Yet in the wake o stronger

compliance regulations, investor groups h

arbitrarily pressured companies to restric

the number o boards on which current

CEOs and board chairs may sitostensib

to keep directors rom spreading their

time on boards too thinly.

Our research shows the eectiveness o th

pressures. Top executives now account

or 32 percent o new board appointment

down rom 53 percent ve years ago.2 At

the same time, demand or academics, ex

utives o nonprot organizations, and

retired executives has soared. Such peoplmay oer time and good general-

management experience, but unless boar

members (including even retired executiv

are directly involved with competitive

changes its easy to all behind on ast-

moving trends such as the economic devel

ment o China and India. The net eect o

recent tendencies is a move toward boar

that are older and less market savvy.

2Spencer Stuar t US Board Index 2005, Spencer

Stuart, November 2005.

Shaping strategy from the boardroom

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0 McKinsey on Finance Autumn 2006

We believe that on a board o, say, a dozen

directors, a litmus test o strategic energy

is the presence o at least three or our mem-

bers who have deep industry expertise

in the core business and market conditions

the company aces. In the same way

that boards brought on nancial expertise

in the wake o Sarbanes-Oxley, they

should now ensure that their ranks include

directors with the industry knowledge

crucial to the primary business o their com-

panies. Once that expertise is in place,

other board members can be screened or

deep unctional or geographic expertise.

To achieve that level o specialization,

some boards may have to risk seeking out

executives without board experience.

Forward-thinking companies could be well

served by going deeper into their ranks

to nd younger, up-and-coming executives

who are amiliar with the industry trends

and market orces that are essential to

their global strategy. Private equity rms

regularly demonstrate the benets that

can fow to investors when they use

specialized, intense due-diligence work to

support business strategy. Nothing prevents

the directors o public companies rom

building such capabilities into their boards.

Restore power to CEOs in choosing

directors

One o the more glaring aronts o the

1990s era o corporate excess was the way

CEOs staed their boards with golng

buddies and other cronies. Unortunately,

the inevitable backlash has meant that

even value-minded CEOs are denied the

chance to put together a board team that

is truly aligned with managements strategic

approach. Where CEOs once had a near-

exclusive right to select their own boards,

they now nd themselves taking a back-

seat to the chairman o the boards

nominating committee in deciding who

becomes a director.

As a companys chie strategy architect, the

CEO must provide the vision or a strategic

course that a good board can enrich and

support. And to be eective, directors must

have an anity or the CEOs approach.

Better boards have to some extent swung the

pendulum back, restoring the CEOs role

in selecting directors together with the nom

inating committee. We believe that giving

both the committee and the CEO a veto on

any candidate can ensure that boards are

populated not by puppets but by specialists

who can work in a challenging partner-

ship with the CEO. Progressive CEOs

should welcome this kind o partnership.

Reform board processes

Theres nothing wrong with annual board

retreats, but we see the best companies doing

much more. Most retreats take the orm o

show-and-tell sessions where operating

executives report on initiatives. They provide

snapshots o a companys current status, not

ull-motion video, complete with dialogue,

on its strategic direction.

To keep pace with change in the business

world, CEOs should lead regular strategyupdates at least every other board meeting.

These updates might lter new inor-

mation and assess its impact on various

elements o the strategy. Should the company

stay on its strategic course when two

major competitors merge, or example? Do

directors see new risks that might argue

or a dierent approach?

Some better boards have swung the pendulum back,

restoring theCEOs role in selecting directorsalong

with the nominating committee

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With beeed-up industry expertise in place,

three or our board members might serve as

a sounding board or the CEO, since people

who are close to the ormulation o strategy

can help make important judgments about

it. Industry experts on the outside can serve

to challenge conventional thinking.

Dennis Carey is a partner at the executive search firm Spencer Stuart; Michael Patsalos-Fox (Michael_

[email protected]) is a partner in McKinseys New York office. Copyright 2006 McKinsey &

Company. All rights reserved.

None o these steps need undermine the r

o the CEO. Rather, they should reinorce

checks and balances and stimulate debat

among directors capable o helping the

CEO to evaluate all options. As complian

issues move backstage and attention turns

to growth and innovation, a new source

shareholder value will fow rom compani

with boards that embrace this kind o

strategic dynamism. MoF

Shaping strategy from the boardroom

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Successful mergers

start at the top

A cohesive top-management team is essential for integrating

acquisitions successfully.

David G. Fubini, Colin Price,

and Maurizio Zollo

Unortunately, recent thinking about change

management no longer emphasizes the

pivotal role o the top team. The consensus

on how to manage change has shited

to a dispersed approach because too many

initiatives designed to cascade down

the hierarchy have delivered disappointing

results. The usual interpretation is that top-

down change ails because at every step

messages get diluted, so that each succeedingone seems less compelling and less authentic.

While this may be true in certain circum-

stances, a merger requires direction rom

the top because that is the only way to

initiate change throughout an organization.

The change required to integrate companies

cannot be driven rom an entrepreneurial

business unit, an innovative unctional unit,

or the ront line. Too much coordinated,

programmatic change must be achieved

in too short a time or such approaches to

succeed. The spirit o the project is

determined at the top, where the conditions

are set or the whole integration eort.

But the top team must do more than just

talk about the new company, adopt its

language and trappings, and act accordingto its norms. The team must become the

new company in the ull sense (see sidebar,

Whos on the top team?). Its messages,

processes, and targets must deeply incorpo-

rate the aspirations o the new company in

a way that is visible to managers, employees,

and even outside observers. As the top

team goes on to integrate the company down

the line, it in eect re-creates itsel. The

To integrate companies ollowing a merger, arguably the most important challenges involve

the top o the organizationappointing the right top team, structuring it appropriately,

dening its agenda, and building the trust that enables its members to work well

together. Executives who ail to overcome these challenges are responsible or the ego

clashes and politics that are oten the root cause o spectacular ailed mergers.

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Successful mergers start at the top

company is not just rolling out messages,

processes, and a set o targets; it is rolling

out itsel.

In the best cases, members o the top team

signal the kind o company they are

creating and their commitment to that new

company. In other cases, the team visiblylacks the requisite quality, and its weaknesses

inevitably spread throughout the merging

companies. The power o the signals emanat-

ing rom the top team refects the act

that they are not just signals: they create

concrete realities. The important signals

all into three categories: senior appoint-

ments, the top teams alignment, and clarity

about roles.

Senior appointmentsOne o the most memorable things during

an integration eort is the way managers,

employees, and even other stakeholders

closely watch to see who ends up on the top

team. This attentiveness represents much

more than a voyeuristic interest in the

human drama taking place. The appoint-

ments provide strong clues about the

new companys direction and, more subtly,

about the degree o its commitment to its

proclaimed course. Managers and employ

will, o course, also interpret appoint-

ments to the top team as signals about the

own uture.

Timing is crucial: in general, the earlier th

decision-making process begins and ends,the better. In our study o 161 mergers, th

early appointment o a top team was a

strong predictor o the long-term peror-

mance o the combined organization.

Understanding the impact o these signal

on each side o the boundary between th

merging companies is critical because

the signals may depart rom expectations

very dierent ways. In the case oLSG

Sky Ches 1995 acquisition o Cater Airormer CEO Michael Kay told us that

early decisions signaled to employees an

managers o both companies that they

were deeply committed to high perorman

Cater Air managers aced a moment

o truth when they encountered Sky Che

stringent perormance standards. The

Sky Ches managers aced a similar mome

when they realized that their position as

Whos on the

top team?

Loosely speaking, the top team includes senior

managers at the relevant levelgenerally the corpo-

ration as a whole, but in some cases a group, a

division, or a business unit that engages in mergers.

The team shares general responsibility or the

organizations uture. The number o people in the top

team and the organizational levels represented on

it are highly context specic. In some cases, the top team

may be the dozen (or ewer) people who will interact

regularly with the CEO, but we have seen teams wi th

40 or more members.

A handul o our interviewees provocatively insisted

that the boards o the merging companies should

be counted as part o the top team. Ater all, the boards

perormance could have a major impact on the creatio

o value during the integration period and beyond.

One CEO observed, Very ew companies actually cha

their boards as a result o a merger, but in the same

way that the management team needs to be tested

whether it has the right skill set, so should the board

be. The capabilities o incumbent directors should al

be tested and the best chosen. Ater all, i the board

members strike deals among themselves, what sign

does this send to the management team? And i

the board is polarized, it cannot provide the required

leadership and support to the CEO. The people

who should serve on the board are those who can be

help the new company create value.

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the acquiring company would not give

them an edge in the competition or appoint-

ments. Indeed, managers on both teams,

at both companies, were surprised when a

number o Cater Air managers were

selected or senior leadership roles in the

combined company.

Appointing managers to the top team or

the wrong reasons can have disastrous

eects. Consider, or example, the aborted

three-way merger o equals among Alcan,

Algroup, and Pechiney in 1999. During early

negotiations, the need to achieve at least

the appearance o balance among the three

partners drove the decision making. Two

o their six business groups were allocated

to each o them, irrespective o whether

the resulting six appointees were best posi-

tioned to carry the new company orward.

Had the deal gone through, Alcan CEO Dick

Evans believes the same goal o political

balance would have had a host o deleterious

eects on decision making. Thats probably

the way we would have allocated capital

and a lot o other things, he told us. Thus,

the poor handling o a standard people

issuethe strongly elt need to signal

inclusiveness by appointing senior managers

in an equitable ashioncould have

compromised the merged companys value

creation eorts long ater integration was

complete. In the end, the deal ell through

because the three companies could not

agree about which operations should be

divested to meet EU conditions or antitrust

approval. (Ater the deal ell through,Alcan acquired Algroup in 2000 and then

separately acquired Pechiney in 2003,

completing the original three-way merger

plan o 1999.)

Creating a new company at the top is partic-

ularly problematic in a merger o equals

because managers are sorely tempted to

maintain the identities o the predecessor

organizations. To be sure, the proclaimed

strategy usually calls or their ull inte-

gration. Yet compromises on people issues

may atally obstruct this eort and

ultimately undermine the merged companys

pursuit o value. The resulting mess

will oten be attributed to incompatible

cultures, as i the ailure o integration

was the inevitable result o trying to mix

oil and water.

Another source o ailure at the top is an

unwillingness to ace the prospect o

job losses among close colleagues who have

perormed well or yearseven though

many more job losses are likely among

people urther down the line. John McGrath

the CEO o Grand Metropolitan during

its 1997 combination with Guinness to orm

Diageo (and aterward CEO o the combined

company), emphasized the importance

o quickly reaching dispassionate decisions

about who remains in the top team in

a merger while dealing humanely with the

people involved: Just be completely

ruthless in your decisions on people. I

youve got your right people in place,

I think its very dicult or it [a merger]

notto work. Make those decisions

quickly, and then treat the people decently.

New appointments and the treatment

o those who ail to get them speak volumes

about the combined companys business

ocus and values. One example involves a

conversation McGrath had with a

colleague ater the integration o GrandMetropolitan and Guinness. The

colleague told McGrath that people who

had been let go seemed, strangely, not

to eel resentul. He speculated that they

didnt, because they elt they had been

treated airly and decently. Its not always

the size o the check; sometimes its how

people are handled emotionally. You need

to explain to them why they lost out. I

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Successful mergers start at the top

must have seen 100 or 120 people on exit

interviews. I cannot tell you how many

reerences I wrote. And I still get Christmas

cards rom them! Although we were

viewed as a airly rough bunch at Grand Met,

it was all done in quite a caring way.

Alignment of the top team

Although appointment decisions can be

dicult, at least in the end it is clear

to all what has been decided. Top-team

alignment, by contrast, is a rather nebu-

lous outcome o many diverse activities.

People know when a company really has it,

but at various stages along the way they

ask, Are we aligned yet?

To secure genuine alignment, many CEOs

demand open debate. Kevin Sharer o

Amgen, or example, insisted that each o

his eight executive-committee members

take a position on the planned acquisition

o Immunex (a deal that closed in 2002).

Amgens culture ostered independent

thinking, but in the end every committee

member elt able to support the deal

publicly. That support held up throughout

the integration process. There has

never been a minute o recrimination about

whose deal this is, Sharer told us. When

a new company has been created at the top,

senior managers become strongly aligned.

It is never my deal or your deal but

always our deal.

In a merger, the top team must ashion

its own identity vis--vis the external worldo business partners, competitors, cus-

tomers, and regulators to reach this level

o agreement. Our research shows that

when top teams turn their attention to the

external environment, they oten experience

a catalytic eect, which carries them

past the usual internal rictions much more

quickly. Compared with the pressing need

to thrive in the marketplace, these rictions

simply do not matter very much. As

Michael Kay told us, Whenever there

were any tensions on the team, I would

change the subject to customers. They go

the message ater a while.

This eect is particularly striking when

an external crisis suddenly emerges.

At one merging company, or example,

the integration o the top team had

been supercial. Ater a period o polite

behavior, open politicking broke out

a phenomenon that had undermined othe

mergers in the same industry. However,

when a nancial scandal that seriously

threatened the company erupted, the team

nally closed ranks. A senior manager

noted that in the wake o the scandal,

Everybody knew that there was just no

room anymore or internal tur battles.

Getting to that level o agreement withou

a crisis is mostly a matter o discipline.

A careully limited dose o team-building

exercises can also help, but with two

important caveats. First, managers on bo

sides may have very dierent perspective

on what constitutes a constructive, busine

like exercise. I one side perceives an

activity to be a touchy-eely distraction, i

is not worth doing and could be counter-

productive. Second, senior managers

the world over have very limited patience

or time spent on anything other than re

work. This is all the more true under the

intense pressure o integration. It is best

ocus on outputs whose value is clear eveni they are intangible (or example, a set

behavioral norms or the new company).

Role clarity

The members o the top team share

responsibility or the merging companie

uture as a whole, but they also have

distinct individual responsibilities. They

must work together in a complementary

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way not only to help the companies

integrate successully but also to lead the

combined one through its other concurrent

and uture challenges. To do so, the team

must dene roles very clearly and quickly

particularly roles directly involved in the

integration eort. At Diageo, that explains

why McGrath accelerated the appointment

process: We had to put the center together

incredibly rapidly because we needed abso-

lute clarity on the people who were going to

run the business in each o the unctions

and below. These people had an awul lot

o involvement in the integration.

From the perspective o a companys long-

term corporate health, the uture

needs o the business are an equally strong

actor in dening roles. Creating the top

echelon o the new company is as important

or its long-term perormance as or the

near-term success o the integration eort.

As we saw in the case o the aborted

Alcan-Algroup-Pechiney merger o 1999,

it was clear that the top team could

not even integrate the companies, much

less lead a merged one into the uture.

So when Alcan acquired algroup (2000)

and Pechiney (2003), Dick Evans and his

colleagues at Alcan wanted to make sure

the top team could play both roles. The

roles o its members were thereore dened

in the clearest possible way beore the

company turned to identiying synergies

and planning the transitions. As Evans

explained, We needed to know where

the ownership was. This meant naming

the top couple o layers o management,

dening the organizational structure, and

settling boundary issues, such as which

assets go into which business groups. That

way, there is some certainty as to who is

going to own any uture action that needs

to be taken. We elt that until you have

made those decisions, it is useless to try to

orm an integration team.

This example illustrates the rationale or

rming up the new company at the

top. Although the top team may be heavily

involved in the integration eort, it is

ar more than a project team. It carries

the responsibility or leading the company

in the indenite uture and must there-

ore be set up with this larger responsibility

in mind.

Establishing the top team poses a critical

and immediate challenge or merging

companies. The new companys leaders must

appoint the best possible top team

or achieving its goals, and the top teams

members must be aligned around them.

To collaborate eectively, its members must

be clear about their individual roles.

All this is sensible enough and easy to say,

but in practice that degree o leadership can

be hard to achieve during the hectic

period leading up to a merger or even in its

immediate atermath.

The authors would like to thank Jim Wendler for his contributions to this article.

David Fubini ([email protected]) is a partner in McKinseys Boston office, and Colin Price

([email protected]) is a partner in the London office. Maurizio Zollo is the Shell fellow in business

and the environment and an associate professor of strategy at INSEAD, in Fontainebleau, France. This article is

adapted from the authors forthcoming book, Mergers: Leadership, Performance, and Corporate Health, Hampshire,

(UK): Palgrave Macmillan, 2006. Copyright 2006 McKinsey & Company. All rights reserved.

MoF

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Running head

When should CFOs take the helm

CFOs can bring much-needed skills to the CEO role, but the career path

isnt always a direct one.

Richard Dobbs, Doina Harris,

and Anders Rasmussen

Or does it? The ability othe chie nancial

ocer to win promotion to the CEOs job

is mixed. About a th o all CEOs in

the United Kingdom and the United States

once served as CFO. The number drops

to between 5 and 10 percent in European

markets (or example, France and

Germany) and in Asia, perhaps because

many companies in those regions still have

CFOs who are little more than controllers.However, recent high-prole examples

including Werner Wenning at Bayer, Yoichi

Wada at Square Enix, and Charles Chao

at Sinashow that boards in continental

Europe and Asia are willing to turn to

the CFO as the next chie executive, even in

some very large multinational companies.

To explore the CFOs appeal or a compan

top position, we conducted interviews

with investors, board members, external

advisers, CFOs, and CEOs.1 In our

inormal poll, or every respondent who

believed strongly that CFOs make good

CEOs, another vehemently opposed the id

Respondents assigned high value to severa

classic CFO characteristics: the ability to

communicate with shareholders, to ocus the creation o shareholder value, and to

institute perormance measures and contr

On the other side o the balance sheet

were criticisms that CFOs are oten witho

leadership skills, are weak at motivating

and inspiring teams, and have a propensi

to retain rather than delegate control.

Do chie inancial oicers make desirable CEOs? At a time when inance plays an ever

larger role in corporate strategy and many CFOs serve not only as key advisers to

the CEO but also as the point person or communicating with inancial markets, the

CFOs portolio o skills would seem to serve well as a platorm or that inal leap

to the bosss suite.

1These 50 interviews and the analysis came

rom a joint research project undertaken by

McKinsey with Simon Bailey and Susan Bloch

o the executive search rm Whitehead Mann.

8/14/2019 MoF Issue 21

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Our panelists also oered advice on how

CFOs who want to move up can change

perceptions o their abilities and make the

transition to the broader skill set that

CEOs typically need.

Under certain circumstances

Our anecdotal research suggests that CFOs

can rise to the top job and be perceived

as successul in it under either o two

general circumstances. In both cases, the

specic needs o a company match

the demonstrated skills o an individual.

When financial capabilities serve a

companys present needs

Not surprisingly, there is a strong percep-

tion that CFOs perorm well as CEOs when

companies are going through situations

that require nancial discipline and ocus,

such as attempting a turnaround or

implementing mergers, acquisitions, or

divestitures. Indeed, about 70 percent o

UK CFOs who became CEOs did so as

their companies were in the midst o such

situations (Exhibit 1). Moreover, the

skills that the CFO brings to the table are

viewed as particularly essential in

divestitures and turnaround programs

(whether the ocus is on cost cutting or

on the sale o noncore assets). In the words

o one private equity executive, a CEO

with experience in the top nance slot

understands key perormance indicators

and how much they can improve the

perormance o an acquired business.

These same critical skills make CFOs

eective as leaders o large multinational

or multibusiness corporations, where the

numbers become a common language that

links many businesses together. Similarly,

at asset-heavy companies in low-growth, low

margin businesses, the expertise o ormer

CFOs allows them to ocus on optimizing

returns on capital and on controlling costs.

On a related note, our panel perceives the

CFO as a good candidate to step up i

a CEO resigns unexpectedly or a company

Exhibit 1

A natural ft

CFOs are perceived as good candidates

or the CEO role when nancial issues are

core to strategy.

UK CFOs promoted to CEO during the following situations1

Business asusual

1 Jan 2000 to Feb 2006; for the 45 companies in the FTSE 250 index of UK companies whose CEOs have prior CFO experience.

Source: BoardEx; Dealogic; Factiva; FTSE; Hoovers; McKinsey analysis

Turnarounds or M&Agrowth programs

29%

71%

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lacks clear succession plans. As one

respondent explained, Former CFOs are

a sae pair o hands with high integrity

and an existing relationship with the capital

markets. Others explained that appointing

the CFO as CEO in these situations was

less likely to upset the division heads

than would promoting one o their number

above the rest. This choice thereore

increases the likelihood o retaining all the

division heads.

When CFOs have the broader experience

expected of a CEOMany interviewees argued that to become

a successul CEO, a CFO needs hands-

on general-management experience. Too

many, said one, are perceived as much

too narrow ever to become CEOs

a perception that CFOs must continually

ght. A number o interviewees counseled

CFOs to exit the nance department at som

point in their career and build expertise

in a dierent unction.

Indeed, the experience oUKCFOs-

turned-CEOs seems to bear out this

pointmore than two-thirds had at som

point worked outside the nance unctio

This breadth o experience is a crucial

part o what many respondents describe

as a necessary skill: the ability to ocus

on the entire organization, including the

task o motivating employees, rather

than simply mastering the numbers. Mostthe UKCEOs with a CFO background

who moved to the top job rom 2000 to

2006 did so rom within the same compan

but ewer than hal moved directly rom

the CFO position (Exhibit 2). A CFO is

even less likely to be promoted direct ly t

the CEO role at another company.

When should CFOs take the helm?

Exhibit 2

Not always adirect path

Most UK CEOs with a CFO background were

promoted within the same company.

UK CEOs with prior experience as CFOs1

1 Jan 2000 to Feb 2006; for the 45 companies in the FTSE 250 Index of UK companies whose CEOs h ave prior CFO experience.


Moved to CEO rolewithin same company

Moved to CEO rolefrom other company

42%

11%

36%

11%

Moved to CEO

role from otherposition

Moved to CEO

role directly fromCFO position

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0 McKinsey on Finance Autumn 2006

Our respondents also elt that CFOs could

broaden their appeal by working under

more than one CEO and in more than one

company. Upward o 90 percent oUK

CFOs who became CEOs had worked at

more than one (Exhibit 3).

Making the transition

When CFOs do win the promotion,

the transition to CEO isnt easy (see sidebar,

Making the transition to CEO: An inter-

view with Carreours Jos Luis Durn).

Former heads o nance not only must deal

with the usual challenges acing new

CEOs but also, in many cases, drasticallychange their approach to business. A ew

key critical issues emerge rom the inter-

views with stakeholders who have watched

CFOs making the transition to CEO and

with ormer CFOs themselves:

Adopting a CEO mind-set.CFOs-

turned-CEOs need to orget their nance

role as quickly as possible and take a

much more holistic view o the business.

In particular, they should ocus on

the entire organizationnot only on the

numbersby spending time in opera-

tions and with customers and by acting

as the companys external ace to

broader stakeholder groups beyond the

nancial community.

Delegating responsibility. Our interviews

revealed that CFOs-turned-CEOs must

avoid being what one interviewee termed

a controlosaurus. They must resist

the amiliar habits o their previous roles

in nance and control and give theirnew teams enough room to operate

without intererence. It is particularly

important to give new CFOs some latitude

to lead the nance unction rather

than push them down into a limited role

as controller.

Building the right team. Former CFOs

need to recognize their limitations and

Exhibit 3

Broad experiencepreerred

Experience in more than one role and

more than one company broadens a CFOs

appeal as a CEO candidate.

UK CEOs with prior experience as CFOs1

1 Jan 2000 to Feb 2006; for the 45 companies in the FTSE 250 index of UK companies whose CEOs have prior CFO experience.


Experience in financeand general management,from >1 company

22%

69%

Experience in finance only,from >1 company

Experience in financeand general management,from only 1 company

9%

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Making the

transition to CEO:

An interviewwith Carreours Jos

Luis Durn

One CEO who was promoted directly rom his CFO

position is Jos Luis Durn, who served or three years

as Carreours chie nancial ocer beore being tapped

or the top slot in 2005. He discussed his transition

between these roles in an interview earlier this year with

McKinseys Peter Child and Erik van Ockenburg. What

ollows is an excerpt rom that interview.

McKinsey on Finance:In your experience, whats the

hardest part o the transition rom CFO to CEO?

Jos Luis Durn:The hardest part is dening what

is really important or the CEO to do and what should be

delegated to others. We all think we know how to

delegate, yet I nd I delegate much more as CEO than I

did as CFO. In those rst days and weeks, when I

was trying to work the same way I had as CFO, I quickly

realized it was just impossible.

As CEO one has to be conscious that normally theres

somebody who does the detailed and technical work

better than you. At Carreour that includes everything

around product ranges, loyalty programs, supply chains,

IT systems, and even the nancial structure. I have

to be condent that the people around me know how to

do all this better than I do. New CEOs probably have

to learn this on their own, but its crucial to learn it very

quickly; otherwise its easy to get bogged down in

the minutiae. One has to learn to manage the compa

on a cross-border basis with the main key indicators,

looking more at trends than at the individual details

behind them.

MoF:You said new CEOs have to learn the new role

quickly. In your experience, what should they ocus on

during the frst 100 days?

Jos Luis Durn:Communication is key, both intern

and externally, to make it very clear what are the

priorities and the key indicators you intend to ocus o

In my own case, because retail is to a certain extent

a pure people business, communication was even mo

important. I needed to show that I was a regular

guy who could be very customer ocused, and I neede

to dene our prioritieswhich in our case are only

two: growth and customers. And in our organizatio

430,000 people, these messages had to be accelerate

quickly spanning the organization rom top to bottom

A second main issue is to simpliy the organization in

terms o people and decision-making processes. Ta

time to think, to be close to your people, to be on

the shop foor, to visit units in dierent countries, a

to give advice. And i you want to have the time to

Jos Luis Durn

Peter N. Child

and Erik van Ockenburg

Career highlights

Carreour (1994present)

Group managing director, chairman o board (2005present)

CFO, managing director o organization and systems, member o executive committee (200104) CFO, Spain (19972000)

Management auditor, southern Europe and then Americas (199497)

(continued on next page)


8/14/2019 MoF Issue 21

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address all these issues, you must delegate to the

people around you. I you dont eel that the right

person is around you, its better to change the person

rather than toughing it out or doing it yoursel. At

the same time, at the CEO level, one has to be a little

more patient, a little less emotional, than one

might have been as CFO.

MoF:What keeps you awake at night now, compared

with what kept you awake as CFO?

Jos Luis Durn:I think that the priorities change

rom technical challenges to more people-oriented

ones. So a CFO might lie awake worrying about very

short-term issues, such as next months P&L, the

next road show, or a rough set o sales gures. In

contrast, a CEO lies awake worrying about people

about a team in one o the main markets that isnt

motivated; about a country manager who doesnt have

what it takes to deal with upcoming challenges; about

people who arent communicating. These things keep

me awake much more than the short-term issues.

In our case, we made a certain number o changes

which we were, rankly, a little worried about making.

For example, we had pretty clear ideas about w hat

we needed to do in terms o port olio rationalization

and the tools we have to give back to the shopfoor. But whenever an issue is people related, you are

always less sure; its always more sensitive, and you

always have to take into account other consequences

a change can have, bot h internally and externally.

O course, now that its clear that those changes have

worked, its easy to say we should have implemented

them earlier, but in the end weve done quite well.

MoF:Given your experiences as CEO, how would

you suggest todays CFOs should approach their role

dierently?

Jos Luis Durn:My advice or a CFO today is to

expand your knowledge beyond what might be

included in your role as a technical CFO and to expand

your responsibility within the company. What I look

or is an operating CFO whos interested in the

business, who can discuss dierent procedures within

the company or within the back oce but who also

knows how the ront oce works. Someone who isnt

interested in the main activity o the business doesnt

create the value that a CFO should.

You also have to be open to the entire business. When

you think about nance and new accounting rules,

o course, you have to be the strictest person in your

organization. You have to respect the rulesto be,

to a certain extent, the lawyer o internal control. But

at the same time, you have to be as open minded

as possible, to interest yoursel in the main activity and

the main operations o the business. And i theres

any opportunity to get involved in mergers and acquisi-

tions or in nancial communications or even in the

supply chain, take it! Take it and try to play the game.

As a corollary, my advice to any CEO who has a purelytechnical CFO would be, rst, to give your CFO the

opportunity to be much more active in the business

to understand inventory control and the supply

chain rom supplier to shop foorin order to better

understand the business. I that doesnt work, then

change CFOs as quickly as possible.

Peter Child ([email protected]) is a partner in McKinseys Paris office, and Erik van Ockenburg

([email protected]) is a partner in the Brussels office.

8/14/2019 MoF Issue 21

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the need to build a complementary team.

In particular, that team must have strong

marketing capabilities, operations, and

salesincluding people with the right

combination o business and interpersonal

skills to mentor the CEO in those areas.

CFOs promoted to the top job can bring

a unique set o skills. Those who strengthe

their management capabilities early

on are more likely to be perceived as stron

candidatesand will be better positione

or success once they get the nod. And

or those who dont end up in the CEOs

suite, our interviews suggest that the stea

ocus many CFOs have on shareholder

value recommends them to become eecti

board chairs.

The authors would like to thank Simon Bailey and Susan Bloch for their contributions to this article.

Richard Dobbs ([email protected]) is a partner in McKinseys London office, where Doina Har

([email protected]) is a consultant. Anders Rasmussen ([email protected])

is an associate principal in the Copenhagen office. Copyright 2006 McKinsey & Company. All rights reserved

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Index of articles, 00 to 00

Previous issues can be downloaded at www.corporateinance.mckinsey.com.

Individual articles are available to McKinsey Quarterly subscribers at

www.mckinseyquarterly.com. A limited number o past issues are available;

please send a request by e-mail to [email protected].

Number 20, Summer 2006

Learning to let go: Making better exit decisions

Habits of the busiest acquirers

Betas: Back to normal

The irrational component of your stock price

Number 19, Spring 2006

The misguided practice of earnings guidance

Inside a hedge fund: An interview with the managing partner of Maverick Capital

Balancing ROIC and growth to build value

Toward a leaner finance department

Number 18, Winter 2006

How to make M&A work in China

Capital discipline for big oil

Making capital structure support strategy

Better cross-border banking mergers in Europe

Data focus: A long-term look at ROIC

Number 17, Autumn 2005

Measuring stock market performance

Reducing the risks of early M&A discussions

Smoothing postmerger integration

Comparing performance when invested capital is low

What global executives think about growth and risk

Number 16, Summer 2005

Measuring long-term performance

Viewpoint: How to escape the short-term trap

The view from the boardroom

The value of share buybacks

Does scale matter to capital markets?

Number 15, Spring 2005

Do fundamentalsor emotionsdrive the stock market?

The right role for multiples in valuationGoverning joint ventures

Merger valuation: Time to jettison EPS

Number 14, Winter 2005

Outsourcing grows up

Finance 2.0: An interview with Microsofts CFO

The hidden costs of operational risk

The right passage to India

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Podcasts

Download and listen to these and other select McKinsey on Finance articles

using iTunes. Check back requently or new content.

Learning to let go: Making better exit decisionsPsychological biases can make it difficult to get out of an ailing business.

John T. Horn, Dan P. Lovallo, and S. Patrick Viguerie

The irrational component of your stock price

In the short term, emotions influence market pricing. A simple model explains

short-term deviations from fundamentals.

Marc H. Goedhart, Bin Jiang, and Timothy Koller

The misguided practice of earnings guidance

Companies provide earnings guidance with a variety of expectations and most of

them dont hold up.

Peggy Hsieh, Timothy Koller, and S . R. Rajan

Toward a leaner finance department

Borrowing key principles from lean manufacturing can help the finance function

to eliminate waste.

Richard Dobbs, Herbert Pohl, and Florian Wolff

Measuring stock market performance

TRS doesnt reflect a companys performance or health. What does?

Richard Dobbs and Timothy Koller

Reducing the risks of early merger discussions

Used early in negotiations, a third-party clean team can help companies assess a

deal and protect sensitive data.Seraf De Smedt, Vincenzo Tortorici, and Erik van Ockenburg

Smoothing postmerger integration

It takes less time than you think for a clean team to make valuable contributions

to the integration of businesses.

Nicolas J. Albizzatti, Scott A. Christofferson, and Diane L. Sias

The value of share buybacks

Companies shouldnt confuse the value created by returning cash to shareholders

with the value created by actual operational improvements. After all, the market doesnt.

Richard Dobbs and Werner Rehm

How to escape the short-term trap

Markets may expect solid performance over the short term, but they also value sustained

performance over the long term. How can companies manage both time frames?

Ian Davis

All P/Es are not created equal

High price-to-earnings ratios are about more than growth. Understanding the ingredients

that go into a strong multiple can help executives make the most of this strategic tool.

Nidhi Chadda, Robert S. McNish, and Werner Rehm

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