Chapter 1
The building blocks of an effective Capital Agenda
A successful business strategy is wholly dependent on a rigorous Capital Agenda.
A robust Capital Agenda that can help an organization meet its strategic goals should be:
- Complete: each element should work properly on its own as well as supporting the overall agenda.
- Aligned: in addition, every element needs to be properly supportive of the organization’s overall strategy and operations.
- Resilient: the core area where stress testing comes in, a successful Capital Agenda facilitates long-term growth by both absorbing downsides and helping the organization seize potential upsides through baked-in flexibility.
To achieve this, there are four key areas to consider when building a Capital Agenda that will remain resilient in the face of potential stress:
- Raising: accessing the capital markets to properly fund growth and day-to-day operations.
- Investing: deploying capital to new opportunities, both organic and inorganic.
- Optimizing: reviewing the business portfolio for capability gaps as well as divestment candidates.
- Preserving: assist in managing risk and adapting to changes in the business environment.
A broad stress test can help a company to systematically analyze its strategy across these four areas – even in an uncertain economic and geopolitical climate.
Chapter 2
Defending against avoidable risks
An effective stress test can shield companies from potential threats before they arise.
Thoroughly stress testing a Capital Agenda strategy involves various processes – but one of the most important is a premortem. This process involves assuming that a business effort has completely failed before it is implemented. This encourages those involved to think of all the possible reasons for the failure, before considering better ways to future-proof the project.
Understanding your Capital Agenda with a premortem
The EY Stress Test book provides a sample premortem framework to help work through things that could potentially go wrong with a Capital Agenda to help anticipate and get ahead of possible issues before they happen. Here are some of the questions to consider:
What went wrong? |
What caused it? |
We overpaid for the acquisition. |
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We failed to capture the planned synergies for the acquisition. |
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We waited too long to divest an underperforming business. |
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We had to retreat from an important market. |
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We had to give the activist shareholder a board seat. |
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Our stock was downgraded. |
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We lost money on the joint venture. |
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Chapter 3
Making the most of your Capital Agenda
How to give your capital strategy the best chance of adding value and driving growth.
There are a number of a guiding principles that can help give direction and aid in prioritization as you try to optimize your organization’s Capital Agenda.
- Principle 1: Enterprise-wide capital allocation
Investment decisions – from capital expenditures and acquisitions to dividends and share repurchases – are among the most important functions of your executive team. To ensure they are being made as objectively as possible, evaluate them using criteria that remains consistent across the organization.
- Principle 2: Comprehensive transaction strategy and processes
Understanding how a company can create strategic and financial value is a fundamental cornerstone of success. One of the best ways to improve the chances of adding value and driving growth is to build organizational agility at a tactical level to enable you to act on unexpected opportunities when they arise.
- Principle 3: Adaptive financing and payout policies
Capital structure and financing choices for individual investments don’t just happen in isolation – they also combine to help shape a company’s overall resilience. To maximize that resilience, dividends and share repurchases should balance shareholder preferences, operating needs and risk – and carefully consider if and when to go public.
- Principle 4: Finance in sync with, and enabling, strategy and operations
The capital agenda is what converts a company’s strategy and operating model into shareholder value. With rising uncertainty, ongoing success needs closer collaboration between policymaking and implementation teams across finance, operations and strategy to give greater flexibility and efficiency.
Capital allocation improvement
72%of CFOs of large companies admit their capital allocation process should be improved.
A company that lacks a formal, systematic approach to capital allocation often displays lower-than-expected returns on investments and pressure from investors for increased dividends and share repurchases. Conversely, a business that adopts an efficient approach to capital allocation will be better placed to reap value from its investment decisions and have the flexibility to quickly assess new investment opportunities that emerge.
Who is responsible?
A systematic, resilient Capital Agenda requires strong input from C-suite leaders who can foresee problems and work across the entire company. Additionally, company boards have the right to exercise their governance responsibilities by asking the right questions concerning large share repurchases and acquisitions. Throughout the business, leaders in key functions – manufacturing, supply chain, risk management, sales and marketing and more – must also understand how their daily activities align with and bolster the Capital Agenda.
Ultimately, organizations must work together to implement a complete, aligned and resilient Capital Agenda while simultaneously attempting to protect their companies from future shocks.
The Stress Test Every Business Needs examines which Capital Agenda questions must be continually asked by company leaders. The book offers an understanding of how to approach each question independently and sheds light on how each works as part of the wider Capital Agenda.
The following are some of what we consider the most important self-assessment questions, which we explore in more detail through dedicated chapters in the book:
- How resilient is your Capital Agenda?
- Do you know the intrinsic value of your company and how to manage it?
- Are you allocating capital across the enterprise to reduce C-suite stress?
- Are your portfolio reviews timely, objective and thorough?
- Do your acquisitions consistently pay off for shareholders?
- Are you planning and executing divestments for maximum value?
- How well does working capital management contribute to cash flow and earnings?
- Are strategy, finance and operations integrated for optimal value creation?
- How can you preempt activist shareholders?
A company’s full potential ultimately depends on its leaders' comprehensive approach to managing capital, executing transactions and applying practical corporate finance tools and processes that optimize strategic and operational decisions. Failure to align these actions can ultimately hinder growth and long-term success. The examples given in the EY Stress Test book tellingly show how companies that do not adopt a holistic approach to their Capital Agenda can quickly move from the top of the heap to the bottom of the pile.
We encourage you to read the entire book, rather than just this article alone, to understand how the EY Stress Test book can add valuable insight and guidance to every step of your Capital Agenda.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Summary
Our book, The Stress Test Every Business Needs, has a number of suggestions on how to build and maintain a resilient Capital Agenda. As well as recommending a premortem to test how your capital strategy might perform under pressure, it offers key four principles to help prioritize your Capital Agenda decisions.
