CFOs who evolve their capital allocation approach to one that prizes responsiveness can add 2.5 percentage points to economic value added than “unresponsive” peers, said Gartner recently.
To achieve this, CFOs should replicate the practices of activist investors who are willing to reassess the organisation’s value creation strategy and have a willingness to divest business lines to bring the portfolio in line with a coherent vision, the firm noted.
In a world where most public companies fail to create meaningful economic value through their enterprise investments, a 2.5 percentage point enhancement to value creation is significant, said Emily Riley, director, research in the Gartner Finance practice.
Most organisations have not yet achieved a high level of capital responsiveness that a disruptive environment like today requires, Riley pointed out .
“The best way to achieve capital responsiveness is for CFOs to take a ‘capital activist’ approach to their allocation strategy and actively challenge long-held attachments that impede meaningful capital pivots,” she advised.
Gartner said its research was based in part on a survey of 100 CFOs in July 2021 that assessed capital allocation strategies and their organisations’ abilities to:
- Quickly shift capital to new high-value uses
- Quickly shift capital away from low-value uses
- Make significant, rather than incremental, changes to where capital is allocated
The data showed that only 17% of organisations consistently exhibited all three characteristics of a capital responsive strategy, and at most 38% of organisations consistently were able to meet just one of the criteria, Gartner said.
The “Activist” CFO
The surest path to consistent capital responsiveness is through CFOs transforming their posture from their traditional reviewer and advisor roles to that of an activist, Gartner observed.
To achieve this, CFOs must move beyond their comfort zone of pressure-testing business assumptions and assessing strategic alignment of investments to a more active role in steering their organization to assemble a portfolio of investments that will maximize long-term value for the enterprise, the firm said.
“Being an activist CFO does not mean taking investment decisions out of business partners’ hands, but rather exerting influence on how investments are evaluated to ensure that enterprise-wide value creation is put first, rather than short-term or siloed objectives,” Riley explained.
Capital activism shouldn’t be limited to CFOs but should also include any senior finance staff involved in setting or communicating strategy, approving or blocking resource allocation, providing analytics to business leaders related to investments or interacting directly with business leaders, she added.
While most finance teams are not currently practicing capital activism, they have most of the tools in place to do so, according to Riley.
“Capital activism leverages many of the practices that teams focused on traditional ‘reviewer’ and ‘advisor’ roles play, such as stakeholder management, but enhances those skills to exert influence on enterprise-wide value creation both in funding new ideas and killing legacy investments not aligned with top priorities,” she pointed out.
According to Riley, finance teams can actively drive capital responsiveness in their organisation in several ways, including:
- Intervening earlier in investments’ lifecycle to reduce resource intensity
- Aligning funding to priorities, not individual projects
- Monitoring operating resource uses on the basis of activities, not line items, to create the visibility required to realign people, technology and other capabilities as multi-year investment priorities change