…and stay there, is the lack of understanding of resource (people and capital) allocation. Understanding talent and assigning the right people to the right opportunities seems to be straight forward (I know it isn’t) but capital allocation, as a mindset, seems to be more difficult to grasp.
Interestingly, the investment community is quite strong on this area but weak on understanding the day-to-day implications of running a business. Many have never been there before and others are too far away from the ground to fully understand. There is a clear gap to bridge on both sides, which if closed, could provide a good opportunity for development and growth on both sides.
Sales is vanity, profit is sanity and cash is king. Companies go bankrupt when they run out of cash. But, if cash is king, why middle management is more focused on sales, gross profit, and volume? Goals and incentives and the specialisation of big corporations prevent management to be directly exposed to capital allocation challenges, options and decisions that generate value. Most people are never exposed to decisions around dividends’ distribution, Capex, re-purchasing shares, issuing new shares, leveraging through debt, acquiring companies, etc. Also, this is not being taught in a pragmatic way in Business Schools so, if you are not directly exposed, it would be difficult to understand how it works.
However, as a CEO, this is one of the three areas Boards and investors will be obsessed and expecting you to excel on. There’s an evident catch-22. So, the question is how to become aware and proficient at capital allocation if you are not exposed to it in your current function and role? There is no single right answer or easy way but to get directly exposed to the topic. I believe an approach you can take is to start investing your own money, with sufficient skin in the game, analysing companies across sectors, reading earning calls transcripts, 10-Ks, learning from great investors like Buffet (the letters), Munger (Poor Charlie’s Almanak), Lynch, Greenblatt, Dalio and Fisher among many others. Also, getting closer to your CFO and the finance community is a great way to become more aware and proficient on the topic. Good investing and good learning!
PSI: I’ve taken the picture at José Ignacio’s lighthouse in Punta del Este, Uruguay, a place I call home together with Madrid, Spain. I’ve always found lighthouses inspiring; a great analogy for seeking the right direction while avoiding unnecessary risks.
