Top Priority of a CEO

CEOs need to do two things well to be successful: Run their operations efficiently and deploy the cash generated by operations. Most CEOs focus on Managing Operations which is undeniably important however dismiss the importance for Capital Allocation. If you go back to History you will always see the successful ones have always been the best Capital Allocators. Stated Simply ,two companies with identical operating results and different approaches to allocating capital will derive two very different long term outcomes for shareholders.

Essentially Capital Allocation is an investment and as a result all CEOs are both Capital Allocators and investors.In fact this Role just might be the most important responsibility any CEO has, and yet despite its importance, there are no courses on capital allocation in the Top business schools. As Warren buffett has observed very few CEOs come prepared for this critical task.

As Buffett Says:

“The Heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in areas such as marketing, production, engineering, administration or sometimes institutional politics. Once they become CEOs, they now must make Capital Allocation decisions, a critical job they have never have tackled and that is not easily mastered. To Stretch the point, it’s as if the final step for a highly talented musician was not to perform at the Carnegie hall, but instead to be named Chairman of the Federal Reserve.”

Basically CEOs have five essential choices for deploying capital-investing in existing operations, acquiring other business, issuing dividends, paying down debt, or repurchasing stock and three alternatives for raising it-tapping internal cash flow,issuing debt or raising equity.

A Very Few CEOs Understand that:

• Capital Allocation is CEOs most important Job.
• What counts in the long run is per share Value and not overall growth or size.
• Cash flow not reported earnings is what determines long term value.
• Decentralized Organizations release entrepreneurial energy and keep both costs and Rancor Down.
• Independent thinking is essential to Long term Success, and interactions with Outside advisors (Wall Street, press) can be distracting and time consuming.
• Sometimes the best investment opportunity is your own Stock.
• With Acquisitions, Patience is a Virtue, as is occasional Boldness.

The CEO’s who follow these are rare and if you are evaluating any company’s management make sure to keep this in Mind: Capital Allocation, Capital Allocation, Capital Allocation!!