MoF Issue 21
Transcript of 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.
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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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McKinsey on Finance Autumn 2006
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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Creating value: The debate over public vs. private ownership
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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McKinsey on Finance Autumn 2006
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.
Creating value: The debate over public vs. private ownership
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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
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McKinsey on Finance Autumn 2006
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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McKinsey on Finance Autumn 2006
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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McKinsey on Finance Autumn 2006
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.
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McKinsey on Finance Autumn 2006
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.
Source: BoardEx; Dealogic; Factiva; FTSE; Hoovers; McKinsey analysis
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.
Source: BoardEx; Dealogic; Factiva; FTSE; Hoovers; McKinsey analysis
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)
When should CFOs take the helm?
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McKinsey on Finance Autumn 2006
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.
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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
MoF
When should CFOs take the helm?
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McKinsey on Finance Autumn 2006
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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Copyright 2006 McKinsey & Company