Dive Brief:
- CFOs who emulate activist investors generate return on invested capital that is on average 2.5 percentage points higher than those who do not, Gartner said, suggesting that finance leaders adopt a “no investment is sacred” mindset and view their portfolios as a set of trade-offs and synergies.
- CFOs who take an approach of “capital activism” quickly shift capital from low-value uses to high-value uses, and favor significant capital reallocation over incremental changes, according to Emily Riley, a research director with Gartner Finance. Only 17% of CFOs surveyed by Gartner pursue an approach of “capital responsiveness.”
- “Capital activists narrow their organization's focus to a shortlist of clearly articulated, differentiating priorities, ensure funding is distributed across priorities to maximize overall enterprise value and force operating resource trade-offs to support the execution of capital investments,” Riley said.
Dive Insight:
Emulating the way activist investors and private equity firms approach capital is especially essential to CFOs as they seek to overcome several challenges, including the pandemic, climate change and the imperative for digital transformation, Riley said. “Disruption is the new status quo.”
“Activist investors succeed by bringing to companies a laser focus on their value creation strategy and a willingness to divest — sometimes even profitable businesses — to bring the portfolio in line with a coherent vision,” Riley said in a report. “CFOs must add ‘capital activism’ to their more conventional attempts to streamline capital allocation processes.”
For example, a CFO at a multinational conglomerate crafted a strategy to spin off a large, profitable business unit to better align its portfolio with long-term strategy, Riley said in an email response to questions. The transaction helped push up revenue and earnings per share.
Many CFOs “overestimate the degree to which they are successfully practicing capital activism,” Riley said.
Capital activism does not mean just reviewing business assumptions, such as “pressure-testing” the rationale for a new investment, she said.
Many CFOs serving as a “reviewer” or “advisor” need to step up to the role as an “activist,” she said. They need to proactively pull together a strategy and portfolio of investments that will maximize long-term value.
“CFOs need to be wary of status quo bias — the fact that an investment has been valuable in the past is no reason to keep it in the growth investment portfolio in the future,” she said. “No individual investment is sacred, only the enterprise mission and mission alignment of the portfolio.”
CFOs in recent years have taken a bigger role in crafting business strategy and deepened their involvement across their businesses in order to better understand revenue and profitability from the point of view of each separate team.
Some companies have outsourced accounting to enable their finance teams to focus more on guiding investment decisions, Riley said.
To be sure, a CFO can take the approach of an activist investor too far, Riley said.
“There’s certainly the risk of misinterpreting the tenets of ‘capital activism’ and having it lead to changing investment priorities too frequently, ultimately undermining the ability to realize value from those investments,” she said. “That’s why it’s so important to take a somewhat long-term lens.”
“The bigger risk for most CFOs, though, is that they don’t take this far enough, and only move from being a reviewer to an advisor — not an activist,” she said.
Gartner surveyed 100 CFOs from 26 industries, including transportation, health care, materials, retailing and software.
