The Stress Test Every Business Needs

A Capital Agenda for Confidently Facing Digital Disruption, Difficult Investors, Recessions and Geopolitical Threats

Jeffrey R. Greene, Steve Krouskos, Julie Hood, Harsha Basnayake, William Casey

• Publisher: Wiley
• Year: 2018
• Print ISBN:
  9781119417941
• Edition: 1
• eBook ISBN:
  9781119418139
• Topic: Business
• Subtopic: Business General
• Index: Business

Future-proof your business today for stronger performance tomorrow

The Stress Test Every Business Needs: A Capital Agenda for Confidently Facing Digital Disruption, Difficult Investors, Recessions and Geopolitical Threats provides a comprehensive approach to creating value and flexibility in an increasingly volatile business environment that presents both great risks and opportunities every day. The authors extend the banking "stress test" concept to a company's Capital Agenda — how executives manage capital, execute transactions and apply corporate finance tools to strategic and operational decisions. Having a static Capital Agenda, however appropriate for your current market position, is not enough in today's uncertain world. Long-term success comes from building resilience into each element and in the way those elements interact.

The book uses a broader definition of business stress that includes traditional macroeconomic and geopolitical risks, as well as technological disruption, hostile takeovers and activist shareholders. Companies that make poor strategic decisions or underperform operationally will likely find themselves facing great stress. And that stress is symmetric; threats come from downside risks and from missed opportunities.

The chapters address the how and why of essential issues such as:

• Formulating corporate strategy in a digital world
• Pre-empting activist shareholders
• Restoring distressed companies to operational and financial health
• Ensuring effective collaboration among strategy, finance and operations
• Getting the most out of your advisors
• Proactively managing intrinsic value
• Rigorously allocating capital across the enterprise
• Acquiring and divesting for optimum value
• Syncing financing decisions with business strategy and capital market conditions
• Incorporating tax planning throughout the Capital Agenda
• Liberating excess cash with leading working capital management practices
• Aligning strategic goals and metrics to reach your company's full potential

Companies that develop strategy and set operational priorities with a balanced Capital Agenda are best positioned to control their own destiny. The Stress Test Every Business Needs provides a roadmap to future-proof your business today for stronger performance tomorrow. 

1
How resilient is your Capital Agenda?

Jeffrey R. Greene

Framing decisions within the Capital Agenda

The Capital Agenda is a comprehensive approach companies should use to manage capital, execute transactions, and apply practical corporate finance tools to strategic and operational decisions. This book synthesizes what we’ve learned over literally thousands of engagements helping clients as they navigated out of crises to confront technological disruption, unrelenting investor scrutiny, slow gross domestic product (GDP) growth, and geopolitical volatility.¹ EY’s Capital Agenda framework has been such a valuable tool that we’ve built Transaction Advisory Services around it, using it to set priorities for recruiting and talent management, innovation, and thought leadership.

Having a static Capital Agenda, however appropriate for your current environment, is not enough in today’s uncertain world. Long-term success comes from building resilience into each element of the Capital Agenda and in the way those elements interact. Banking regulators have mandated well-defined parameters for stress tests of our most important global financial institutions. We believe every nonfinancial company should adopt an analogous approach to “future-proofing” its Capital Agenda.

We use a broader, more strategic definition of stress that encompasses not only traditional macroeconomic, sovereign-risk, and commodity- related shocks—such as interest rates, recessions, oil prices, and expropriation—but also forces such as technological disruption, hostile takeovers, and activist shareholders. In this expanded view, companies that make poor strategic decisions or underperform operationally—even in a benign economic and geopolitical climate—can still find themselves facing great stresses. We believe that stress is symmetric; the threat can come from downside risks as well as from missed opportunities.

The Capital Agenda’s building blocks

While every company’s Capital Agenda is specific to its strategy, operating model, and business environment, Figure 1.1 provides examples of common activities. Each quadrant represents one of the four key processes that make up the Capital Agenda framework:

1. Raising. Accessing the capital markets to properly fund growth and day-to-day operations.
2. Investing. Deploying capital to new opportunities, both organic and inorganic.
3. Optimizing. Reviewing the business portfolio for capability gaps as well as divestment candidates.
4. Preserving. Managing risk and adapting to changes in the business environment.

Figure 1.1 Capital Agenda’s building blocks

As we’ll see, many essential activities affect more than one quadrant. For example, valuation, capital allocation, and tax planning are relevant to the entire Capital Agenda.

Who can benefit from this book?

We created this book to help boards and management teams make better, more informed decisions around their Capital Agenda in an increasingly uncertain business environment that presents both great risks and opportunities every day. How much better? Our friend, Professor Richard Ruback at Harvard Business School, tells students he hopes they’ll get 5% better from engaging in his class. It doesn’t seem like much, but if you’re a professional golfer, 5% better means 14 strokes over four rounds—normally the difference between winning and not making the top 25. In a major tournament, that’s likely a difference of more than US$1 million in prize money. As a chief executive officer (CEO) or chief financial officer (CFO), if your stock price is 5% higher each year than it otherwise would have been and that difference accumulates over time, your market value would be more than a quarter larger after five years, and almost two-thirds larger after 10 years—likely enough to ward off a hostile acquirer or activist shareholder. So maybe 5% better at managing your Capital Agenda from reading a book is pretty good.

In these pages we distill more than 400 years of the contributors’ collective experience into practical guidance for executives trying to master both the Capital Agenda and the ability to future-proof their companies. We measure business success in two ways:

1. Shareholder value creation. How well are you rewarding shareholders, and what’s expected over the next two to three years?
2. Resilience. Are you adaptable enough to absorb unexpected threats and to seize unanticipated opportunities? This applies to evolving long-term trends—like demographics and consumer tastes—and to the rapid pace of short-term changes.

Consistently creating value and maintaining resilience are complicated by the demands of optimizing all the individual elements of the Capital Agenda, as well as managing them holistically. Your ability to control your own corporate destiny faces ever-greater challenges created by:

• Accelerating uncertainty from technology-driven disruption and industry convergence.
• Less bounded macroeconomic and policy uncertainties.
• Growing political divergence with emerging nationalism and subnationalism.
• The formidable power of traditional investment managers and activist hedge funds.

Implementing the Capital Agenda well requires an integrated, strategic focus from C-suite leaders who can see and work across the enterprise. But fluency with the Capital Agenda is necessary for everyone from the board of directors to middle managers. Boards need to exercise their governance responsibilities by asking the right questions that are informed by the Capital Agenda, such as:

• Do our large share repurchases signal to investors that we’ve exhausted our opportunities to grow organically?
• Is this acquisition candidate a good strategic fit, and do we have the ability to earn an adequate return on our purchase price?
• Are we the best owner of each business in our portfolio?

Leaders in key functions—manufacturing, supply chain, sales and marketing, research and development (R&D)—should understand how their day-to-day activities align with, and support, the Capital Agenda to create value and build resilience. Likewise, practitioners within companies working on strategy, corporate finance, mergers and acquisitions (M&A), tax planning, and operations have essential roles to play in helping make their company’s Capital Agenda complete, internally consistent, and resilient. Our thinking should also resonate with advisors looking for new perspectives to address their clients’ challenges at the intersection of global capital markets and competitive strategy. Academia represents another important audience: teachers and students who want to explore how financial theory works in practice.

Universal lessons from Allergan and Valeant

The 21st of April 2014 started out like any other beautiful day in Southern California. Despite a Monday packed with meetings, Allergan Inc.’s longtime CEO, David Pyott, took a break around noon to stop by the employee cafeteria and grab lunch.

It was the quiet before the storm.

Within hours, Pyott and his senior team learned of two US Securities and Exchange Commission (SEC) filings that put Allergan in the crosshairs of both an activist shareholder, Pershing Square Capital Management LP, and a hostile acquirer, Valeant Pharmaceutic...

Table of contents

• Cover
• Title Page
• Copyright
• Acknowledgments
• Chapter 1 How resilient is your Capital Agenda?
• Chapter 2 Do you know the intrinsic value of your company and how to manage it?
• Chapter 3 Are you allocating capital across the enterprise to reduce C-suite stress?
• Chapter 4 Are your portfolio reviews timely, objective, and thorough?
• Chapter 5 Do your acquisitions consistently pay off for shareholders?
• Chapter 6 Are you planning and executing divestments for maximum value?
• Chapter 7 Do your financing choices support flexibility and efficiency?
• Chapter 8 How well does working capital management contribute to cash flow and earnings?
• Chapter 9 Is tax a full partner in building resilience and driving value?
• Chapter 10 Are strategy, finance, and operations integrated for optimal value creation?
• Chapter 11 How can you get the most out of your advisors?
• Chapter 12 Can your strategy thrive in a digital world?
• Chapter 13 How can you pre-empt activist shareholders?
• Chapter 14 How should you restore a distressed company to health?
• Chapter 15 Will your strategic goals ensure your company reaches its full potential?
• Glossary
• Contributor Biographies
• About EY
• Index
• End User License Agreement