Η ΑΛΗΘΕΙΑ ΕΛΕΥΘΕΡΩΣΕΙ ΥΜΑΣ
1.The allocation process should be CEO led, not delegated to finance or business development personnel.
2.Start by determining the hurdle rate – the minimum acceptable return for investment projects(one of the most important decisions any CEO makes). Hurdle rates should be determined in reference to the set of opportunities available to the company, and should generally exceed the blended cost of equity and debt capital(usually in the mid teens or higher)
3.Calculate returns for all internal and external investment alternatives, and rank them by return and risk(calculations do not need to be perfectly precise). Use conservative assumptions. Projects with higher risk(such as acquisitions) should require higher returns. Be very wary of the adjective strategic- it is often corporate code for low returns.
4.Calculate the return for stock repurchases. Require that acquisition returns meaningfully exceed this benchmark. while stock buybacks were a significant source of value creation for these outsider CEOs, they are not a panacea. Repurchases can also destroy value if they are made at exorbitant prices.
5.Focus on after-tax returns, and run all transactions by tax counsel.
6.Determine acceptable, conservative cash and debt levels, and run the company to stay within them.
7.Consider a decentralized organizational model.(What is the ratio of people at corporate headquarters to total employees- how does this compare to your peer group?)
8.Retain capital in the business only if you have confidence you can generate returns over time that are above your hurdle rate
9.If you do not have potential high-return investment projects, consider paying a dividend. Be aware, however, that dividend decisions can be hard to reverse and that dividends can be tax inefficient.
10.When prices are extremely high, it’s OK to consider selling businesses or stock. It’s also OK to close under-performing business units if they are no longer capable of generating acceptable returns.
Words of Wisdom
durable competitive advantage
one dollar test
look through earnings
circle of competence
margin of safety
free cash flow
cash conversion cycle
habit is a second nature
the do-nothing rationale
sunk cost / opportunity cost
theory of constraints
※We should revise this policy every year if needed.