Corporate Planning: Capital Allocation is Still Alive

Corporate Planning—A COVID-19 Casualty

5/14/2020

Are you the CEO, the CFO, or Chief Strategy Officer of your firm? If so, do you feel like you’re living a nightmare? Have you awakened, as West Texas Intermediate did in April, publicly naked and in free fall?

Do you feel like there is nothing you learned in school or on the job that has prepared you for this?

As you read over your first quarter results, does your mind think you’re reading fiction—Stephen King maybe?

Can you predict the next six months, three months, one month, one week, or even one day? Is your Chief Risk Officer on the verge of a breakdown?

No Man’s Land

No corporate processes were built for this. No resume includes a paragraph on the skill set required. You were not chosen for your prowess in survivalism. True, you may have earned your stripes during the Great Recession. That scary episode threatened the financial markets and could have depressed Main Street, but in the end, it did not likely rip up your corporate manuals.

You may have won plaudits for holding your nerve during Y2K and the dotcom crash; the latter may have thrashed your options, but it only really hammered a small group of industries—technology, media, and telecoms—not most. Even September 11 hit a nerve, but the structure of your firm was not in doubt.

Almost every person, every firm, every process, every government, and every country, however, will be a victim of COVID-19, whether from the illness itself or the drastic overreaction to it.

The structure that you and everyone else uses to organize your life, income, and spending has been shattered. The architecture that your organization—and almost everyone else's—relies on to generate sales, allocate capital, and make decisions has collapsed. The interaction of you and your colleagues, and you and your friends and family, has gone from 3D and 4D to 2D and 1D; like everyone else's. Massive spending by governments will shatter their balance sheets and spending opportunities for generations. Microns add up. SARS-COV2 has, like an anonymous and invisible bomb, destroyed much of what has guided our modern society.

From Fiction to Fact

As CEO, CFO, or Chief Strategy Officer, you must forget all that you knew in January (when your shares and hopes were high) and that you used to guide your business. The corporate planning and budgeting process, the foundation of all capital allocation and bonuses, is a casualty of COVID-19. Your 2020 budget numbers and 2021–23/25 forecasts are fictional, worthless. Another round of budgeting and planning now would make little sense, even if you felt that it might rescue you and your firm from free fall—and possibly awaken you from the nightmare.

However, this is an opportunity for you. The planning and budgeting process is archaic, from a slower and less dynamic age (industrial revolution one or two), not the information age when every employee can be a value creator. Taking months to forecast numbers that are usually inaccurate unless goal-sought and gamed at every level makes little sense. Yes, your control system and everyone's compensation is linked to it, but that is another problem. The politics that the process generates borders on fraudulent, with managers incentivized to prevaricate or withhold information at every level. The time that you and your colleagues have wasted negotiating targets rather than delivering on them is a tragedy. Therefore, the chance to try an alternative is a possible game changer—a governance changer—from this COVID coma.

Whether planning for the near term or the longer term, you must maximize your flexibility, adding as much optionality to generating revenue or spending on costs and capital projects.

Be a Leader ... On Your Marks, Get Set ...

Go! Speed matters. You want the ability to change course quickly, adjusting to new information and events. You want to change more of your fixed costs into variable ones. You want to spend capital more slowly, bolt-on rather than lump-sum, and across a range of projects. Yet, as in all downturns, you should restructure and streamline into your core, where you have the greatest competitive advantage. That is good corporate governance in crisis now and in future.

Separate your planning and budgeting from target setting. Remove the incentive to lie and the subjectivity and politics from decisions. Set targets for multiple years, especially those determining pay. Build your budgets and plans as a roadmap to hit and beat targets, not retroactively decide what they were. Add flexibility to the forecast. Change them as new information is learned: the numbers should reflect reality, real time. Exercise operating, financing, and investment options quickly with new information.

Rip up your pay manuals. Align pay with your new forecasting framework. Add optionality, variability, and flexibility. Before medieval guilds used time to govern pay, weavers were paid by the piece, just as anyone in a medieval marketplace was. Payment was for delivery not for effort, and certainly not for promises.

More and more individuals desire adaptive work schedules and the ability to work from where they choose; if that is possible. Such practices encourage women to return after maternity leave and reduce turnover in employees looking for more flexibility. Pay for hours, or time commitment, may offer stability, but pay for performance provides a goal-oriented culture, and maximizes variability in and the value of compensation costs. If your goal is truly to deliver value for shareholders, then alignment works at every level: from owners to boards, to managers, and to employees, as well as across every function and operation.

Synthesis Follows Antithesis