“CFOs are missing out on opportunities to optimise capital allocation”

Ask yourself this simple question: What does a CFO really do?

There are of course many answers to that questions: CFOs manage a range of support functions including finance, ensuring timely and adequate external and internal reporting, running the financial planning process, managing relationships with banks and investors etc. We all know this already.

But the best CFOs do more than that, according to Kim Hendil Tegner who is North South Europe Leader, Finance & Performance and Leader of Deloitte’s CFO Programme. Besides the traditional CFO tasks, they also spend a considerable part of their time making sure that capital is allocated in a way that supports long-term sustainable growth in cash flow generation. Kim Hendil Tegner explains:

“There are numerous studiesⁱ that show that companies that do capital allocation well are long-term winners and create significantly more value for their stakeholders than companies that do not do this well. At Deloitte, we believe that capital allocation is among the most important tasks of the modern CFO. Look at how much value Novo Nordisk has created by the capital allocation decisions to invest in Obesity Care, or see how much value DSV has created by buying UTi, Panalpina and Agility GIL while staying true to a clear capital allocation policy to shareholders. Any CFO wanting to support long-term growth should be at the heart of capital allocation, no matter the size of your company.”

Not all agree

On the surface, one could argue that it is difficult to disagree with this view; yet, Deloitte’s Spring 2024 CFO Survey shows differently. Here, less than half of the surveyed CFOs consider capital allocation to be among their top three most important tasks.

Figure 10. Importance of capital allocation in the CFO’s role​
_{How important do you consider the capital allocation task to be for you in your role?}

Kim Hendil Tegner is not surprised by the numbers:

“What the numbers show, at least, is that capital allocation is still an underprioritised discipline in many companies and that many Danish CFOs have a big opportunity ahead to make sure that their companies invest enough in the right things and that capital is distributed back to the owners in the right amounts and ways.”

“Even in larger companies, some CFOs have the opportunity to make a lot more impact in this area. In fact, not prioritising capital allocation in a disruptive economy could severely weaken a company’s ability to make adequately informed decisions and ultimately be a stepping stone to eroding shareholder value over time.”

Positioned for long-term success

While some CFOs are clearly missing out on opportunities to allocate capital to match a growth agenda, many CFOs are doing everything in their power to position their company for long-term success through diligent and proactive capital allocation. This includes how to trade off investments in sales, marketing, R&D, supply chain, production capacity, support functions, technology, M&A and more with repayment of debt, dividends to shareholders, buying back shares and so forth.

Kim Hendil Tegner is pleased to see CFOs take on this important work:

From having worked with CFOs across many sectors and countries, Kim Hendil Tegner has seen first-hand how capital allocation decisions can mean the difference between failure and success:

“When we look at the top performers within capital allocation, the results are actually striking: From allocating capital based on past experience to allocating capital based on the future growth agenda. From putting together yearly budgets to working dynamically with investments without being restricted by the calendar. From leaning back on commercial conservatism to pursuing an active long-term growth agenda. This is really an area where we see some CFOs take a very proactive and successful stance.”

Showing the way

Two CFOs who are taking a very proactive stance on capital allocation are Ulrica Fearn, Group CFO of Carlsberg, and Anders Lonning-Skovgaard, CFO of Coloplast. Both of them have agreed to give a glimpse into the ‘machine room’ of capital allocation in Deloitte’s Spring 2024 CFO Survey.

In Humlebæk, Anders Lonning-Skovgaard is now 10 years into his tenure as CFO of Coloplast, taking the company not only through successful organic growth but also major acquisitions of first Nine Continents Medical, then Atos Medical and finally Kerecis, at a combined price of 25 billion DKK.

Similarly, in Valby, Ulrica Fearn is also driving an aggressive growth agenda as Group CFO of Carlsberg, taking over from Heine Dalsgaard in January of 2023. “To me, capital allocation is not just part of my job, it is what I do,” she says in her interview.

Kim Hendil Tegner believes that companies with CFOs who are an integral part of the capital allocation strategy, principles and process will be long-term winners – and not just in their current industry:

Finally, Kim Hendil Tegner urges CFOs to start preparing for future growth now:

“Will it become easier to be a CFO in the coming years? Absolutely not. If you have not started yet, now is for sure the time to upgrade your capital allocation procedures and capabilities to handle the increased complexity in capital allocation decisions we have already seen over the last 5-10 years. These complexities include geopolitical risks, supply chain complications, digital disruption, cunning M&A and the global transformative ESG agenda, just to mention a few examples. You may not be dealing with all of these agendas now, but you will likely very soon, so start preparing now.”

_{ⁱ https://hbr.org/podcast/2024/03/how-8-successful-ceos-allocated-capital-to-build-durable-businesses or https://hbr.org/2014/01/focusi...}

Three pieces of advice from Kim Hendil Tegner on capital allocation