“The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising because most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics.”
-Warren Buffett, 1987 letter to Berkshire Hathaway shareholders
The Oracle of Omaha observed the lack of emphasis on capital allocation over 30 years ago, and since then, it seems that little changed. A 2015 Harvard Business Review article entitled “CEO’s Don’t Care Enough About Capital Allocation” found that hardly any top CEO’s talked about return on invested capital (ROIC).
Just two year earlier, in 2013, a McKinsey survey found that only 16% of board members completely understood how their companies created value. It’s no wonder that CEO’s don’t care about capital allocation when the board members that hold them accountable don’t understand the fact that ROIC is the primary driver of value creation.
However, the tide seems to be turning in recent years.