Sometime during the last 25 years, the best-run companies settled into a routine for capital planning. Every year, the top executives would get together to discuss their strategy for generating growth. The discussion would typically start with the identification of market niches that were underserved and undersupplied. It would then move on to an assessment of internal needs and of whether the staff’s talent and resources were sufficient to seize the opportunity. If they weren’t, an acquisition or partnership might be proposed. Finally, those present would talk about funding and set priorities.
Different companies handled this planning in different ways. Some treated it as a two-year planning cycle, others as a five-year; some limited the meeting to top executives, others invited hundreds of managers; some held the meeting in the Caribbean, others at the local Hyatt. But for all, the idea was the same and the sequence identical: Strategy discussion first, capital availability discussion second.
That sequence, it turns out, has become passé. It is a form of corporate planning that is as outdated as the notion that AT&T is a stock for widows and orphans or that a board appointment can be a sinecure. Successful companies, now and in the future, will discuss their sources of funding first, and only turn to strategy afterward. To be sure, there were companies in the past that started their corporate planning sessions by talking about capital availability, but those companies typically were either startups or already facing financial ruin. What’s new is the impatience felt by the C-level executives of many established and fundamentally sound companies during the strategy part of the discussion. They have a sense that the discussion is starting in the wrong place. They should trust this instinct. Ideas are no longer the scarce resource at most companies, the factor on which everything depends. Capital is.
The Impatient Herd
The underlying cause is, of course, related to the crisis that struck capital markets in early 2008. But the fundamental cause isn’t a scarcity of capital. In fact, there is a tremendous amount of capital in the world. That’s clear to anyone who has followed the rise of such sovereign wealth funds as the Abu Dhabi Investment Authority (now a big investor in Citigroup Inc.) or the China Investment Corporation (now a big investor in Morgan Stanley and the Blackstone Group). What’s different these days is the behavior of capital: None of it is patient. Today, capital has a short-term nature that borders on the ruthless.
Short-term thinking about financial assets has been a prevalent factor in corporate strategy since at least the 1980s; former U.S. Treasury Department official Michael T. Jacobs lamented the trend in his 1992 book, Short-Term America: The Causes and Cures of Our Business Myopia. But in the last few years, the short-term emphasis for investors has penetrated more deeply and become far more widespread. The globalization of financial markets and the emergence of counterparties everywhere have turned short-term thinking into an American export, as common in Singapore and Kuwait as it is in New York. The US$7.5 billion that Abu Dhabi’s sovereign fund invested in Citigroup in 2007 could be just as quickly withdrawn if Abu Dhabi doesn’t like where Citigroup is heading.
One result of this global impatience is that old mechanisms of allocating capital have lost their primacy. The clearest casualty has been fundamental research. Investors no longer believe that good research can help them beat the market; in fact, in many cases, they have given up trying to beat the market in the first place. Instead, their goal is to be the neither first to embrace a new investment thesis nor the last to abandon it. We’d wager that as much as 90 percent of the world’s capital moves in a herd, waiting for an investment to gain momentum and then joining in.