CEOs are more likely to ... delegate at least part of the decision process to others when it comes to their company's capital structure, payouts, investments, and capital allocation [than when a merger or acquisition is involved].
Within firms, which executives are the key decision-makers with respect to investment choices? In Capital Allocation and Delegation of Decision-Making Authority within Firms (NBER Working Paper No. 17370), authors John Graham, Campbell Harvey, and Manju Puri find that the amount that CEOs delegate decision authority varies by the type of corporate decision. For example, CEOs are more likely to dominate merger and acquisition decisions than they are other investment and financing decisions. In contrast, they are more likely to delegate at least part of the decision process to others when it comes to their company's capital structure, payouts, investments, and capital allocation. They're also more likely to delegate when their companies are large or complex, but less likely when they have special knowledge of a project, an MBA degree, long tenure as CEO, or pay that's more performance-based than at the average corporation.
This study incorporates responses from 950 CEOs and 525 CFOs in U.S.-based companies - as well as a smaller sample of Asian and European senior executives - and it also offers a rare opportunity to study the decision processes of private companies. Nearly 88 percent of the firms are private; the companies' overall mean sales revenue is $551 million. Nearly half of the CEOs (46.5 percent) surveyed said they made M&A decisions without any input or with very little input from others. About four-in-ten (39.5 percent) did the same for capital-structure decisions. Other areas were less dominated by CEOs: payout (38.7 percent), capital allocation (38.1 percent), and investment (36.3 percent).
In companies that have made at least two acquisitions in the past two years, CEOs are more likely to share decision authority on capital structure and capital allocation decisions. "This [sharing decision authority] result is consistent with the common view that executives of acquiring firms spend a disproportionate amount of their time integrating new business units into their firms," the authors write. But "CEOs are not inclined to share the merger and acquisition decision itself, even when their firm has recently made multiple acquisitions."
As for what tools CEOs use to allocate capital within their firms, nearly 79 percent say that net present value (NPV) rankings are important or very important. More than 71 percent of U.S. CEOs pointed to the reputation of divisional managers. Approximately half of CEOs listed their "gut feel" as being important in deciding how to allocate capital across divisions. "We find this [gut feel] response to be very interesting because it highlights the subjective nature of corporate investment and (perhaps) of decision making more generally," the authors write. "[S]ignificantly more CEOs of small firms rely on their gut feel to make decisions (49 percent of small firm CEOs rely on gut feel versus 38 percent of large firms)."
The authors also look at a smaller sample of European and Asian companies and note two differences. A significantly higher proportion of foreign executives (18 percent of CEOs and 36 percent of CFOs, compared with 10 percent of CEOs and about 25 percent of CFOs for American firms) acknowledged that corporate politics affect capital allocation. Also, nearly one in seven foreign CEOs -- roughly double the share of U.S. CEOs -- said that their company tries to balance capital allocation evenly across divisions.
--Laurent Belsie
FAQs
The Financial Manager of a company must have the proper ability and training to address key financial management decisions. The main aspects of the financial decision-making process relate to investments, financing dividends and asset management.
Who are the people who make decisions in a company? ›
The key decision makers within a business typically include the CEO, the executive team, and the board of directors. They are responsible for making strategic decisions that impact the company as a whole, such as setting goals and objectives, allocating resources, and determining overall direction and strategy.
How do companies make financial decisions? ›
Analyze financial data, market trends, and potential risks to make well-informed choices. Evaluate Options. Consider multiple alternatives and evaluate their potential outcomes. Compare each option's costs, benefits, and risks to identify the most suitable action.
Does the CEO make financial decisions? ›
In large corporations, CEOs typically deal only with very high-level strategic decisions and those that direct the company's overall growth. For example, CEOs may work on strategy, organization, and culture. Specifically, they may look at how capital is allocated across the firm or how to build teams to succeed.
Who handles the financial management of a company? ›
The financial management department of any company is handled by a financial manager.
Who takes strategic decisions in a company? ›
In the strategic decision-making process, there are groups of people that are responsible for making the decisions. These people include the following: shareholders, a board of directors, and managers. Managers take a lot of responsibility in the strategic decision groups.
Do financial managers make financing decisions? ›
The financial manager must decide how much money is needed and when, how best to use the available funds, and how to get the required financing. The financial manager's responsibilities include financial planning, investing (spending money), and financing (raising money).
How do managers make financial decisions? ›
Financial decision-making requires full insight into the current health of the company's spending. Spend visibility is the process of aggregating expense and spending data from many different sources within your company to get a baseline of the company's past and present spending patterns.
Why do financial managers make financial decisions? ›
The main goal of the financial manager is to maximize the value of the firm to its owners. The value of a publicly owned corporation is measured by the share price of its stock. A private company's value is the price at which it could be sold.
Which is higher CEO or CFO? ›
The CEO is the highest-ranking role in the organization. CEOs and CFOs are not equal in the organizational hierarchy, despite both having 'Chief' in their titles. Generally, the CEO reports to the board of directors, whereas the CFO reports to the CEO.
While most large companies will have a CEO who is the highest-level executive in charge, smaller companies are usually run by an owner. The CEO is in charge of the overall management of the company, while the owner has sole proprietorship of the company.
Does the CEO have power over the CFO? ›
Is the CEO higher than the CFO? Yes, the CFO is one of the positions who reports to the CEO. The CFO may often be a member of the board of directors, too.
What are 5 steps for making financial decision? ›
Plan your financial future in 5 steps
- Step 1: Assess your financial foothold. ...
- Step 2: Define your financial goals. ...
- Step 3: Research financial strategies. ...
- Step 4: Put your financial plan into action. ...
- Step 5: Monitor and evolve your financial plan.
When it comes to managing finances, there are three distinct aspects of decision-making or types of decisions that a company will take. These include an Investment Decision, Financing Decision, and Dividend Decision.
What 4 factors may influence financial decisions? ›
Personal circ*mstances that influence financial thinking include family structure, health, career choice, and age. Family structure and health affect income needs and risk tolerance. Career choice affects income and wealth or asset accumulation.
How do companies make strategic decisions? ›
Weigh advantages/disadvantages of each. Consider cost to the business, potential loss of morale/teamwork, time to implement the change, whether it meets standards, and how practical the solution is. Predict the consequences of each option.
