McKinsey on

Finance
Perspectives for CFOs and other finance leaders

Forward,
faster
Inside: Gen AI reality,
VC clarity, TSR winners,
M&A leaders, and
advantages of long-term
value creation

Number 84,
December 2023
McKinsey on Finance is a quarterly publication Editorial Board: Ankur Agrawal, Marc Goedhart, McKinsey Global Publications
offering perspectives drawn from across—and Vartika Gupta, Eileen Kelly Rinaudo, Tim Koller,
beyond—McKinsey for CFOs, those who aspire Rosen Kotsev, Anthony Luu, Patrick McCurdy, Publisher: Raju Narisetti
to be CFOs, and other finance professionals. Werner Rehm, Derek Schatz, David Schwartz,
Global Editorial Director and Deputy
Marc Silberstein, Liz Wol
This and archived issues of McKinsey on Publisher: Lucia Rahilly
Finance are available online at McKinsey.com, Editor: David Schwartz
Global Publishing Board of Editors:
where selected articles are also available in
Contributing Editors: Heather Hanselman, Roberta Fusaro, Mark Staples, Rick Tetzeli,
audio format. A series of podcasts on corporate-
Joanna Pachner Monica Toriello
finance and strategy topics is available for
streaming or downloading on McKinsey.com, Copyright © 2023 McKinsey & Company.
Design and Layout: Cary Shoda
as well as on Apple Podcasts and All rights reserved.
Google Podcasts. Data Visualization: Jonathon Berlin, Richard
Johnson, Matt Perry, Jonathon Rivait, This publication is not intended to be used as
Editorial Contact: the basis for trading in the shares of any
Jessica Wang
[email protected] company or for undertaking any other complex
Managing Editor: Heather Byer or significant financial transaction without
To request permission to republish
consulting appropriate professional advisers.
an article, send an email to Editorial Production: Nancy Cohn, Ramya
[email protected] D’Rozario, Mary Gayen, Drew Holzfeind, Philip No part of this publication may be copied
Kim, LaShon Malone, Pamela Norton, Kanika or redistributed in any form without the prior
Punwani, Charmaine Rice, Diane Rice, Dana written consent of McKinsey & Company.
Sand, Regina Small, Sarah Thuerk, Sneha Vats,
Pooja Yadav

Circulation: Alexandra Campos

Photo on Cover and Page 2:

© Eugene Mymrin/Getty Images
 Table of contents

3 Item 1: This edition

4 Gen AI: A guide for CFOs

How should CFOs approach
35 CFOs’ balancing act: Juggling
priorities to build resilience
generative AI—enterprise-wide As surveyed CFOs concurrently
and in the finance function— manage defensive and growth-
and what can they do right now to oriented considerations, they expect
rapidly climb the learning curve? major changes in the months ahead
and see two pivotal paths for
strengthening their organizations.

12 How CFOs can adopt a VC

mindset: Staircase Ventures’ 44 Do big companies cut dividends
to grow?
Janet Bannister Large, stable corporations almost
A high-tech pioneer describes never cut dividends as a strategic
how technology has continually choice. Instead, they reduce
disrupted business, why generative dividends only when they have low
AI is accelerating today’s earnings or when challenging
disruption, and what leaders economic conditions force
can do to stay ahead. their hand.

18 The seven habits of

programmatic acquirers 48 Investors want to hear from
companies about the value of
Our latest research shows that sustainability
programmatic acquirers continue Investors want companies to
to create value from this approach sharpen their equity story and
to M&A and identifies the clarify the value of their
capabilities and practices these sustain­ability initiatives. Here’s
companies use to deliver their what company leaders can do.
M&A strategies.

29 Five paths to TSR

outperformance 56 Looking back
More shareholder value leads to
It’s hard for companies to more jobs.
significantly beat long-term market
TSR, harder still for the largest
corporations, and hardest of all
in the face of low growth. But
industry endowment needn’t
Interested in reading McKinsey on Finance online? Email
be destiny.
your name, your title, and the name of your company to
[email protected], and we’ll notify you
as soon as new articles become available.
Item 1: This edition
It’s unclear who said it first, but by 1899 the major changes these leaders expect in the months
phrase was widely published: “Everything that can ahead. But are they being bold enough? While these
be invented has been invented.” Airplanes, are remarkably challenging times, we crunched
antibiotics, digital computers, and the internet the numbers in “Do big companies cut dividends to
might like a word. Much fun had been poked at grow?” and found that even when economic
the observation even before it was displayed conditions are favorable, large companies almost
on overhead projectors—and then after software never cut dividends to fund growth.
made that equipment obsolete.
Yet the long term has a way of catching up with
For more than 12 decades (and counting), the best everyone. In “Five paths to TSR outperformance,”
CFOs have helped to ensure that innovation our colleagues show how extraordinarily difficult—
continues to charge ahead. They’re leaders, doers, particularly for large companies—it is to beat
and champions of change; people who act in ten-year market TSR decisively by even a few
well-considered, bold ways, moving capital where percentage points. Strategy can’t be shortsighted,
it will have the greatest effect while being and M&A can’t be decoupled from strategy. The
ever mindful of guardrails, risks, and broader, most effective dealmakers follow a clear set of
social implications. practices, as shown in “The seven habits of program­
matic acquirers.” Intrinsic investors, for their part,
Today, these characteristics are particularly home in on the long-term value-drivers of environ­
essential. Technology is moving faster, particularly mental, social, and governance initiatives, as we
at the dawn of generative AI (gen AI). In “Gen AI: discovered in “Investors want to hear from companies
A guide for CFOs,” Ankur Agrawal, Ben Ellencweig, about the value of sustainability.” In fact, an
Rohit Sood, and Michele Tam discuss the principles, overwhelming majority of these investors would be
approaches, and actions that finance leaders can willing to pay a sustainability premium. As we see
apply in allocating capital to the most value-creating in this edition’s “Looking back” chart and discussion,
gen AI opportunities for their corporation, while at companies that generate more value for share­
the same time implementing the most effective gen holders also create more jobs in the economy.
AI initiatives within the finance function.
Now, as gen AI accelerates a new wave of disruption,
Janet Bannister—the well-known high-tech pioneer, the most effective CFOs are at the ready—and
venture capitalist, and gen AI proponent—enforces recognize that profound changes are still to come.
that message in this edition’s interview: “How
CFOs can adopt a VC mindset: Staircase Ventures’ Michael Birshan
Janet Bannister.” She sat down with McKinsey’s Senior partner
John Kelleher and Tim Koller to exhort CFOs to be London
change agents and focus relentlessly on long-
term results. Celia Huber
Senior partner
Understandably, CFOs still need to mind resilience. Bay Area
Our recent global CFO survey, “CFOs’ balancing
act: Juggling priorities to build resilience,” explores Andy West
how today’s finance leaders manage growth- Senior partner
oriented and defensive considerations, and the Boston

3
 Gen AI: A guide
for CFOs
How should CFOs approach generative AI—enterprise-wide
and in the finance function—and what can they do right now
to rapidly climb the learning curve?

by Ankur Agrawal, Ben Ellencweig, Rohit Sood, and Michele Tam

4 McKinsey on Finance Number 84, December 2023

 Technology changes every business, often Gen AI and enterprise-level
radically, and the pace of change is getting faster. value creation
Now, generative AI (gen AI) is beginning to The most important action that CFOs should take is
show its disruptive potential (see sidebar “Gen AI: to identify the largest opportunities for value
A primer”). The technology won’t affect all creation—and then make sure that they receive the
businesses equally, and certainly not at the same money and other resources that they need. Gen AI
time. Yet across industries and geographies, holds the potential to be a revolutionary technology,
gen AI could present substantial opportunities for but it doesn’t change foundational principles of
significant value creation. finance and economics: a company must generate a
return above its cost of capital.
But value doesn’t create itself. Instead, it’s the
CFO’s role to allocate resources at the enterprise Moreover, company capital (or access to more
level—rapidly, boldly, and disproportionately— capital) is finite, and projects compete with one
to the projects that create the most value, regardless another. For CFOs to maximize value creation, they
of whether they are driven by gen AI. Similarly, must rank the company’s 20 to 30 most value-
in leading the finance function, the CFO can’t accretive projects regardless of whether they are
implement gen AI for everyone, everywhere, all at AI-related. The Pareto principle always applies;
once. CFOs should select a very small number of usually a very small number of opportunities will
use cases that could have the most meaningful deliver most of the company’s cash flows over
impact for the function. In this article, we’ll discuss the next decade. The CFO cannot let the highest-
how CFOs can most effectively approach gen AI value initiatives wither on the vine merely because
company-wide, prioritize specific use cases within a competing project has “gen AI” attached to it.
the finance function, and rapidly climb the gen AI Sooner or later, shareholders have to pay for
learning curve. everything, and none of them should be on the hook
for a gen AI premium.

Gen AI: A primer

Generative AI (gen AI) is a predictive analytical AI. It can be adapted to generate with new innovations in robotics and
language model that produces new (hence the name) content that seems automation, to make human lives better,
unstructured content such as text, images, human, such as written documents, audio more creative, and more self-fulfilling.
and audio. Traditional, or analytical, AI, conversations, software programming,
by contrast, is used to solve analytical tasks charts, and visual images. But it doesn’t For more about gen AI, see “The state of AI
such as classifying, predicting, clustering, create the way a human does: it predicts in 2023: Generative AI’s breakout year,”
analyzing, and presenting structured data. what a human would enjoy or find useful. “The economic potential of generative AI:
And unlike traditional, analytical AI, The next productivity frontier,” “The
Gen AI technology is powered by artificial gen AI doesn’t calculate or do math. The organization of the future: Enabled by gen
intelligence models called foundation technology, therefore, won’t displace AI, driven by people,” and visit our featured
models, which are trained on a broad set traditional AI. Instead, the ideal is that each insights page “Insights on Artificial
of data, including the outputs from will complement and enable the other, Intelligence,” all on McKinsey.com.

Gen AI: A guide for CFOs 5

 The best CFOs are at the vanguard of
innovation, constantly learning more
about new technologies and ensuring
that businesses are prepared as
applications rapidly evolve.

But to that same point of maximizing shareholder as well. Morgan Stanley’s Wealth Management
value, a CFO must recognize existential threats division, for one, has shown remarkable progress in
to a company’s businesses and be clear about the developing an internal-facing service that uses
most important levers for generating and sustaining OpenAI technology and Morgan Stanley’s proprietary
higher cash flows. When an opportunity squarely data to provide its financial advisers with relevant
addresses or significantly relies on gen AI, CFOs content and insights in seconds.
should not shunt it aside because they don’t
understand the technology or lack imagination A world-class CFO ensures that these and other
to recognize the value it could create. gen AI initiatives aren’t starved of capital. Indeed,
one of the biggest misconceptions we find is the
Often, a choice about capital allocation won’t be belief that it’s the job of the CFO to wait and see—or,
either/or: an important business or value lever worse, be the organization’s naysayer. Capital
can have an even greater impact by incorporating shouldn’t sit; it should be aggressively moved to
gen AI. That applies whether the most important fund profitable growth. The best CFOs are at
drivers are revenue generators (such as creating an the vanguard of innovation, constantly learning
interface that will attract more customers or more about new technologies and ensuring
encourage more cross-selling), margin expanders that businesses are prepared as applications rapidly
(for example, reducing manufacturing, procurement, evolve. Of course, that doesn’t mean CFOs should
or distribution costs), or a factor that spans throw caution to the wind. Instead, they should
revenues and costs (such as helping to attract, relentlessly seek information about opportunities
retain, and motivate employees by freeing them and threats, and as they allocate resources, they
for more creative work). should continually work with senior colleagues to
clarify the risk appetite across the organization
Microsoft, for example, has been far ahead of and establish clear risk guardrails for using gen AI
the curve in investing in gen AI to build competitive well ahead of the test-and-learn stage of a project
advantage in key core businesses, such as by (see sidebar “New technology, new risks”).
creating the Microsoft 365 tool Copilot, which
provides real-time suggestions to improve For some CFOs, it may feel orthogonal as a
documents, presentations, and spreadsheets. “numbers person” to champion visionary innovation.
While demonstrated commercial success has But they’ve got to do it: market-beating growth
largely come from digital natives, some traditional, won’t come from incremental change. Behind the
nontechnology companies are moving aggressively scenes, CFOs can take advantage of their

6 McKinsey on Finance Number 84, December 2023

New technology, new risks

The CFO is often a company’s de facto what appeared to be a convincing legal particularly applicable for the finance
chief risk officer, and even when a company brief—except that its citations were fantasy, function for internal use cases—company
already has a separate risk team (as including court cases and quotations data is often proprietary.) Other risks
is the case, for example, with financial supposedly made by judges but in fact include privacy breaches, such as exposing
institutions), CFOs remain a key partner in conjured by the model.1 Gen AI models can confidential or even market-moving
helping to identify and mitigate risks. also produce wildly incorrect financial information to third-party models, model
reports; the product appears flawless, but bias, and tail event errors that could
Generative AI (gen AI) brings a slew of the line items don’t apply to the company result from an absence of having a human
them. In fact, the old phrase that “to err is and the math looks like it should sum but being stress test what the solution
human; to really foul things up requires doesn’t. What seems like a real 10-K form creates.2 An overreliance on gen AI and
a computer” applies now more than ever. on the first flip through may be wholly lack of understanding underlying analyses
To start with, even the most cutting- untethered from reality. or data can also reduce the preparedness
edge gen AI tools can make egregious of finance teams to gut check “reasonable­
mistakes. Since gen AI can’t do math Beyond hallucinations, other important ness” of outputs. It’s critical to bear in mind
and can’t “create” out of thin air—instead, concerns include legal issues stemming that gen AI is designed to enhance the
it’s constantly solving for a what a from the intellectual property used as the productivity of people, not to replace them.
human would want—it can “hallucinate,” source of gen AI models, not just in terms While it can boost efficiency tremendously,
presenting what seems to be a convincing of the rights to present the information real people must always be involved.
output but what is actually a nonsense but also to process the information to
result. Such was the case, for example, teach the solution as it learns. (This is a
when one leading gen AI platform wrote major reason why gen AI can be

1
Dan Mangan, “Judge sanctions lawyers for brief written by AI with fake citations,” CNBC, June 22, 2023.
2
See Roger Burkhardt, Nicolas Hohn, and Chris Wigley, “Leading your organization to responsible AI,” McKinsey, May 2, 2019; and Benjamin Cheatham, Kia Javanmardian,
and Hamid Samandari, “Confronting the risks of artificial intelligence,” McKinsey Quarterly, April 26, 2019.

relationships with functional and business Gen AI and the finance function
unit leaders to prod them about exploring gen AI For many finance functions, gen AI will be table
opportunities, and repeatedly follow up in stakes—one among several of the essential tools
subsequent interactions. They should upskill and that every effective, forward-looking finance
empower their own team members to build function will use. The technology has the potential
important relationships across the organization to save meaningful amounts of time and resources.
and better understand the assumptions That in itself is a reason to move forward—and
underpinning innovation projects. And they should why most, if not all, finance functions in large
be “always on” when it comes to innovation— enterprises will likely be using gen AI in significant
not just in periodic reviews or when closer scrutiny ways within the next three to five years. In fact,
is needed for struggling projects. one way to conceptualize gen AI is to consider it as

Gen AI: A guide for CFOs 7

 digital’s “third wave” (Exhibit 1). The first wave is to bold CFOs put their finance team in the best
establish a digital foundation; in our biennial survey position to learn to work with these tools as
of global CFOs completed in late 2023, about two- the technology gains momentum.
thirds of respondents reported that their functions
were digitally connected and using data for the Getting started in the finance function
basics such as visualization in dashboards.1 CFOs typically aren’t software engineers, let alone
practiced experts in predictive language models.
The second wave, clearly under way, is analytics But they don’t have to be. Their first step should be
empowerment; about half of the CFOs reported to try out the technology to get a feel for what
that their functions were already using advanced it can do—and where its limits are at the moment.
analytics for discrete use cases such as cost Solutions such as OpenAI’s ChatGPT are available
analysis, budgeting, and predictive modeling. The online, and other applications (including McKinsey’s
third wave will make extensive use of robotics and Lilli) are already in use.
AI. Very few companies are at the third wave yet. But

Exhibit 1

Generative AI is part of the ‘third wave’ of digitization—and leading finance

functions are already using it.
Financial performance, by wave level, 2023,1 % (illustrative)

WAVE 1 WAVE 2 WAVE 3

Digital Analytics Intelligent automation
foundation empowerment revolution

Top-performing
organizations 65 60 36

1.1× 1.6× 1.4×

All other
organizations 62 37 26

Data Advanced Robotics

visualization analytics
and connectivity for finance

1
Self-assessed financial performance vs competition.
Source: McKinsey biennial global survey of CFOs

McKinsey & Company

1
See “CFOs’ balancing act: Juggling priorities to build resilience,” McKinsey, August 31, 2023.

8 McKinsey on Finance Number 84, December 2023

Try experimenting by uploading publicly available Gen AI doesn’t create like a human does or have a
earnings calls transcripts from your competitors and eureka moment. It doesn’t even do math (that’s
asking the AI tool to produce the five most-asked the remit of traditional, or analytical, AI). Gen AI is
questions—and to suggest answers. Or upload your a predictive language model—a translator that
company’s and its competitors’ financials, and sits above existing unstructured data and seeks
ask the gen AI solution to take the perspective of to generate content that a human would find
an activist investor: What elements of your pleasing. The data sets themselves first need to
company’s performance would an activist home be rigorously processed and curated, just as data
in on? Depending upon the sophistication of the gen scientists prepare data lakes for advanced analytics
AI solution, CFOs can also upload invoice and and analytical AI.
payments data and ask it to create charts that
visualize the information—including a request for Identifying use cases
the one, most important chart. We find that We believe that gen AI can have an impact on
when CFOs experience the technology firsthand, finance functions in three major ways. First, through
they not only better understand what gen AI is automation—performing tedious tasks (such as
but also more rapidly grasp near- and immediate- creating first drafts of presentations). Second, by
term opportunities. augmentation—enhancing human productivity
to do work more efficiently (such as by gathering
We advise CFOs to budget a nominal amount at the and synthesizing multiple pieces of information
learning stage, not for purposes of deploying AI at into a coherent narrative). Third, through
scale but rather to improve the learning experience acceleration—extracting and indexing knowledge
for themselves and their team members. Again, to shorten financial reporting cycles, and
though, the goal is not to let a thousand flowers speeding up innovation. Gen AI can greatly enhance
bloom. Instead, CFOs should select a handful of use CFOs’ ability to manage performance proactively
cases—ideally two to three—that could have and support business decisions. A high-performing
the greatest impact on their function, focus more on finance function understands the use cases that
effectiveness than efficiency alone, and get going. could most significantly and feasibly improve their
function (Exhibit 2).
One point that quickly becomes apparent when
moving forward is that gen AI is not plug and play; For example—and by no means as an exhaustive
companies can’t simply set the models on existing list—a few multinational enterprises have already
sources of information and let them have at it. begun to implement the following:

CFOs’ first step should be to try out

the technology to get a feel for
what it can do—and where its limits
are at the moment.

Gen AI: A guide for CFOs 9

 Exhibit 2

A high-performing finance function understands the use cases that could

most significantly and feasibly improve it.

Matrix of impact High

Prioritize these
and feasibility use cases
in finance, by use
cases, score 5
10
(illustrative)
15 3
11 6
13 4
7
Impact/
value creation 8
1
12
9

2 14

Low Feasibility/ High

ease of implementation

Cognitive Adaptive Autonomous Data-centric Predictive

decision performance performance investor cost and
making optimization monitoring relations risk control

1 Scenario and 5 Predictive cash flow 8 “One” digital 11 Market value 14 Early fraud
response planning forecasting reporting analytics prevention

2 Augmented revenue 6 Enhanced working- 9 Automated root- 12 Predictive market 15 Cost

forecasting capital management cause analysis sentiment analysis

3 Market and competition 7 Dynamic capital 10 Real-time 13 “Talking point”

monitoring allocation performance creation
tracking
4 Prioritizing growth/
M&A targets

McKinsey & Company

— Synthesis of information, which can create — Digital performance management, which

customizable interactive charts through natural- answers performance-related questions,
language queries. For example, solutions exist synthesizes status and scenarios, identifies
that provide a general Q&A chatbot, a chart drivers and root causes of budget variances, and
creation tool that generates charts seconds suggests resolutions. This solution is typically
after receiving a prompt or description of code, self-serve, business user–friendly (as opposed
and a visualization tool that customizes charts to finance user–friendly), and can lead to more
by using existing code and validating the effective performance management dialogues.
accuracy of the code.

10 McKinsey on Finance Number 84, December 2023

— First drafts of external reporting, which not only The array of gen AI use cases is wide, varied—and
can save weeks of team time in preparing no longer merely theoretical. And while it’s still early
advanced first drafts of securities filings and days, the rate of adoption is speeding up. Those
stakeholder reports (such as sustainability realities make it even more important for CFOs to
reports) but also runs queries on the current get started in a considered and proactive way.
regulations and standards to help ensure that
the reports meet current standards.

— Working capital management with features Gen AI can be an important tool for value creation.
such as an always-on support bot to help CFOs should strive to be gen AI enablers, not
facilitate collections and payments, and an gatekeepers, and make sure that strategically critical
always-updated customer payment history initiatives rapidly and continually receive necessary
risk assessment, including the capability resources. They should also ensure that they and
to limit customer credit based on real-time their own function quickly climb the gen AI learning
information about customer-specific activity curve. The future is already starting.
and market events.

Ankur Agrawal ([email protected]) is a partner in McKinsey’s New York office; Ben Ellencweig
([email protected]) is a senior partner in the Stamford, Connecticut office; Rohit Sood
([email protected]) is a senior partner in the Toronto office; and Michele Tam ([email protected])
is an expert associate partner in the Chicago office.

Copyright © 2023 McKinsey & Company. All rights reserved.

Gen AI: A guide for CFOs 11

 How CFOs can adopt
a VC mindset: Staircase
Ventures’ Janet Bannister
A high-tech pioneer describes how technology has continually disrupted
business, why generative AI is accelerating today’s disruption, and what
leaders can do to stay ahead.

12 McKinsey on Finance Number 84, December 2023

It’s probably no coincidence that Janet Bannister how great this opportunity is. Why is it only
was a competitive long-distance runner and a growing three times year over year?” Granted, it is
Canadian National Triathlon champion: she’s focused easier to have that level of growth when you are
on winning over the long term. Decades ago, starting from a small base, but that aggressiveness,
Bannister spent four years at eBay, where she helped that mindset of constantly seeking new ways to
transform the company from a collectibles site to grow, and to grow as quickly as possible, is critical.
a mainstream marketplace. In 2004, she launched
the online classifieds business Kijiji and expanded it In venture capital, it’s the long-term results that
to become one of Canada’s most visited websites. count. My approach when working with my portfolio
Her firsthand experience in the disruptive power of companies reflects this focus. If a company misses
new technologies has been critical to her success a quarter’s revenue, that in and of itself is typically
in venture capital (VC)1—she’s the founder and not a problem. What I care about is why they missed
managing partner of Staircase Ventures—and she’s their number. Is this an indication of a larger problem,
bullish about generative AI (gen AI). In a series of or is it because they are setting themselves up
conversations with McKinsey’s John Kelleher and for long-term success? Provided the company is
Tim Koller, excerpted here, Bannister discusses building a long-term, high-growth, profitable,
how executives can adopt a VC mindset, the threats and sustainable business, they are on the right
and opportunities of gen AI and technology track. Obviously, this approach is much more
more generally, and the human and organizational difficult when leading a public company that is
challenges of focusing on the long term. judged on a quarterly basis, but the mindset
of focusing on the long term is critical.
McKinsey: What does it mean to have a
“VC mindset”? This long-term focus is particularly important now
as technology disruption is accelerating. The
Janet Bannister: My portfolio companies and I average life span of a company listed on the S&P
spend our working hours figuring out how we can 500 was 61 years in 1958. Today, it is less than
disrupt the incumbents, take away their most 18 years. Technology is the driver of this change. In
valuable customers, and nullify their competitive 1980, technology stocks accounted for 6 percent
advantage. When you have a VC mindset, you’re of the S&P 500; today it is close to 30 percent.
focused on the long term, you’re willing to take bets, Technology is disrupting every industry, and compa­
and you are relentless about winning. When I meet nies need to disrupt or be disrupted. Yet, as
with legacy companies, often the absence of a the pace of innovation is accelerating, most large
growth focus is striking. They are more focused on companies’ ability to innovate is stagnating.
maintaining what they have than on growing. At
a young technology company, you expect year-over- McKinsey: In your experience, what stops
year growth of 100 percent at a minimum. I incumbents from disrupting themselves? Is it that
remember working at eBay in its early days, and they don’t see the disruption coming, or that they
one of my direct reports stood up and made a are incapable of making the right strategic choices,
presentation to Meg Whitman [former president hiring the right people, and executing well?
and CEO of eBay] about how great a particular
opportunity was and how the business unit’s Janet Bannister: It varies. One way to think about
revenue was going to grow three times every year it is on a skill versus will matrix. In some cases,
over the next few years. Meg’s comment was, the incumbents lack the will because they do not
“You’ve just spent the first half hour convincing me believe that a major tech disruption will impact

1
In addition to serving as co-chair of C100 and on the boards of Communitech in Waterloo, Vector Institute in Toronto, and the Ivey Business
School, Bannister has won numerous awards and recognition, including Venture Capital Journal’s 2021 Women of Influence in Private Markets,
PitchBook’s 2021 Female Founders and Investors to Know, and American Banker’s 2019 Most Influential Women in Payments.

How CFOs can adopt a VC mindset: Staircase Ventures’ Janet Bannister 13

 ‘If a company misses a quarter’s revenue,
that . . . is typically not a problem. I care
about why they missed their number. Is
this an indication of a larger problem, or
is it because they are setting themselves
up for long-term success?’

their industry. Over the last 25 years, I have watched Janet Bannister: Right. But there are a couple
industry after industry say, “We’re different; of changes that enterprises can consider to
technology is not going to dramatically change our be more comfortable with investing in disruptive
industry.” People who have worked in an industry business ideas. The first is to change leadership
with little change for 30 or more years often cannot compensation. Often, except for the most senior
conceive of the idea that their industry’s dynamics executives, compensation is primarily based
could be radically and rapidly reshaped. on short-term results. In venture capital, all upside
compensation is based on long-term results.
The other aspect—the skill dimension—is the ability
to disrupt oneself. Even if a company wants to Venture capital companies can take a relatively
change, it may not have the capabilities to rethink high level of risk with each investment because
and remake its core business. Often the biggest they have a portfolio of investments. Similarly,
challenge is attracting the right types of people who companies can make a portfolio of “bets” into
will drive innovation, and then ensuring that disruptive business ideas, each with a series
the rest of the organization enables—rather than of “investment gates,” whereby each initiative gets
inhibits—their progress. more funding if it is on track to reach its long-
term goals.
McKinsey: And one of the things about venture
capital is that you’re always looking down the road Companies should also think through the build, buy,
when you make an investment. You’re taking a risk, or partner options when adopting innovative
and you accept that the companies you invest technology. If a company is going to acquire another
in are going to have volatile P&Ls [profit and loss business in order to innovate or disrupt itself,
statements] in the beginning. It’s an approach it may not want to buy at the earliest stage; it may
that many big companies don’t seem to be very want to wait until it can be sure that the fit is right
comfortable with. and that the acquired company will be one of the

14 McKinsey on Finance Number 84, December 2023

winners in the space. If a company is not going to prises. CEOs or CFOs who take the approach
build in-house, partnering is often a good place to of “We’re reducing every department by the same
start. But, ultimately, the right strategy for any percentage” don’t have to have uncomfortable
specific company is dependent upon their situation; discussions with executives whose departments are
what works in one context may be wrong in another. being disproportionately negatively affected.
Often, though, the right call is to cut one department
McKinsey: Definitely, too many companies seek more than another. Developing well-informed
a “silver bullet.” Large companies in particular can conclusions and having hard conversations is a key
get so big and complex that they can’t see the part of any executive’s job.
nuances. I’m always surprised, for example, when
a company says: “Every department needs to cut McKinsey: Speaking of well-informed conclusions,
expenses by 10 percent.” what effect do you think generative AI—and AI in
general—will have on business?
Janet Bannister: That kind of “peanut butter
approach”—equal cuts across the board—is taking Janet Bannister: AI, particularly generative AI, is
the easy road, and it’s a common problem. To draw transformational. It is critical that all business
a parallel, most venture capital firms have money for leaders, in every industry, understand the threats
initial investments and money reserved for follow- and the opportunities posed by AI. It will change
on investments in their existing portfolio. How do virtually every aspect of every business over the
they decide how much money each of the portfolio next several years. If an executive has not spent
companies should get in follow-on investment? time playing with it, using it, and thinking about how
Some firms have simple rules such as: “At the it could help or hinder their business, they have
company’s next funding round, we invest $1 for work to do. For those reading this who have not yet
every initial $1 we put into the company.” Sure, it tested the capabilities of generative AI, don’t go
makes life easy; you don’t have to do deep analytical to bed tonight until you do.
work nor have hard discussions with your founders.
But doing the in-depth company analysis, making I believe that generative AI will usher in the next
difficult decisions, and having tough conversations wave of rapidly growing tech disruptors. As a
is what you’re paid to do in VC and in large enter­ parallel, the rise of cloud computing enabled the

‘For those reading this who have not yet

tested the capabilities of generative AI,
don’t go to bed tonight until you do.’

How CFOs can adopt a VC mindset: Staircase Ventures’ Janet Bannister 15

 growth of thousands of tech companies; suddenly, in my career, I consulted for a broadcast television
entrepreneurs could relatively easily and cheaply company and explained to them that their
launch and scale a software business, as they could viewership was vulnerable to Netflix, YouTube,
access computing power at a low cost and sell and other innovative platforms. “No one will ever
software online with a SaaS [software-as-a-service] stop watching television,” the industry insiders said.
business model. I think we’re going to see a similar “It is engrained in the American way of life.” I have
dynamic with generative AI. We are already seeing seen this scenario play out over and over: people
some tech start-ups scaling more quickly and say that their industry is different, and then time
with fewer people, and therefore at a lower cost, by proves that it’s not. If you look at the most valuable
leveraging generative AI to write software, conduct companies in the world, they are now almost all
analysis, and optimize their operations. technology companies. Go back 15 or 20 years and
that was not the case.
McKinsey: The world has seen plenty of disruptions
over the years. Is AI really any different, compared to McKinsey: But can AI and technology in general
what has gone on for a long time, perhaps even as far really change all industries? Take a mining company,
back as Schumpeter’s theory of creative destruction? for example. Someone’s got to dig the ore out of the
ground. That won’t be a technology company, right?
Janet Bannister: AI is an accelerant; disruption
from technology invariably comes, and now it’s Janet Bannister: I think about technology in
coming faster. I have long been fascinated by how terms of challengers and enablers. Challengers
different industries have responded to the are companies that directly compete with the
disruptive power of technology. When I moved to incumbents; enablers sell technology to incumbents
Silicon Valley in early 2000 and joined eBay, it to enable them to win versus other incumbents.
was primarily a collectibles trading site. My mission Will mining companies disappear? Probably not. But
was to expand it to be a broader marketplace, if you’re in the mining industry, you need to be
including clothing, home items, jewelry, and thinking about how technology can enable you to win
sporting goods. This was in the early days of versus your competitors. If you don’t use it, one of
e-commerce. For perspective, at that time, Amazon your competitors is going to adopt the technology
was solely a bookseller. Retailers spoke of how and establish an edge over you.
consumers would never shop extensively online,
as consumers wanted to flip through books before Consider the construction and agriculture industries.
purchasing them, try on clothes in a store, and I don’t think you’ll see technology companies buying
touch and hold items before making a buying dump trucks, cranes, or farms. But today’s large
decision. “Online shopping only works for a very companies that adopt technology faster and better
small subset of the population and for very few will separate themselves from the competition.
items; it will never get above 1 percent or 2 percent In construction, technology has enabled companies
of all consumer commerce,” they said. In 2004, to dramatically increase their efficiency, reduce
I launched Kijiji, an online classifieds site that went errors, communicate across the value chain more
on to virtually eliminate the classifieds section quickly and transparently, and complete
of newspapers, which had accounted for up to projects more quickly. I see the same potential
25 percent of their profits. When I launched Kijiji, in agricultural businesses.
I tried to partner with newspapers to reach
consumers, but most would not even take my call, In other industries though, technology companies
as they were convinced that online classifieds are more than enablers; they are challengers,
would never achieve wide-scale adoption. Later seeking to win at the expense of the legacy compa­

16 McKinsey on Finance Number 84, December 2023

nies. The financial-services industry is an example going to be worth more than $200 million in the
where we see a lot of challenger companies, from foreseeable future?” To answer that, venture
payments, including Square, Stripe, and Venmo, investors will dig into questions including: What is
to bank accounts—for example, Revolut and Chime— the size of the market? How is the market evolving?
to wealth management, such as Betterment Who are the competitors, and how will they
and Wealthfront. Financial services is particularly respond? How will this company win long term?
attractive to challenger companies because How strong is the team? What gross and net
incumbents find it difficult to innovate, and the profit margins can we expect from this company?
reward for successful challengers is great. And of course, investors would also look at the
Specifically, large legacy players spend, by some company’s cash projections, determine if and when
estimates, 70 percent of their technology budget the company will need to raise more money, and
to keep their current systems running. In addition, understand where that next round of financing
many lack a culture of innovation, and they are could come from, among other things.
working in a cumbersome regulatory environment.
Add to that the massive size and profitability of All upside compensation for venture investors
financial-services markets, and it is a very attractive is based on the long-term outcome, which may be
market for challengers. eight to ten years after we make an initial
investment. Therefore, VC investors spend a lot
McKinsey: On a granular level, how do VC funds of time thinking about where technology is going,
decide which specific early-stage companies to how industries and market dynamics will evolve,
invest in, especially when an early-stage business and how existing players will react. Technology will
has minimal revenue and market traction? dramatically impact every industry, transform
the competitive dynamics, create new winners, and
Janet Bannister: Venture investors seek at least lead to the deterioration of many incumbents.
a ten times return on each investment. So VC If executives are not thinking seriously about tech­
investors approach an opportunity with the nology, particularly now at the dawn of generative
question, “If I invest today at, say, a $20 million AI, they may be just rearranging deck chairs on
valuation, do I believe that this company is the Titanic.

Janet Bannister is the founder and managing partner of Staircase Ventures. John Kelleher ([email protected])
is a senior partner in McKinsey’s Toronto office, and Tim Koller ([email protected]) is a partner in the Denver office.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or
positions of McKinsey & Company or have its endorsement.

Copyright © 2023 McKinsey & Company. All rights reserved.

How CFOs can adopt a VC mindset: Staircase Ventures’ Janet Bannister 17

 The seven habits of
programmatic acquirers
Our latest research shows that programmatic acquirers continue to
create value from this approach to M&A and identifies the capabilities
and practices these companies use to deliver their M&A strategies.

18 McKinsey on Finance Number 84, December 2023

There are no ‘sure things’ in any M&A transaction— 70 percent outperformed programmatic peers
but there are clear conclusions that one can draw that made fewer deals. Moreover, the gap between
from thousands of deals over the past decades. programmatic acquirers and companies that take
Among the most prominent is the power of program­ an organic approach widened through the turbulent
matic M&A, which is when companies pursue COVID-19 years (programmatic acquirers created
multiple small or medium-size acquisitions per year 3.9 percent of excess TSR in the past decade,
as part of their growth strategy. Taking a program­ compared with 2.9 percent in the 2010s). Indeed,
matic approach to dealmaking gives companies the even with some of the lowest M&A volumes in
greatest likelihood of generating excess TSR with recent years,2 the latest research shows that the case
comparatively low levels of risk. Our latest findings— for programmatic M&A is stronger than ever.
drawn from both our annual, in-depth analysis of
the world’s largest global public companies (what Our latest research also takes a closer look at
we call the “Global 2,000”) and our most recent companies that operate in high-growth sectors to
McKinsey Global Survey on M&A capabilities1— test whether the case for programmatic M&A
reinforce and advance more than two decades remains as compelling: it does. Programmatic
of research. acquirers in high-growth sectors outperform their
high-growth peers that did not pursue M&A as
Strikingly, we found that programmatic dealmakers part of their strategy (that is, an organic approach
with the most deals earned the highest returns: to M&A).

Taking a programmatic approach

to dealmaking gives companies
the greatest likelihood of generating
excess TSR with comparatively
low levels of risk.

1
The online survey was in the field from January 17 to January 31, 2023, and garnered responses from 1,092 participants representing
the full range of regions, industries, company sizes, functional specialties, and tenures. To adjust for differences in response rates, the data
are weighted by the contribution of each respondent’s nation to global GDP.
2
Andres Gonzalez and Anirban Sen, “Global dealmaking sinks to lowest level in over a decade,” Reuters, March 31, 2023.

The seven habits of programmatic acquirers 19

 The case for programmatic M&A and very large deals, occasionally pursue M&A, and
Companies can take one of four approaches to are often reactive in their dealmaking—or largely
M&A: programmatic, selective, large deal, and forgo M&A and choose to grow purely organically
organic. A programmatic approach treats deal­ (Exhibit 1).
making as a capability and not an event. The
continuous process of acquiring and integrating Our latest Global 2,000 research shows the degree
new businesses and divesting nonstrategic to which programmatic acquirers are outperforming
ones can improve an organization’s odds of other companies.
outperforming companies that only do one-off

Web <2023>
<Programmatic>
Exhibit
Exhibit <1>1 of <9>

Programmatic M&A strategies tend to achieve higher returns than others.

Global 2,000¹ companies’ TSR, Programmatic Selective Large deal Organic
by M&A strategy, % (2013–22)2

Median excess TSR Average excess TSR

2.3

1.8

–0.1 –0.2

–0.9

–1.6

–2.2
1
Companies that were among the top 2,000 companies by market cap at Dec 31, 2012 (>$2.5 billion), and were still trading as of Dec 31, 2022; excludes
companies headquartered in Latin America and Africa. Programmatic companies are those with more than 2 small/midsize deals per year, with meaningful total
market cap acquired. Selective companies are those with 2 or fewer deals per year, where the cumulative value of deals is more than 1.4% of acquirer market
cap. Large-deal companies are those with at least 1 deal where target market cap was at least 30% of acquirer market cap. Organic companies are those with
1 deal or fewer every 3 years, where the cumulative value of deals is less than 2% of acquirer market cap.
²Jan 2013–Dec 2022.
Source: Global 2,000 (2022); S&P Global; Corporate Performance Analytics by McKinsey

McKinsey & Company

20 McKinsey on Finance Number 84, December 2023

The results are particularly intriguing when compared As we dug into the details, we found that these
with the performance of companies that took an program­matic acquirers markedly outperformed
organic approach: it might seem counterintuitive for organic peers that didn’t enjoy growth tailwinds
a company in a high-growth business to allocate (Exhibit 2). But even high-growth organic companies
meaningful resources to deals when it likely has an did not, in the aggregate, outperform companies
abundance of internal investment opportunities. across sectors that took a programmatic approach.

Web <2023>
<Programmatic>
Exhibit 2of <9>
Exhibit <2>

High-growth programmatic acquirers outperform high-growth companies that

take an organic approach.
Global 2,000¹ organic and programmatic acquirers’ median excess TSR, by excess revenue growth
(ERG),2 % (2013–22)3

Programmatic +0.3 +4.7

Organic –4.4 +1.6

Negative ERG Positive ERG

1
Companies that were among the top 2,000 companies by market cap at Dec 31, 2012 (>$2.5 billion), and were still trading as of Dec 3, 2022; excludes
companies headquartered in Latin America and Africa.
²Delta between company 10-year revenue CAGR and median revenue CAGR of artificial index composed of the same Global 2,000 companies by sector.
³Jan 2013–Dec 2022.
Source: Global 2,000 (2022); S&P Global; Corporate Performance Analytics by McKinsey

McKinsey & Company

The seven habits of programmatic acquirers 21

 Lessons from programmatic acquirers that programmatic acquirers have become even
The accumulated research suggests important more likely than others to take these steps since
lessons for companies that are engaged in or actively our 2021 survey, suggesting that they do so
considering M&A. What capabilities and actions set even amid times of uncertainty. In our experience,
successful dealmakers apart? the most effective acquirers understand how
economic cycles will affect their M&A plans,
1. Double down on successful strategy: proactively explore different scenarios, and
Programmatic acquirers create a well-defined develop plans to continue investing even during
M&A blueprint that outlines why and where the downturns. Indeed, we found that survey
company needs M&A to deliver on specific respondents from programmatic acquirers were
themes in its strategy. But this is just the first more likely to say that their companies’
step. Programmatic acquirers also actively level of M&A activity remained the same or
manage their portfolios and regularly reallocate increased in 2022, a year fraught with
capital to the acquisitions that align with their economic challenges.
enterprise strategy (Exhibit 3). Our research finds

Web <2023>
<Programmatic>
Exhibit 3of <9>
Exhibit <3>

Programmatic acquirers confidently allocate capital to M&A opportunities that

support their corporate strategy.
Those who strongly agree that their organizations regularly reallocate capital to potential M&A
opportunities that align most closely with their overall strategy,1 % of respondents
Respondents from programmatic acquirers All other respondents

34

13

2.6×
Those whose companies’ level of M&A activity remained the same or increased in 2022 in light of
the economic climate,1 % of respondents

58

48

1.2×
1
For respondents from programmatic acquirers, n = 166. For all other respondents, n = 564.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023

McKinsey & Company

22 McKinsey on Finance Number 84, December 2023

2. Do not window shop. Once an M&A plan is in for the top-priority targets. Our research indicates
place, experience shows that successful that programmatic acquirers are more likely than
execution requires unwavering focus—from the others to run an effective target-prioritization
initial stages of creating comprehensive views process and to have key stake­holders well coor­
of the market to developing an outreach strategy dinated when working on a deal (Exhibit 4).

The most effective acquirers understand

how economic cycles will affect their
M&A plans, proactively explore different
scenarios, and develop plans to continue
investing during downturns.

Web <2023>
<Programmatic>
Exhibit 4of <9>
Exhibit <4>

Programmatic acquirers zero in on the assets they need to meet their strategic
aspirations and keep stakeholders aligned.
Those who strongly agree with the given statement,1 % of respondents
Respondents from programmatic acquirers All other respondents

Company Company has an Key stakeholders

34 35
understands effective process involved in the
which assets they 32 for prioritizing company’s 1.4×
need to acquire M&A options M&A are well
to realize the coordinated
company’s M&A
1.9× 2.3× when working
25
aspirations on a deal

17
15

1
For respondents from programmatic acquirers, n = 166. For all other respondents, n = 564.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023

McKinsey & Company

The seven habits of programmatic acquirers 23

 3. Develop strong internal conviction. In our the board that will allow them to execute their
experience, the conviction to go after the M&A strategy effectively. Additionally, respon­
necessary M&A targets becomes even more dents from programmatic acquirers are more
crucial—and even more difficult to maintain— likely to develop comprehensive business cases,
in challenging economic times. Responses to well beyond a specific trans­action’s go-no-go
our survey suggest that programmatic acquirers criteria (Exhibit 5). A business case can be
are more likely than others to take a proactive a valuable tool for gaining agreement among
approach to sourcing deals, regardless of executives and the board about a proposed
prevailing economic conditions; they provide a transaction—and for enabling swift
steady stream of options to the top team and decision making.

Web <2023>
<Programmatic>
Exhibit 5of <9>
Exhibit <5>

Programmatic acquirers use comprehensive business cases to build

internal conviction.
Those who strongly agree with the given statement,1 % of respondents
Respondents from programmatic acquirers All other respondents

When evaluating M&A opportunities,

37
company develops comprehensive
business cases beyond a specific 21
transaction’s go-no-go criteria
1.8×

Company regularly establishes 32

relationships with the most
attractive targets, regardless of 18
whether they are “for sale”
1.8×
1
For respondents from programmatic acquirers, n = 166. For all other respondents, n = 564.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023

McKinsey & Company

24 McKinsey on Finance Number 84, December 2023

4. Deliver the full potential of the deal. The deal synergies. In fact, survey respondents from
findings suggest that programmatic acquirers programmatic acquirers are twice as likely
manage potential disruptions to their core as their peers to report actual integration costs
business, and the targets, while also aggressively that were at least 20 percent below what
pursuing the full value potential of a deal. was budgeted at the outset of a deal. In our
Programmatic acquirers are much more likely experience, having a clear and accountable
than other companies to set internal synergy owner is essential for seizing a deal’s full
targets (revenue, cost, and capital) equal to or potential. That accountability, paired
above the due diligence estimates (Exhibit 6). with financial discipline, should be present
They also carefully budget and track the costs— at all stages of M&A, from ideation
often one-time in nature—required to deliver to execution.

Web <2023>
<Programmatic>
Exhibit 6of <9>
Exhibit <6>

Programmatic acquirers are better than other acquirers at setting and

capturing synergies.
Companies’ synergy-target practices and results,1 % of respondents
Respondents from programmatic acquirers All other respondents

1.1×
Set internal Captured Have actual
72
synergy targets
equal to or
>90% of their
planned revenue
1.3× integration costs
that are lower
63
above deal synergies 61 than budgeted
model estimates costs at the
outset of a deal
46

2.0×
16

1
For respondents from programmatic acquirers, n = 166. For all other respondents, n = 564.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023

McKinsey & Company

The seven habits of programmatic acquirers 25

 5. Start with a healthy culture. Culture is often the those by less healthy ones.3 Specifically,
forgotten factor in a deal’s success. Lack of companies with healthy cultures (that is, compa­
cultural fit and friction between the acquiring nies in the top two quartiles of organizational
company and the target is the most common health) see an improvement of 5 percent excess
reason that survey respondents say an integration TSR, while those companies with unhealthy
has not met expectations. In our experience, cultures (that is, companies in the bottom two
culture is often an important driver of financial quartiles of organization health) realized a
performance. Also, related research has 17 percent decrease in excess TSR (measured
determined that large acquisitions by healthy in median excess TSR, two years post
companies tend to perform better than do deal closing) (Exhibit 7).

Web <2023>
<Programmatic>
Exhibit 7of <9>
Exhibit <7>

Deprioritizing culture and organizational health can put deal success at risk.

Most common reasons that integrations fell short of Median change in excess
leadership’s expectations, past 5 years, % of respondents TSR 2 years post deal
closing,1 %
Lack of cultural fit and friction
44
between company and the target
5 Unhealthy
Poor integration
35 acquirers³
planning and execution

Poor management (eg, inadequate Healthy

27
integration governance) acquirers²

Disruption of existing commercial 23

and/or business operations

Poor retention of critical talent (at

22
the target company or internally)
–17
Overpayment 16

Poor rationale for the deal 14

1
Measured using excess total shareholder returns compared with their industry peers, to isolate the effects measured from broader industry trends.
²Those companies with Organizational Health Index scores in the top 2 quartiles of the data set.
³Those companies with Organizational Health Index scores in the bottom 2 quartiles of the data set.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023; Organizational Health Index by McKinsey

McKinsey & Company

3
Becky Kaetzler, Kameron Kordestani, and Andy MacLean, “The secret ingredient of successful big deals: Organizational health,” McKinsey
Quarterly, July 9, 2019.

26 McKinsey on Finance Number 84, December 2023

6. Recognize the value of people and plan for 7. Take a best-owner mindset. Programmatic
the worst. The talent of an M&A target is often acquirers also understand the flip side of
the key to its success. Leaders should approach a clear acquisition strategy: which assets are
integrations with the expectation that talented nonstrategic and should be divested (Exhibit 9).
employees, from both the target and their own Survey respondents from programmatic
organizations, are at a high risk of leaving. acquirers are more likely than others to say their
Rapidly identifying critical roles and individuals organizations have conducted divestitures in
as early as possible (often during due diligence) the past five years, and research on the Global
is a critical risk mitigation step not to be over­ 2,000 compa­nies shows that the companies
looked. Our research shows that programmatic making the most deals—including divestitures in
acquirers are much more likely to offer financial addition to acquisitions—have higher excess
incentives to encourage employees to stay, but TSR. By divesting, they can help management
that is just one piece of the puzzle. Nonfinancial focus on the strategically “core” businesses they
recognition and cultural factors, such as already own and those that they should
personal communications from senior leaders consider acquiring.
and tailored career development plans
outlining advancement potential, are often as
or more effective for retention (Exhibit 8).

Web <2023>
<Programmatic>
Exhibit 8of <9>
Exhibit <8>

Programmatic acquirers recognize the power of people.

Those who strongly agree with the given statement,1 % of respondents

Respondents from programmatic acquirers All other respondents

In preparation for or during

70
integration, the company
offered financial incentives 46
as a talent retention tactic
1.5×
During implementation of the 24
combined company’s new
operating model, employees 14
were informed of and understood
the organizational changes 1.7×
1
For respondents from programmatic acquirers, n = 166. For all other respondents, n = 564.
Source: McKinsey Global Survey on M&A, 1,092 participants, Jan 17–31, 2023

McKinsey & Company

The seven habits of programmatic acquirers 27

 Web <2023>
<Programmatic>
Exhibit 9of <9>
Exhibit <9>

Programmatic acquirers know when it is time to divest from a business.

Global 2,000¹ companies, by >20 5–19 1–4 <1 Company conducted at
number of deals in the past decade² least 1 divestiture in the past
5 years, % of respondents
Median excess TSR Median number of divestitures Respondents from programmatic
performance, % per decade acquirers
1.0 12 All other respondents

75

1.4×
53

–0.1

4
–0.5

1
0
–1.3

1
Companies that were among the top 2,000 companies by market cap at Dec 31, 2012 (>$2.5 billion), and were still trading as of Dec 31, 2022; excludes
companies headquartered in Latin America and Africa.
²The number of deals includes both acquisitions and divestitures.
Source: Global 2,000 (2022); S&P Global; Corporate Performance Analytics by McKinsey; McKinsey Global Survey on M&A

McKinsey & Company

Decades of research show the efficacy of program­ continue to invest in their M&A capabilities and
matic M&A—and our latest findings make it even demonstrably outperform companies that take a
more clear. Whether external conditions are less strategic approach to M&A.
favorable or challenging, programmatic acquirers

The survey content and analysis were developed by Paul Daume ([email protected]), a partner in McKinsey’s
Cologne office; Cathy Lian ([email protected]), a consultant in the New York office; and Patrick McCurdy
([email protected]), a partner in the Boston office.

They wish to thank Riccardo Andreola and Thomas Cristofaro for their contributions to this article.

Copyright © 2023 McKinsey & Company. All rights reserved.

28 McKinsey on Finance Number 84, December 2023

Five paths to TSR
outperformance
It’s hard for companies to significantly beat long-term
market TSR, harder still for the largest corporations,
and hardest of all in the face of low growth. But industry
endowment needn’t be destiny.

by Pedro Catarino, Tim Koller, Rosen Kotsev, and Zane Williams

Five paths to TSR outperformance 29

 What does it take for large companies to decisively Methodology: The importance of
beat market TSR over a decade? To analyze how top realistic expectations
performers achieved their success, we studied the To quantify and more clearly frame long-term TSR
1,000 largest corporations by market capitalization outperformance, we conducted two analyses.
in the United States. In all, we found that long-term First, we looked at the 1,000 largest corporations
TSR out­performers took one of five distinct paths: in the United States by market capitalization,
(1) being in or moving to high-growth markets (or examining how many reached the top decile of ten-
segments of markets), (2) offering new or enhanced year TSR performance over any of three different
products, (3) refreshing their business portfolio, ten-year periods.1 Doing so meant beating market
(4) conducting a successful turnaround, or TSR by about 20 percent. During those periods,
(5) managing their business better than their peers. only 11, 15, and 18 percent, respectively, of the top-
Some of these paths were more likely to best decile TSR performers were “very large”
market TSR outperformance—and being in or companies—that is, among the 250 largest
moving to growth provided the widest path companies by market capitalization.
of all. But growth wasn’t the only way to beat long-
term market TSR. Strikingly, the same five Because so few of the largest companies were
paths were apparent over each of the three among the high-TSR performers, we conducted
decade-long periods we analyzed. a second analysis, identical to the one for

‘Merely’ beating market-average TSR

by more than 5 percent over a decade
still puts large corporations on
an extraordinary list: only 23, 28, and
37, respectively, of the 250 largest
companies were able to do so in
the ten-year periods ending 2012,
2017, and 2022.

1
The ten-year periods that ended as of year-end 2012, 2017, and 2022.

30 McKinsey on Finance Number 84, December 2023

the 1,000 largest companies, that focused just The five paths to outperformance
on the 250 largest publicly traded US companies. “Merely” beating market-average TSR by more than
Knowing that very few could best long-term market 5 percent over a decade still puts large corporations
TSR by about 20 percent, we gave them a lower bar— on an extraordinary list: only 23, 28, and 37, respec­
to beat ten-year market TSR by 5 percent or more. tively, of the 250 largest companies were able to do
Very few large companies reached even that mark. so in the ten-year periods ending 2012, 2017, and
2022. As well, over the past decade, about 10 percent
The first lesson, therefore, is one of setting expec­ of large companies that bested market TSR by
tations. It’s not unusual for senior executives of 5 percent or more were in cyclical industries such as
very large corporations, particularly managers who oil and gas or aerospace and defense; decades
are new to their roles, to pronounce mandates of research show that cyclical companies will not
such as “this company will beat market TSR by reliably beat the broader markets when their
10 percent”—or sometimes by an even greater margin. industry cycles inevitably turn down.
Realistically, however, that goal is rarely attainable.
There’s a limit, after all, to how much market size Still, whether or not one considers cyclicality (we
a company can ultimately capture, and smaller conducted both analyses), the results remained
companies have a lot more room left to grow. When stark: there were five distinct paths to substantially
the market or segment in which a company competes beat market TSR (exhibit).
isn’t growing, smaller companies have much better
odds of long-term TSR outperformance: the smaller 1. Being in or moving to high-growth markets
a company’s initial market share, the greater The widest path to significant TSR outperformance
the likelihood that it can beat and keep beating is growth. Many of the companies that took this path
investor expectations. started with the good fortune of strong tailwinds,

Web 2023
five-paths-to-tsr-outperformance_ex1
Exhibit
Exhibit 1 of 1

Few of the 250 largest companies beat ten-year market TSR by

5 percent or more.

Distribution of large companies¹ that outperformed 10-year² S&P TSR by category and time period,³ %

Being in or moving Offering a new Refreshing Achieving a Managing your Number of

to high-growth or enhanced the portfolio successful business better than large-company
markets product turnaround your peers outperformers

2012 43 13 9 17 17 23

2017 36 21 14 14 14 28

2022 46 5 24 5 19 37

1250 largest companies by market capitalization, excluding cyclicals.

2Time periods are measured as the 10-year periods that ended as of year-end 2012, 2017, and 2022, respectively. “Outperformance” and “outperfomer” for
purposes of this analysis are defined as beating, by 5 percent or more, 10-year S&P TSR.
³Figures may not sum to 100%, because of rounding.
Source: S&P Capital IQ; Corporate Performance Analytics by McKinsey

McKinsey & Company

Five paths to TSR outperformance 31

 particularly those whose core businesses were proactively seek out faster-growing markets where
in industries such as high tech or that competed in they can build, or practicably acquire, a competitive
other sectors in which technology could make advantage. It’s a narrow path; over the last decade-
an outsize difference (as was the case for payment long period we studied, only nine of the 250 largest
systems in financial institutions). Yet endowment companies were able to succeed in beating market
is not destiny; for example, not every semiconductor TSR by 5 percent or more by refreshing their
company was a TSR outperformer. Across industries, portfolios. Having a proven track record in a core
the companies that did outperform by taking business or businesses was typically a precondition
advantage of tailwinds both executed well in their to successfully expanding into new spaces and
core business and continued to invest in innovation capturing new pockets of growth. One outperformer,
and improving their business processes. Most for example, had operated significant publishing
important, they relentlessly sought out a high-growth and education businesses while also providing
“niche within the niche.” For example, rather than financial research. Recognizing emerging trends and
settling for providing technology support, one businesses for which it was and was not the best
services firm took advantage of a surging demand owner, the company divested its publishing and
for cybersecurity. Similarly, while the pharma­ education divisions and allocated more resources
ceutical sector has generated strong returns for toward financial research and analytics, which then
decades, pharmaceutical suppliers have recently played an outsize role in value creation. Another
been a growth dynamo within the broader life prominent example is Microsoft. In 2007, it was the
sciences industry. third-largest US company by market capitalization;
many of its core products, including Office,
2. Offering new or enhanced products Windows, and Xbox, were household names. Yet
The second-biggest category of large companies the company still committed to refreshing its
that beat market TSR comprised companies that portfolio. In 2008, it began to develop its cloud
offered new or enhanced products. We distinguish business; in 2014, new CEO Satya Nadella
this second category from “being in or moving to made clear that the cloud was among the company’s
high-growth markets” because the major driver or highest priorities; and by 2022, Microsoft’s
drivers of outperformance were a small number of “Intelligent Cloud” was firmly in the lead as its largest
specific products (sometimes, only one product) and most profitable division—and still its fastest
rather than an uplift in a specific business as part of growing—as the company moved up to become
industry-wide trends. Here again, companies in the second-largest US corporation.
the pharmaceutical industry, along with the biotech­
nology sector, are instructive. Several companies in 4. Achieving a successful turnaround
these industries introduced breakthrough medicines A small number of large companies—fewer than
(for example, for autoimmune diseases or diabetes) 20 percent in each ten-year period (and in the last
for which there were large, eager markets; these period studied, fewer than 5 percent)—beat market
new products enabled these large corporations to TSR by more than 5 percent by achieving a successful
meaningfully beat broader market TSR. turnaround. These companies came from a diverse
range of industries. Several of them generated large
3. Refreshing the portfolio improvements in ROIC through efficiency upgrades
A third path to TSR outperformance is to refresh the and economies of scale. Typically, the turnarounds
corporation’s portfolio of businesses, tacking were extremely rigorous, going far beyond the
toward more value-creating businesses while at superficial to substantially improve core operations.
the same time not going too far beyond the Best Buy, for example, ended its European
organization’s core. Companies in this category operations and Best Buy Mobile stores and focused

32 McKinsey on Finance Number 84, December 2023

‘Managing your business better than
your peers’ was the second- or third-
largest category of TSR outperformers
among each of the ten-year periods.
Even so, there were more than twice as
many TSR outperformers from a high-
growth sector in each period.

on dramatically growing revenue from its US stores superbly. Execution brought exceptional strategy
and operations, including through initiatives such and distinctive capabilities to life, as reflected by
as the “Geek Squad” for in-home support and repair their long-term TSR performance. During the ten-
and by more seamlessly matching its online- and year period ended December 31, 2022, these
physical-store offerings. Or consider a large manu­ companies delivered an excess TSR of about 6 and
fac­turer of technology products. The company 11 percent, respectively. Over the last ten years,
dramatically upgraded its manufacturing process, Costco grew almost four percentage points faster
shifting from a labor-intensive model to one that than the median for large-cap retail companies.
was faster, more automated, and highly digitized; by Progressive, for its part, outgrew the insurance
year-end 2022, it had exceeded ten-year market industry median by about 5.5 percentage points,
TSR by more than 6 percent. continually investing in advanced institutional
capabilities such as analytics, consumer experience,
5. Managing your business better than your peers and others. Both companies also expanded inter­
Finally, one additional path presented itself for large nationally and benefited from strong customer
corporations: superb execution. As hard as it is for retention. Indeed, “managing your business better
a company in a traditional, steady-state industry to than your peers” was the second- or third-largest
gain market share, continue to outperform peers, category of TSR outperformers among each of
and, as a result, beat long-term TSR by 5 percent or the ten-year periods. Even so, there were more than
more, a handful of large caps did just that. Consider twice as many TSR outperformers from a high-
the retailer Costco and the insurer Progressive. growth sector in each period.
Neither could avail itself of an industry growth wave,
and neither substantially changed its business
portfolio. But they managed their businesses

Five paths to TSR outperformance 33

 An examination of three decade-long periods reveals right, companies should be realistic about the level
that there are five paths to beating long-term of sustained TSR outperformance that’s attainable.
market TSR. Growth is the widest path, though none For the largest corporations, beating market TSR
of the approaches ensure success, and strong over a ten-year time frame by more than 5 percent
strategy and exceptional management are always is a significant achievement indeed.
essential. Indeed, even when everything breaks

Pedro Catarino ([email protected]) is a capabilities and insights analyst in McKinsey’s Lisbon office; Tim Koller
([email protected]) is a partner in the Denver office; Rosen Kotsev ([email protected]) is a director
of client capabilities in the Waltham, Massachusetts, office; and Zane Williams ([email protected]) is a senior
knowledge expert in the New York office.

Copyright © 2023 McKinsey & Company. All rights reserved.

34 McKinsey on Finance Number 84, December 2023

CFOs’ balancing act:
Juggling priorities to
build resilience
As surveyed CFOs concurrently manage defensive and growth-
oriented considerations, they expect major changes in the
months ahead and see two pivotal paths for strengthening
their organizations.

CFOs’ balancing act: Juggling priorities to build resilience 35

 In the past few years, CFOs have been faced with and advanced technologies as the two sources
daunting challenges and tectonic opportunities. that will best support their organizations for the long
Is this the time for offense or defense? The latest term. Indeed, respondents who say they work for
biennial McKinsey Global Survey on the role of organizations that outperform industry peers report
the CFO reveals that CFOs’ priorities are not a matter being further ahead in both areas.
of either/or.1 Instead, we find that effective CFOs
report that they toggle continually between
offensive and defensive considerations, while also How CFOs are preparing for the future
addressing other priorities such as capability The survey results show that CFOs perform
building. These CFOs have a bifocal view of both a strategic balancing act, spending much of their
short-term and longer-term priorities, which time taking steps to reduce their companies’
call for different mindsets and approaches. We find exposure to financial risks while also seeking
that CFOs are balancing different strategies, growth opportunities. While surveyed CFOs report
driven by the need to navigate what they see as the spending most of their time in the past year
top threats to their companies’ growth: increasing managing financial risks, nearly three in ten also
industry competition and greater economic volatility. prioritized future growth: they report having
The results show how CFOs are spending their time invested significant time identifying growth
as they aim to develop their organizations’ resilience. opportunities, while also addressing areas, such as
They further reveal that CFOs expect profound capability building, that support both defensive
changes for their organizations in the year ahead. and offensive efforts (Exhibit 1).
These finance leaders identify capability building

Web <2023>
<CFOSurvey>
Exhibit 1
Exhibit <1> of <7>

In the past year, CFOs spent the most time managing financial risks but also
looked ahead to offensive strategies.

Areas where CFOs spent the most time, past 12 months,1 % of CFO respondents (n = 136)
Defensive move Offensive move Defensive or offensive move

Managing financial risks

38
(eg, credit risk, liquidity risk, market risk)

Identifying growth opportunities

29
(eg, pricing of products and/or services)

Finance capabilities
27
(eg, developing finance skills around the finance function)

Cost and productivity management

27
(eg, cost cutting)

Performance management
24
(eg, metrics, value management, incentives/targets)

1
Out of 15 areas that were presented as answer choices. Respondents were able to select up to 3 answer choices.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

1
The online survey was in the field from May 9 to May 19, 2023, and garnered responses from 298 participants representing the full range of
regions, industries, and company sizes. Of those respondents, 136 said they were the CFOs of their companies; the others were executives in
other roles or members or leaders of the finance function. To adjust for differences in response rates, the data are weighted by the contribution
of each respondent’s nation to global GDP.

36 McKinsey on Finance Number 84, December 2023

We also see a mix of defensive and offensive consid­ their organizations plan to engage in M&A within
er­ations when CFOs share their expectations for the next 12 months.
the year ahead, regarding both how they spend their
time and which transformative moves they see on Amid competing priorities and major initiatives
the horizon. CFOs expect profound changes in their to strengthen their organizations, CFOs point to two
organizations to bolster resilience and capitalize key areas that can help their organizations build
on market opportunities (Exhibit 2). Fully 55 percent resilience (Exhibit 3), which we define as overcoming
of surveyed CFOs say their organizations will build adversity and shocks while adapting and positioning
a new business in the next year to create new the company to accelerate future growth. They
revenues. Respondents who say their organizations see capability building across the organization and
outperform their competitors expect changes that advanced technologies such as automation and
are long-term strategic moves: they are, like others, real-time reporting as the most valuable areas to
most likely to expect new-business building, and address, as opposed to more reactive, short-
they are much more likely than others to report that term measures such as contingency planning.

Web <2023>
<CFOSurvey>
Exhibit 2of <7>
Exhibit <2>

CFOs expect their organizations to make both offensive and defensive moves
in the year ahead as part of efforts to build resilience.

Strategic actions that CFOs expect their organization to make within the next 12 months,
% of respondents (n = 136)

Defensive move Offensive move Defensive or offensive move

Business building (eg, creating new products, services, or businesses that require new capabilities)

Restructuring the shape of the organization (eg, reporting lines)

55 Changing the capital structure (eg, debt–equity mix)
Transformation of the entire enterprise or a specific business function or unit
50
47
45 M&A
Joint ventures/alliances
Corporate venture capital activities
38 (eg, investing in early-stage companies)
34
Significant reallocation of resources
across the business

24 23 Divestitures/carve-outs

12

Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

CFOs’ balancing act: Juggling priorities to build resilience 37

 Web <2023>
<CFOSurvey>
Exhibit 3
Exhibit <3> of <7>

CFOs see capability building and advanced technologies as the most effective
ways to build their organizations’ resilience.
Most valuable step to improve organization’s resilience,1 % of CFO respondents (n = 136)

44 44 33

Improved capability building Advanced technologies Agile ways of working

30 24 23

Advanced scenario planning Contingency Continuous cost

(eg, more granular scenarios through digital tools) plans optimization

1
Out of 11 areas that were presented as answer choices. Respondents were able to select up to 3 answer choices.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

What’s more, CFOs who say their finance function

McKinsey commentary has succeeded at strengthening their organizations’
resilience2 in the past year are 6.5 times more likely
Christian Grube, Partner than other CFOs to say they spent most of their time
The number and complexity of the challenges that on talent management, and 4.3 times more likely to
CFOs face have certainly increased over recent report spending most of their time supporting
years. Pandemic-related risk management rapidly digital capabilities and advanced analytics in that
evolved into a cash constrained world where cost time frame.
of capital is skyrocketing. Yet, we see an increasing
risk appetite, with many CFOs actively steering their
boards toward bold M&A and business-building
Retooling the finance function as a
endeavors. This through-cycle mentality could
strategic priority
unlock outperformance over the next cycle, yet it Not only do CFO respondents view organization-
requires discipline not to overinvest while closely wide capability building as a top tool for enhancing
managing the core business’s performance. resilience, but about half say they are involved in
capability-building programs, both across the

2
That is, the CFOs who describe their finance function’s performance in strengthening the organization’s resilience over the past 12 months as
“good” or “excellent.”

38 McKinsey on Finance Number 84, December 2023

organization and within their function. Responses project management, as the ones most critical for
suggest that capability building will be of utmost the function in the future. Yet, just 12 percent of
importance moving forward because finance respondents report that most of their organization’s
functions are not equipped with all of the skills that finance employees have that skill set.
executives believe will be needed. Few survey
respondents point to foundational skills, such as However, the survey finds meaningful differences in
understanding financial principles, as those most the skill sets that company CFOs find most impor­
necessary for the future, suggesting that those tant and those prioritized by other executives—that
skills alone aren’t enough. Overall, the skills that is, the internal customers of the finance function
respondents—including CFOs and other executives (Exhibit 5). Other executives, for example, are
and managers within and outside of the finance 1.4 times more likely than company CFOs to see
function—see as most critical for the future are the change management as critical, suggesting
skills that they most often say are missing in the that the importance of finance employees
function today (Exhibit 4). They most often cite implementing changes during cross-functional
change management skills, such as adaptability and projects—as opposed to focusing solely on

Web <2023>
<CFOSurvey>
Exhibit 4of <7>
Exhibit <4>

Change management is the least developed skill in most finance

organizations, but respondents say it is a critical addition for the future.

Available skills now vs most important skills in the future, Skill that a majority Most important
% of respondents (n = 298) of finance-function skills for the
employees at future success
respondents’ orga- of the finance
70 nization have now¹ function²

52

46

39
36
34

23 24
22 22

12
9

Understanding of Understanding of Understanding of Ability to Ability to make Change

financial principles general business the organizations extract insights business decisions management
and accounting principles industry based on advanced alongside skills³
practices analytics business partners

¹Out of 10 areas that were presented as answer choices.

²Out of 10 areas that were presented as answer choices. Respondents were able to select up to 3 answer choices.
3
For example, adaptability, collaboration, project management.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

CFOs’ balancing act: Juggling priorities to build resilience 39

 Web <2023>
<CFOSurvey>
Exhibit 5of <7>
Exhibit <5>

Internal customers and CFOs have different expectations regarding the

necessary skill sets within the finance function.

Most important skills or capabilities for the success of the finance function,1 Company CFOs
% of respondents
Other executives
70
45
41

35
33 32
28

19
15

Ability to make Understanding of Change Ability to offer business

business decisions the organization’s management recommendations in
alongside business industry skills conversations with busi-
partners ness partners at all levels

¹Out of 10 areas that were presented as answer choices. Respondents were able to select up to 3 answer choices. For company CFOs, n = 136. For
other executives, n = 110.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

analytics—is a high priority for them. Also, CFOs other organizations largely agree on the variety of
are 1.5 times more likely than other surveyed skills that will be needed, respondents from top-
executives to want finance talent to be able to make performing companies point to talent development
decisions alongside business partners, while as the best way to strengthen the finance function’s
other executives appear to be satisfied to have capabilities, while others focus on succession
finance talent offer financial recommendations planning (Exhibit 6). More specifically, those from
to business partners. top-performing companies see efforts to rotate
talent as effective approaches. In our experience,
Notably, respondents who say they work for organi­ three types of talent rotations are particularly
zations that outperform competitors3—who are valuable for developing skills within the finance
1.5 times more likely than others to be satisfied by organization: moving finance talent across
their organizations’ ability to attract, and 1.2 times geographies or divisions; moving employees, such
more likely by their ability to develop, finance as those working on financial planning and analysis,
talent—think differently about how to develop into specialized roles that focus on areas such
the capabilities they will need within the finance as project management or analytics; and allowing
function. While these respondents from top- finance employees to rotate into business roles
performing organizations and respondents from and then return to the finance function.

3
We define a top-performing organization as one that, according to respondents, has achieved financial performance that is above or far above
industry peers’ performance over the past 12 months.

40 McKinsey on Finance Number 84, December 2023

 Web <2023>
<CFOSurvey>
Exhibit 6of <7>
Exhibit <6>

Executives who say they work for top-performing organizations point to talent
rotation as the most effective approach for developing capabilities.

Most effective talent management activities for developing capabilities within the finance function,1
% of respondents
Respondents who say they work Respondents at all
55 at top-performing organizations² other organizations³
+21
percentage
points

38
35 +9 36
32 +4 33 –6 –15
29 28 27

21

Rotating talent Rotating finance Delivering Maintaining an Planning the

within different talent into on-the-job internal talent succession
finance roles business roles coaching pipeline
1
Respondents’ self-assessed financial performance of their organization, compared with industry peers.
²Respondents who say their company’s performance over the past 12 months has been above or far above peers’; n = 140.
³Respondents who say their company’s performance over the past 12 months has been far below, below, or about the same as peers’; n = 155.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

McKinsey commentary

Jonathan Steffensky, Associate partner

Despite ongoing talk about talent shortages, talent management—and that is paying off, who not only are comfortable with change
it might surprise some to see that high- which you can see reflected in survey but can engage others within the organi­
performing finance organiza­tions are much respondents’ satisfaction rates with talent zation to participate in those changes. This
less concerned about gaps than others management and training efforts at is high-performing organizations’ recipe
are. Rather than focusing on planning these organizations. Higher-performing for talent success: you can’t train for
succession for individual roles, they take organi­za­tions take a long-term view, every possible scenario, but you can teach
to heart the old investor’s wisdom, even promoting rotations outside of their employees different problem-solving
“Don’t put all of your eggs in one basket,” own function in their endeavor to build a approaches to use in various situations.
and pursue a portfolio approach to pool of highly versatile finance employees

CFOs’ balancing act: Juggling priorities to build resilience 41

 The increasingly tech-enabled have lasting effects on a company’s resilience. This
finance function year, two-thirds of respondents say that more than a
The survey findings suggest that CFOs are increas­ quarter of finance-related processes have been
ingly digitizing their finance functions and that digitized or automated. Looking at specific technol­
top-performing organizations have taken more steps ogies, a majority report use of visual tools and
than others to embed technology into their daily dashboards to display real-time data, such as for key
finance operations. The share of respondents measures of business performance, and nearly half
reporting that more than half of their finance function report using advanced analytics for finance and
activities were digitized or automated in the past business operations, while just 22 percent say their
year doubled since the 2021 survey, which found finance functions are using artificial intelligence.4
that increasing technology adoption in finance could

Web <2023>
<CFOSurvey>
Exhibit 7
Exhibit <7> of <7>

The technologies used by finance functions in organizations that respondents

say outperform go far beyond visual tools and dashboards.

Share of respondents reporting use of the given technologies within their organizations’ finance
function,1 % of respondents
Respondents who say they work Respondents at all
at top-performing organizations² other organizations³

+4 percentage points
65
61 60
57
+23
+21

37 36 36
+10

26 25 +6
19

Visual tools and dash- Advanced Advanced-analytics Software robots Artificial

boards displaying analytics for techniques to optimize to automate intelligence
real-time data finance⁴ business processes⁵ repetitive tasks

1
Respondents who said “other,” “none of the above,” or “don’t know” are not shown. ²Respondents who say their company’s performance over the past 12
months has been above or far above peers’; n = 140. ³Respondents who say their company’s performance over the past 12 months has been far below, below,
or about the same as peers’; n = 155. ⁴Ie, use of statistical modeling and data analysis techniques to gain insights and make data-driven decisions in finance
processes (eg, cost analysis, budgeting, working capital management, forecasting). ⁵Eg, predictive modeling, pricing.
Source: McKinsey Global Survey on the CFO’s role, 298 participants, May 9–19, 2023

McKinsey & Company

4
The survey defined advanced analytics for finance as “the use of statistical modeling and data analysis techniques to gain insights and make
data-driven decisions in finance processes (for example, cost analysis, budgeting, working-capital management, forecasting)” and defined
advanced analytics for business operations as “the use of advanced analytics techniques to optimize business processes (for example,
predictive modeling, pricing).” Artificial intelligence was defined as “the use of computer algorithms to simulate human intelligence and
decision-making capabilities (for example, document recognition for expense management).”

42 McKinsey on Finance Number 84, December 2023

Respondents from top-performing organizations top-performing organizations are 1.6 times more
report higher levels of digitalization and broader likely than others to say their finance functions
adoption of technologies within their finance are using advanced analytics for both finance tasks,
functions than other respondents do (Exhibit 7). like cost analysis and budgeting, and business
Thirty-nine percent of respondents at these operations tasks, such as predictive modeling
organizations say that more than 50 percent of and pricing.
processes in their finance function have been
digitized or automated, compared with 23 percent
of other respondents. Furthermore, these functions Looking ahead
are using more data-driven technologies to Amid ongoing economic volatility and, for many
enable their work. For example, respondents from industries, strategic challenges with long-term
effects such as structurally higher capital costs and
geopolitical tensions, it’s no wonder that CFOs
McKinsey commentary are spending much of their time managing financial
risks. Moving forward, high-performing CFOs are
Ankur Agrawal, Partner taking a long-term view on their priorities. To best
Today, digital technologies are transforming every prepare their organizations for the coming years
functional area within an organization: for example, and the next period of volatility, they are focusing
financial and nonfinancial data reporting and on “three Ts.” First, they are taking an active lead
visualization capabilities are becoming standard in transforming their organization’s business or
in finance. To differentiate their finance organi­ operating model, taking steps such as building new
zations, CFOs should take the next step and embed businesses and making acquisitions. Second, they
advanced analytics to make use of their organi­ are investing in technology across the organization,
zations’ data—the vast majority of which typically specifically within the finance function, which can
goes unused. The insights generated can be help leaders receive the information they need from
critical in helping to debias leaders’ decision making across the business and improve decision making.
and may unlock new value pools by challenging Finally, they are prioritizing talent development,
established beliefs. We expect to see generative recognizing that organizations need employees who
AI, in addition to more traditional advanced- can help to implement change. Strengthening the
analytics and machine learning algorithms, play an finance function’s operating model might require
important role in getting the most value out of significantly rethinking the skills needed within the
companies’ data. function and, in particular, adding nontraditional
skills that fall at the intersection of finance,
technology, and business building.

The survey content and analysis were developed by Ankur Agrawal ([email protected]), a partner in McKinsey’s
New York office; Christian Grube ([email protected]), a partner in the Munich office; and Jonathan Steffensky
([email protected]), an associate partner in the Frankfurt office.

They wish to thank Eric Matson, Vanessa Palmer, Felix von Oertzen, and Johanna Zittmayr for their contributions to this work.

Copyright © 2023 McKinsey & Company. All rights reserved.

CFOs’ balancing act: Juggling priorities to build resilience 43

 Do big companies cut
dividends to grow?
Large, stable corporations almost never cut dividends as
a strategic choice. Instead, they reduce dividends only when
they have low earnings or when challenging economic
conditions force their hand.

by Pedro Catarino, Marc Goedhart, Tim Koller, and Rosen Kotsev

44 McKinsey on Finance Number 84, December 2023

CFOs frequently ask whether they should cut least 10 percent. We also examined how many of
dividends to invest in growth. In theory, companies these significant dividend cuts were made in
should consider reducing dividends when the funds response to material underperformance. We
that would have been used to pay for them are excluded companies that don’t pay a dividend, have
instead invested in initiatives that would generate variable dividends (such as real estate investment
returns above the company’s cost of capital. trusts), or underwent a major restructuring (for
In practice, however, almost no well-performing example, a spin-off).
corporations—particularly in stable economic
conditions—reduce their dividends to fund growth. That left us with 1,225 companies with a multiyear,
stable dividend policy. Among them, 71 percent
maintained or increased their DPS level without
What the research shows making a significant dividend cut. The remaining
Companies usually keep their dividend per share 29 percent that announced a significant dividend
(DPS) levels constant or on an upward trend. cut did so when faced with either an economic
Because DPS reductions often come against crisis or a decline in profit of at least 20 percent—or
the backdrop of macroeconomic pressures, both. Virtually no company over the multidecade
disappointing earnings, or even financial distress, period made a significant dividend cut out of choice
they’re associated with a decline in stock price. rather than need, let alone to fund a bold investment
But how often do CFOs announce that they’re for future growth (Exhibit 1).
cutting dividends when all is going well?
In fact, on an annual basis, any dividend cut by
Almost never, it turns out. We explored, over the large public companies is unusual; in a typical year,
decades-long time span of 1995 to 2021, how fewer than 2 percent of the 1,225 companies that
frequently large companies publicly listed in the we studied reduced dividends at all. The numbers
United States announced a significant dividend increased only when there was a major economic
cut—which we define as a DPS reduction of at crisis: more than 5 percent of companies reduced

Virtually no large, stable company

made a significant dividend cut out of
choice rather than need, let alone
to make a bold investment for a future
growth initiative.

Do big companies cut dividends to grow? 45

 Web <2023>
Exhibit 1
<Dividends>
Exhibit <1> of <2>

It’s very rare for a large, stable company to announce a dividend cut of
10 percent or more.

Large dividend-paying US public companies, 1994–2021, number

1,225 873

352 207

143 1

Stable and Maintained Cut Cut dividends during Cut dividends Cut dividends
paid dividends or increased dividends economic crisis because of for another reason²
dividends (2008–09/2020–21)¹ declining profits

Note: Dividend per share, adjusted for split-offs and spin-offs. Sample excludes public companies that had a significant corporate event (such as being delisted,
privatized, acquired, or entered bankruptcy) up to 3 years prior to the dividend cut.
1
Dividend cuts linked to the credit crisis (2008–09) or the COVID-19 pandemic (2020–21).
²Dividend cuts not linked to any profit reduction or economic crisis.
Source: S&P Capital IQ; Corporate Performance Analytics by McKinsey

McKinsey & Company

dividends during the 2008–09 credit crisis, and Implications and takeaways
more than 15 percent reduced dividends during the CFOs are right to keep attuned to practical realities,
COVID-19 pandemic. But in most years between including perceptions by investors that a company
1995 and 2021, one could count on two hands—and that cuts its dividends—for whatever stated reason—
in many years, on a single hand—the number of may actually be signaling weaker earnings and
companies that reduced dividends at all in any given lower cash flows ahead. Those perceptions could
year (Exhibit 2). drive down the share price, which can become
value destroying in itself. For example, a lower share
It’s important to note that the scarcity of historical price can make it harder in the short term to attract
examples does not prove that cutting DPS will and retain talented employees; it can also reduce
necessarily lower the stock price. But it bolsters valuable acquisition currency for M&A, since many
what many CFOs have told us: they hesitate to deals are paid at least in part in company stock.
reduce dividends because they’re concerned about CFOs should consider whether the company is
how “the Street” will react. prepared for potential investor blowback, and how
executives could ease investor concerns by clearly

46 McKinsey on Finance Number 84, December 2023

Web <2023>
<Dividends>
Exhibit 2of <2>
Exhibit <2>

The market rarely sees dividend cuts in any single year—except during
economic crises.
Stable dividend-paying companies that reduced or eliminated dividend per share, per year, %

16 16
ECONOMIC CRISIS
14 14

12 12

10 10

8 8

6 6

4 4

2 2

0 0
1995 2000 2005 2010 2015 2020

Note: Dividend per share, adjusted for split-offs and spin-offs. Sample excludes public companies that had a significant corporate event (such as being delisted,
privatized, acquired, or entered bankruptcy) up to 3 years prior to the dividend cut.
Source: S&P Capital IQ; Corporate Performance Analytics by McKinsey

McKinsey & Company

spelling out the rationale for any dividend cut. They that means reducing DPS. But CFOs should
should also run detailed scenarios to determine understand that there isn’t much precedent:
whether the dividend cut would make a material virtually no stable, large companies choose to
difference in delivering the expected growth. cut dividends when earnings and economic
conditions are strong.
Ultimately, changes to a company’s dividend policy
should always be part of a CFO’s tool kit—even if

Pedro Catarino ([email protected]) is a capabilities and insights analyst in McKinsey’s Lisbon office,
Marc Goedhart ([email protected]) is a senior knowledge expert in the Amsterdam office, Tim Koller
([email protected]) is a partner in the Denver office, and Rosen Kotsev ([email protected])
is a director of client capabilities in the Waltham, Massachusetts, office.

The authors wish to thank Werner Rehm for his contributions to this article.

Copyright © 2023 McKinsey & Company. All rights reserved.

Do big companies cut dividends to grow? 47

 Investors want to hear
from companies about the
value of sustainability
Investors want companies to sharpen their equity story and clarify the value of
their sustainability initiatives. Here’s what company leaders can do.

by Jay Gelb, Rob McCarthy, Werner Rehm, and Andrey Voronin

48 McKinsey on Finance Number 84, December 2023

While more than 95 percent of S&P 500 companies The quest for clarity
issue a sustainability report,1 very few fully integrate About 85 percent of the chief investment officers
environmental, social, and governance (ESG) into we surveyed state that ESG is an important factor in
their equity stories. The lack of a clear link between their investment decisions. Sixty percent of
sustainability and strategy can make it difficult respondents review their overall portfolio for ESG
for investors to understand how a company’s efforts considerations, and about 80 percent assess
affect financial performance and, crucially, individual company positions in the context of how
intrinsic value. ESG affects forecasted cash flows. Strikingly, a
significant majority are prepared to pay a premium
Our recent survey of chief investment officers for companies that show a clear link between their
suggests that while major investors believe ESG efforts and financial performance (exhibit).
that ESG is important, they need greater clarity
about the ESG value proposition (see sidebar, Surveyed investors are also eager for clearer ESG
“How intrinsic investors look at ESG initiatives”). standards. They understand that ESG scores today,
Sustainability aspirations or metrics on a page, unlike financial ratings, don’t correlate fully among
without context, are not sufficient to link initiatives ESG score providers. While financial ratings correlate
to cash flow. That lack of clarity presents an at around 99 percent among providers, ESG ratings
opportunity for companies to make the ESG-to- can correlate at less than 60 percent because of
value case more clearly. the different elements and weighting each agency
assigns to various ESG metrics.

The investors’ view The importance of sectoral differences

Long-term-minded investors—whom we call An important part of achieving greater ESG clarity,
“intrinsic investors”—have an outsize effect on stock investors reveal, is understanding industry differ­
performance over time. These investors recognize ences. For example, our survey shows that with
that ESG will affect value,2 but they always want to respect to ESG in the energy sector, investors
dig deeper. They seek out granular information prioritize capital productivity and cost optimization.
about how specific ESG initiatives can be a source We observed similar trends for the industrials,
of growth and which risks are most material to a materials, and consumer sectors. While investors
specific company and its broader industry—and the rate the elements of E, S, and G roughly equally
extent to which distinct ESG actions can mitigate in importance when summing across all industries,
those risks. that isn’t the case within each individual industry.

A significant majority of chief

investment officers are prepared to
pay a premium for companies that
show a clear link between their ESG
efforts and financial performance.
1
2022 Sustainability reporting in focus, G&A Institute, updated February 5, 2023.
2
“The triple play: Growth, profit, and sustainability,” McKinsey, August 9, 2023.

Investors want to hear from companies about the value of sustainability 49

 Web 2023
InvestorsValueOfESG
Exhibit 1
Exhibit

Most surveyed investors not only consider environmental, social, and

governance initiatives to be important—they’re also willing to pay a premium.

Share of respondents, %

Importance of ESG1 Expected size of ESG

initiatives in investment premium, cash flows
decision making and risk being equal More than 10% 22

They matter regardless of their

53
effect on cash flows and risk

5–10% 33

100 100

They only matter if they affect

cash flows and risk over the 32 Less than 5% 28
short and long term

They only matter if they affect cash

flows and risk over the long term 11
No premium 17
They do not matter in investment 5
decision making

Note: Figures may not sum to 100%, because of rounding.

1
Environmental, social, and governance.
Source: McKinsey Investor survey (Q3 2022); n = 19 (left side), n = 18 (right side)

McKinsey & Company

Investors find that excellence in different pillars The compelling opportunity for a
is required based on a company’s sector. For more value-focused ESG story
companies in the industrials and energy sectors, Investor demand for greater detail and nuance
for example, surveyed investors seek out ESG suggests a compelling opportunity for companies
initiatives in the environmental dimension. For to provide a clearer ESG-to-value case. In other
companies in the technology, pharmaceuticals, and words, what is the relevance of ESG for the
travel, logistics, and infrastructure sectors, business? How do ESG initiatives tie to value crea­
investors consider social initiatives to be the most tion? What are the key levers and value drivers?
important. And for those in the financial and Consider, for instance, how CEOs and CFOs provide
insurance industries, investors rank governance context for quarterly and annual earnings, espe­
concerns the highest. cially in their accompanying presentations: publicly
filed reports are the start, but not the sum, of investor
Notably, for some industries, the absence of a clearly communications. Similarly, managers should not rely
defined ESG strategy leads surveyed investors to on formulaic ESG reporting to provide a compre­
consider decreasing their exposure to or to divest hen­sive picture. Just as reports filed under generally
from some industries entirely. That holds particularly accepted accounting principles are not full descrip­
true for investments in the energy, materials, and tions of strategy, carbon disclosures and other
travel, infrastructure, and logistics sectors. But in presentations of ESG metrics do not provide, without
most cases, ESG is part of a broader set of the more context about the company’s unique business
detailed investment factors they consider. model, sufficient descriptions of strategic impact.

50 McKinsey on Finance Number 84, December 2023

How intrinsic investors look at ESG initiatives

If the classic Monty Python sketch about companies in any industry. It ranks as the investment officers we surveyed report,
wanting to buy an argument were placed in third-most-important investment consider­ for example, that for capital-heavy
the present day, it might be about the ation in only two industries—energy and industries, environmental issues are
performance of environmental, social, and materials, which clearly face ever more the most crucial dimension; in the
governance (ESG) funds: Do these pressing challenges to manage the net-zero pharmaceutical and medical industries,
funds outperform the market, or don’t transition. Yet even while the participants social issues matter most; and for
they? Finance professionals, including typically cite other levers (such as cost financial and insurance companies,
academics, sharply disagree. optimization and capital productivity) as governance is the most important.
being significantly more important than
But what about decisions by traditional, ESG in their investment decisions, some When asked to rank different elements
nonpassive equity funds, which don’t investors report that they are considering among E, S, and G categories, chief
operate under a specific ESG remit, when reducing their exposure to entire sectors investment officers identify climate change
it comes to investing in an individual because of ESG concerns (Exhibit 1). This and greenhouse gas emissions as most
company? How do these sophisticated is particularly evident in more resource- important, followed fairly closely by
investors assess the impact that ESG intensive sectors, such as energy, materials, governance structure, material use and
can have on financial performance and and logistics. waste, and labor practices. But the
company value? importance of those individual elements,
The group also takes a business-model again, vary depending on industry and
In our survey, most respondents do not rank perspective on the impact of ESG: they company context. It’s crucial for chief
ESG at the top of their list of factors that assign greater or lesser importance to E, S, invest­ment officers to understand the
drive long-term value creation. ESG is not or G and elements that fall under each company’s unique equity story, and for the
named as the most important factor, dimension depending upon a company’s company to make clear how its ESG
or even the second most important, for specific sector (Exhibit 2). The chief initiatives tie into and enable its strategy.

Web 2023
InvestorsValueOfESG
Exhibit 1 OF SIDEBAR

Exhibit 1

Many surveyed investors are considering reducing their exposure to companies

in certain industries due to environmental, social, and governance concerns.

Considering decreasing exposure due to ESG1 concerns, by industry, % of respondents

Companies without a clear ESG strategy Whole industry Not under consideration

Travel, logistics, infrastructure 53 47

Energy 50 19 31

Materials 50 13 38

Industrials 47 6 47

Pharma and medical products 41 12 47

Financial and insurance 41 59

Consumer 35 12 53

Tech, media, telecom 35 6 59

Note: Figures may not sum to 100%, because of rounding.

1
Environmental, social, and governance.
Source: McKinsey Investor survey (Q3 2022); n = 18

McKinsey & Company

Investors want to hear from companies about the value of sustainability 51

How intrinsic investors look at ESG initiatives (continued)

The result is less of an argument and more allocate capital to that company—depends investors will wade into the details, and
of a conversation: whether and to what on the circumstances and strategy of identify the granular drivers that are
extent elements of ESG matter to a the company itself. Just as they do in other most important to the company to create
company—and an investor’s decision to aspects of investment decisions, intrinsic and sustain value for the long term.
Web 2023
InvestorsValueOfESG
Exhibit 2 OF SIDEBAR

Exhibit 2

Investors rank the environmental, social, and governance categories about

equally for financial impact, but differentiate widely by elements and industry.

Top 3 elements of the ESG1 framework by financial impact, by industry, % of respondents

Top tertile2 Middle tertile Bottom tertile

Financial Pharma Tech, Travel, Average

and and medical media, logistics,
Environmental Energy Consumer insurance Industrials Materials products telecom infrastructure
Climate change and 83 64 17 50 67 22 17 38 45
GHG3 emissions
Material use 44 33 33 25 39
67 45 0 60
and waste
Water usage/ 0 25 13 20
42 18 8 40 11
reduction
Social
Organizational culture, 17 27 67 20 33 22 42 50 35
diversity, and inclusion
Community impact 8 27 42 0 0 44 33 50 26

Labor practices 17 45 17 40 44 56 42 38 37

Governance
Business ethics 17 18 50 30 22 44 33 38 32
External position
25 18 50 20 33 33 17 13 26
and advocacy
Governance structure 25 36 50 40 44 33 58 38 41

1
Environmental, social, and governance.
2
Factors ranked in top third, middle third, or bottom third for each industry.
3
Greenhouse gas.
Source: McKinsey Investor survey (Q3 2022); n = 18

McKinsey & Company

Know your audience company can satisfy every investor. A clear

“Know your audience”—a key tenet of communi­ segmenting exercise can help senior leaders under­
cations in any context—is critical for corporate stand who their target audience is and what to
communications on ESG. Too often, the media tend emphasize in their investor communications.
to refer to “investors” as a homogenous group
with similar interests and needs. Seasoned CFOs, In prior articles, we’ve suggested a practicable way
however, know that different shareholders have to segment investors: intrinsic investors, traders,
different strategies, and that no widely held indexers, closet indexers, and retail investors.3 Our

3
Robert N. Palter, Werner Rehm, and Jonathan Shih, “Communicating with the right investors,” McKinsey Quarterly, April 1, 2008; Robert N.
Palter and Werner Rehm, “Opening up to investors,” McKinsey, January 1, 2009.

52 McKinsey on Finance Number 84, December 2023

research suggests that intrinsic investors — Investors who focus strictly on the economic
drive long-term share prices and should be the impact of ESG initiatives, particularly on cash
primary audience in mind for crafting strategic flows and value creation. For example, these
communications that lay out the long-term value investors might avoid oil and gas companies with
creation of the company (as opposed to next a higher chance of having stranded assets,
quarter’s performance).4 or real estate companies with a greater risk of
having their properties flooded based on
ESG can be a compelling part of this intrinsic the assets’ geography. These investors might
value story. From a top-down perspective, we now also consider whether the company is well
see some investors use rankings or other rules to positioned to create value from new opportu­
screen out companies. For example, some investors nities created by the energy transition (for
simply avoid oil and gas companies. They seem to example, capabilities in hydrogen or in carbon
be in the minority, however, and there is usually little capture, utilization, and storage). Our survey
a company can do when individual investors apply suggests that many investors seem to fall into
an industry-wide embargo. this second category.

Intrinsic investors who do not dismiss industries out For purposes of crafting an ESG equity story and
of hand because of ESG considerations can be investment case, the two categories are sufficiently
grouped into two basic segments: similar that a clear story about how ESG links
directly to sustained financial performance and
— Long-term investors who consider ESG an long-term value creation should satisfy both
important consideration and use it to add a layer intrinsic investor segments. As a company conveys
of additional analysis and judgment for their its ESG initiatives into its equity story, it should
decisions. For example, rather than screening bear in mind that its target investor audience is
out oil and gas companies, these investors might sophisticated, long-term oriented, and relentlessly
differentiate among such companies based on focused on sustainable competitive advantage.
their rates of reduction in carbon emissions and
invest only in those they deem most able to
reduce emissions.

As a company conveys its ESG initiatives

into its equity story, it should bear
in mind that its target investor audience
is sophisticated, long-term oriented,
and relentlessly focused on sustainable
competitive advantage.

4
Rebecca Darr and Tim Koller, “How to build an alliance against corporate short-termism,” McKinsey, January 30, 2017.

Investors want to hear from companies about the value of sustainability 53

 Getting to the ‘how’ of sustainability executives will need to explain why they believe an
communications investment now into low-carbon metal is needed
How then should companies incorporate ESG into (for example, through customer surveys).
their equity stories and strategic communications?
Part of the “how” is relatively easy: CEOs and What is the company’s strategy? For some
CFOs should communicate that they recognize what businesses, linking ESG strategy to value creation
is happening in the market and spell out what is straightforward at a high level. Many car
the company is doing about it. manufacturers, for example, have announced
whether and how quickly they intend to shift
Of course, if ESG communications were that easy, to full electric-vehicle portfolios, regardless of
one would expect that more companies would whether they will support charging networks or
do it well. They don’t. Part of the challenge is that other components of an ecosystem. For businesses
market and societal forces develop rapidly; that face greater uncertainty (for example, carbon-
there are many unknowns, and companies can fall intensive businesses such as building materials,
back on vagueness and platitudes to try to cover where companies experiment with solutions but
multiple potential outcomes. But clear strategy is there is not yet clear movement in the overall market
marked by decisive choices. Effective equity stories with announced strategies to change products),
acknowledge competitive and macroeconomic executives should lay out their views on the levers
changes; they address how the company’s strategy they intend to address. These companies could
will enable it to benefit from the changes, and explain, for example, how much R&D effort is being
they address the risks. Experienced senior leaders put into new materials like recycled plastics for
will explain why the strategy works, and only then construction and less-carbon-intensive concrete,
will they proceed to targets and risks. as opposed to decarbonizing existing processes.
For businesses with greater exposure across their
In our experience, a compelling ESG equity story supply chains, initiatives could be more preliminary
addresses the following issues. (“finding the right suppliers”), or more immediately
pressing (“working now with our suppliers to
What is changing in the market? This description invest in joint ventures to do the following”). All
could be as simple as laying out management’s view companies in high-emissions industries, however,
on how quickly an already shifting market will move should be able to articulate the new opportunities
(for example, the share of electric-vehicle sales in that they intend to pursue to create value from the
five, ten, and 20 years) and the impact those shifts energy transition.
are having. In many energy-intensive businesses,
the impact and range of responses can be highly How does this strategy create value? Executives
uncertain (for example, the role of hydrogen or should be able to identify the direct link between a
carbon capture). Again, a detailed management company’s ESG strategy and its value creation
perspective and explanation are essential: Will strategy. To be credible, that connection should not
the company bet now on a specific scenario (such be a checklist recitation of initiatives with a high-
as a full transition to hydrogen and electricity for minded vision. Rather, companies should be able to
refinery energy), or will it seek to keep more options walk investors through, in a reasonably granular
open (perhaps by making some smaller bets, or way, why they chose the ESG initiatives they did,
by testing the waters with joint ventures)? There will and how they will create value in terms that
also be businesses where the impacts of ESG investors traditionally understand. That is: How will
initiatives are more bounded. For example, while this ESG strategy enhance (or sustain) cash flows,
future frying pans might be made out of zero- return on capital, and margins; mitigate risks; affect
carbon steel, it’s unlikely that the total number of top-line growth; and attract and retain the talent
frying pans sold worldwide will exceed historical needed to produce these results? Examples of clear
demand levels relative to market size. Here, communication include a food company that laid

54 McKinsey on Finance Number 84, December 2023

out differences in customer demand for sustainably What are the risks—and opportunities? Intrinsic
sourced products by region. In another case, an investors are well experienced in approaching
electric utility anchored its strategy on decarbon­ valuation based on probability-weighted scenarios,
ization and pivoted to renewable energy, showing both on the upside in terms of opportunities and
investors that doing so reduces customer on the downside, including risk. An effective equity
costs and operating expenses in wind- and solar- story improves investor understanding of how
power generation. the company is using ESG to raise the odds for
outperformance and address risk. One technology
What’s the evidence that the strategy works? company, for example, takes a holistic approach
Investors want proof points that the ESG strategy is to mitigating and managing climate-related risks on
generating desired results. CEOs and CFOs should its business strategy, including in operations,
be able to provide clear facts that their company can working with suppliers, and by offering sustainable
“win” in an ESG element. Those details are quanti­ products. Another company conducts and shares
tative as well as qualitative: What specific competitive a materiality assessment, based on a 2x2 matrix of
advantages does the company hold, and how are we the expected impact of opportunities and risks
managing them for success? Why should investors across external and internal stakeholders, to
allocate capital to this multibusiness company sharpen its insight and make its ESG strategy
instead of to pure plays? Companies can demonstrate more transparent.
links to value creation in various ways. For example,
a global consumer-packaged-goods company ties
its ESG strategy to financial metrics including
earnings growth and cash generation growth from Investors recognize that ESG can be an important
new products. The food company mentioned factor in choosing whether to invest in specific
above, for its part, highlights the rapid sales growth companies. It may be time for executives to step up
of plant-based food products, as well as sales and fully integrate ESG into their equity story,
of affordable, accessible products in emerging making sure to connect ESG to value creation, and
markets, as it describes present and future differentiate themselves from their peers based
cash flows. on ESG value impact.

Jay Gelb ([email protected]) is a partner in McKinsey’s New York office, Rob McCarthy ([email protected])
is a senior knowledge expert in the Boston office, Werner Rehm ([email protected]) is a partner in the New Jersey
office, and Andrey Voronin ([email protected]) is a consultant in the Almaty office.

Copyright © 2023 McKinsey & Company. All rights reserved.

Investors want to hear from companies about the value of sustainability 55

Looking
back
More shareholder value leads to more jobs.

Web <2023>
Exhibit
<PrimeNumbers19> Two-step interactive with button
Exhibit <1a> of <1>

Companies thatcreate
Companies that createmore
moreshareholder
shareholder value
value create
create more
more jobs
jobs in the
in the economy.
economy.
Correlation betweentotal
Correlation between totalshareholder
shareholder returns
returns and
and employment
employment growth,
growth, 2009–19,
2009–19,1 1
CAGR
CAGR² %2 %
50 50

40 40

30 30

20 20

10 10

Total 0 0
shareholder
returns –10 –10

–20 –20

–30 –30

–40 –40

–50 US –50 Europe³

–60 –60
–15 –10 –5 0 5 10 15 20 25 –15 –10 –5 0 5 10 15 20 25

Employment growth Employment growth

1
This chart is an updated version of the original, which appears in Marc Goedhart, Tim Koller, and David Wessels, Valuation: Measuring and Managing the Value of Companies, seventh edition, Hoboken, NJ:
John Wiley & Sons, 2020, p. 13.
²Sample includes companies with real revenues greater than $500 million and excludes top 2% and bottom 2% outliers in employment growth.
³Includes companies from EU-27, Switzerland, and UK.
Source: Corporate Performance Analytics by McKinsey

McKinsey & Company

56 McKinsey on Finance Number 84, December 2023

Reading the press, it’s easy to conclude that The slope of the correlation is not the same for all
companies focused on maximizing shareholder industries or time periods, of course. Metrics
returns aren’t doing much for employment, and such as a ratio of FTEs to revenue will change over
if anything, new business models and innovations time, and companies may sometimes cut jobs to
such as generative AI and other automation improve efficiency. However, the alternative would
technologies tend to systematically kill jobs. be disastrous to job creation, as businesses with
uncompetitive cost structures would fall into a
The data, however, tell a different story. When we downward spiral: no innovative products, no profits;
compared shareholder value creation and employ­ no profits, no investors; no investors, no jobs.
ment growth—as measured by public companies’
full-time equivalent (FTE) figures—between 2009 It is up to corporate managers to balance
and 2019, we saw a clear correlation (exhibit). competitiveness and efficiency with developing
Strong market performance goes hand in hand a thriving workforce. Using TSR as a metric
with economic and social prosperity. to measure both can offer an effective method
for finding that balance.
Why? High-performing companies need to grow
their workforces, which leads to more attractive
wages to recruit and retain employees and, in turn,
higher consumer spending. To stay competitive
and maintain high morale, those companies also
invest in upgrading their employees’ skills, which
benefits everyone.

Pedro Catarino ([email protected]) is a capabilities and insights analyst in McKinsey’s Lisbon office,
Marc Goedhart ([email protected]) is a senior knowledge expert in the Amsterdam office, Tim Koller
([email protected]) is a partner in the Denver office, and Rosen Kotsev ([email protected])
is a director of client capabilities in the Waltham, Massachusetts, office.

Copyright © 2023 McKinsey & Company. All rights reserved.

Looking back 57
Podcasts
Learn more about these and other topics on our corporate finance and strategy and other podcasts, available
for streaming or downloading on McKinsey.com, as well as on Apple Podcasts and Google Podcasts.

BOARDS AND GOVERNANCE Artificial intelligence in strategy

AI tools can help executives avoid biases in decisions, pull
Untangling the often mysterious process of joining
insights out of oceans of data, and make strategic choices more
a corporate board
quickly. And that’s just the beginning.
Three experts share insights on what newcomers to board service
Yuval Atsmon, with Joanna Pachner
should expect.
Sarah Beshar and Julie Daum, with Celia Huber
In conversation: The CFO’s critical role in innovation
By embracing discipline and well-defined processes, innovation
The board’s role in building resilience
teams can make finance leaders their biggest allies.
Boards of directors can help executive teams build the foresight,
Matt Banholzer, with Sean Brown
response, and adaptation capabilities they need to manage
future shocks.
Celia Huber, Ida Kristensen, and Asutosh Padhi, with Sean Brown DECISION MAKING

How to predict your competitor’s next move

The role of the board in preparing for extraordinary risk Know which competitors matter the most and predict their next
Risks that threaten a company’s existence require unique steps with greater accuracy.
interventions from the board. John Horn, with Emma Gibbs
Nora Aufreiter, Celia Huber, and Ophelia Usher, with Sean Brown

Taking fear out of innovation

CORPORATE FINANCE The risk and ambiguity inherent in innovation can make
employees shy away from it. Creating an innovation culture where
A peek at the future health and wealth of our global economy
risk-taking is embraced must start at the top.
A new McKinsey report looks at four scenarios for inflation,
Laura Furstenthal, Alex Morris, and Erik Roth, with Sean Brown
interest rates, and growth over the next decade. Three of
the economic outcomes portend stagnation and stagflation—
but one offers hope. M&A
Sven Smit, with Roberta Fusaro XPO’s Brad Jacobs on building businesses through M&A
Having done hundreds of deals, the leader of the logistics company
Four front-foot strategies to help create value in explains what he’s learned matters most when making acquisitions.
the net-zero transition Andy West
Companies can identify green growth opportunities and move
boldly to take advantage of them. Agile business portfolio management
Michael Birshan and Anna Moore, with Sean Brown Companies that regularly refresh their portfolios tend to
outperform, but deciding when and how to divest a business may
In conversation: The CFO’s role in talent development be the most challenging part of M&A.
By taking the lead in enhancing financial acumen and other Obi Ezekoye, Anthony Luu, and Andy West, with Sean Brown
capabilities throughout the company, CFOs can raise their
leadership profiles and their organization’s game. A winning formula for deal synergies
Kevin Carmody and Meagan Hill, with Sean Brown The experiences of the most successful acquirers yield some
counterintuitive lessons.
Tim Koller on the timeless truths of corporate finance Jeff Rudnicki and Andy West, with Sean Brown
An expert on value creation shares insights from 20 years of
leading McKinsey on Finance.
Tim Koller, with David Schwartz
December 2023
Designed by McKinsey Global Publishing
Copyright © McKinsey & Company

This McKinsey Practice Publication meets the

Forest Stewardship Council® (FSC®) chain-
of-custody standards. The paper used in this
publication is certified as being produced
in an environmentally responsible, socially
beneficial, and economically viable way.

Printed in the United States of America.