Exploring alternatives
Good capital management identifies, analyzes and compares all opportunities open to a company at the allocation and sanctioning stages in a constant search for better strategies. At a top-performing UK bank, for example, all business units are asked to submit at least three strategic alternatives – one that maximizes long-term value, one that maximizes short-term cash flow and one that minimizes costs. By evaluating alternatives, the CEO and CFO know exactly which opportunities they forego when committing resources to a particular strategy or project. This knowledge ultimately leads to higher value-creating strategies on a consistent basis.

The need to keep many well-articulated alternatives open creates demand for information that is tailored to the needs of capital management. The best capital managers are not content with the information existing systems already provide. They build their own information, step by step, from the bottom up, by clearly outlining the strategic, customer, financial and operational information they need to make good decisions.

Applying decision rules
Decision rules are criteria that guide the evaluation of strategic alternatives and help to determine which alternative is best to fund. They go beyond the singularity of value as the primary criterion to include additional "tests" designed to build confidence that any given alternative can be delivered. For example, a sector-leading global insurance company regularly tests to make sure that alternatives are aligned with overall corporate strategy in order to discriminate against undesirable diversification. In one instance, the executive committee decided to pass on a value-creating opportunity to invest in a profitable part of the world because it did not align with the corporate strategy. The company also tests whether an alternative supports goals for profitability, cost and capital productivity to discriminate against endless "J-curve" strategies that erode performance before improving it.

Decision rules improve the quality of requests for funding and help to explain why some are approved and others are rejected. They set the standard for deciding, prioritizing and shaping competing demands for capital and, as a result, help to create the conditions for an open debate on capital management decisions.

Opening the debate
The power of alternatives and decision rules to influence behavior depends on the extent to which they are openly accepted and debated. Good capital managers know that decisions taken in open debate are more likely to stick than those taken behind closed doors because they raise the stakes for accountability and self-discipline. True dialogue (as opposed to a series of monologues) is the essence of open debate. Several years ago, the management team at one of the world’s best-performing energy companies was able to work together more effectively by moving the debate from the "smoke-filled room" to a series of open dialogues. Today, a well-defined process (including advance preparation) enables its CEO to establish ground rules and contribute ideas without coming across as prescriptive or dictatorial.

Conclusion
Introducing new processes and agreeing on new standards for capital management are not easy, and maintaining them over time is even more difficult. But the payoffs, in the form of faster, higher-quality decisions leading to better performance, are considerable.

In our view, advantaged capital management is the most influential lever the chief executive has to impact business strategy and financial performance. Unlike any other management process, it instills the discipline and accountability necessary to improve returns and accelerate growth over time.