Stock market up, stock market down.
Trade agreement gone, NAFTA re-engaged.
Corporate tax deregulation, natural disasters on the rise.
A seesaw of competing economic indicators has made a guessing game of traditional corporate finance and strategy decisions.
A Bauer College professor says two things could help chart a course for better business investment decisions in tumultuous times: Bridging the gap that exists between finance and strategy department decision-makers in most large corporations and planning for long-term results.
Praveen Kumar, Cullen Distinguished Chair and Department of Finance professor at Bauer, recently published a paper which addresses the gap and provides information on how companies can create and nurture a more integrated approach. Kumar authored the paper with Steven Arbogast, the former Bauer College professor and ex-treasurer of Exxon-Mobil Chemicals.
“A lot of investments are based purely on narrow financial grounds without really considering the long-run strategy implications,” Kumar says. “We give the example of Exxon-Mobil, which historically was hurt by separating finance and strategy. Eventually they changed their corporate finance culture and their corporate decision-making investment framework to bring the two together and greatly improve their economic performance.”
He added: “It becomes very applicable today because when you have tumultuous markets that are driven by both positive and negative forces, it becomes very difficult for executives to decide what to do. They are pulled in different directions. The broad economic growth globally, deregulation and tax cuts are pushing you to be more aggressive in terms of investment, but the political uncertainty, doubts about the international business model, and trading environment are pushing you in the other direction.”
“This is exactly the time where it’s even more important to know what your true long-term strategy is, to know what markets are absolutely crucial for your company now, and in the future, and to know your competitive advantage,” he said. “Those things have to be answered before deciding whether to start a project or investment, instead of using narrow, technical kinds of decision criteria that can actually lead to wrong decisions.”
The Kumar-Arbogast paper was published recently in the Journal of Applied Corporate Finance, a leading academic publication for applied business research.
By Julie Bonnin