Board Members And Executives Say A Clear Capital Allocation Process Is Key To Strategy: KPMG Survey

NEW YORK, July 15, 2015 /PRNewswire/ -- More than 40 percent of U.S. board members and executives are not satisfied with the quality of the board's discussions with management regarding the alignment of the company's capital allocation and strategy, according to a survey by the Audit Committee Institute (ACI) of KPMG LLP, the audit, tax and advisory firm.

KPMG's Spring 2015 Roundtable Series gathered over 1,200 directors and senior executives across 18 cities to share their views on capital allocation. Some 69 percent of those polled were at least somewhat concerned that management tends to allocate the same levels of capital to business units year-to-year, rather than reallocating capital over the medium to long term. Only 40 percent were satisfied that the company's incentive compensation plans encourage managers to make long-term value creating investments that balance the long-term and short-term.

"Capital allocation and strategy go hand in hand, but keeping them aligned isn't easy," said Dennis T. Whalen, partner in charge and executive director of KPMG's ACI, noting the many factors driving capital allocation today—strategy and risk, operations, compensation and incentives. "The capital allocation process needs to be clear and robust—including understanding where on the board the capital allocation discussion is taking place."

With investors sharpening their focus on how companies are deploying their capital, and competitive pressures requiring more frequent shifts in strategy and spending priorities, capital allocation is being "pushed out of the back office and squarely into the boardroom discussion," said Whalen. He noted that boards can help assess the effectiveness of the capital allocation process by considering:

• How the company's allocation of capital aligns with its strategic priorities;
• The real capital requirements of the business and timeframes;
• The spectrum of capital allocation alternatives available and the corresponding risks;
• Whether the right controls and metrics are in place to monitor management's performance.

Roundtable discussions also highlighted a trend toward greater transparency with investors about the company's capital allocation plans. "Communicating with key investors on how the company's capital allocation aligns with strategy can help everyone stay focused on long-term value creation," noted Whalen, "particularly when there's pressure to return excess cash to shareholders." One quarter of executives reported that their company has a formal capital allocation policy describing its framework for allocating capital—including returning free cash flow to shareholders; 32 percent said the company is considering a formal a policy.

The company's capital structure and plan—including shareholder returns—will continue to be challenged in a period of weak global growth and interest rate uncertainty. Asked for their view on the economy, 37 percent of executives surveyed said economic uncertainty is their biggest concern, and 22 percent point to the impact of the regulatory environment as the top worry with regard to the economy.

Meanwhile, a majority of respondents remain optimistic about company performance. Some 55 percent expect moderately higher profits in 2015, while 23 percent expect significantly higher profits. Eighteen percent report they expect profits to decrease.

Forty-six percent of corporate leaders surveyed said they expect increased hiring over the next six months, while 31 percent expect at least to maintain headcount. Eighteen percent anticipate a reduced workforce, and 4 percent were unsure about their hiring plans.

About KPMG's Audit Committee Institute
With a presence in 35 countries worldwide, ACI delivers high quality and actionable thought leadership on risk and strategy, talent and technology, globalization and compliance, financial reporting and audit quality—all through a board lens. Learn more about ACI's Spring 2015 Audit Committee Roundtable Series, and other educational resources for directors at www.KPMG.com/ACI.

About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative ("KPMG International"). KPMG International's member firms have 162,000 professionals, including more than 9,000 partners, in 155 countries.

Contact: Rebecca L. Rickert
KPMG LLP
201.307.8274
[email protected]

SOURCE KPMG LLP

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