Who Makes Financial Decisions within Private Companies?

CEOs are more likely to ... delegate at least part of the decision process to others when it comes to their company's capital structure, payouts, investments, and capital allocation [than when a merger or acquisition is involved].

Within firms, which executives are the key decision-makers with respect to investment choices? In Capital Allocation and Delegation of Decision-Making Authority within Firms (NBER Working Paper No. 17370), authors John Graham, Campbell Harvey, and Manju Puri find that the amount that CEOs delegate decision authority varies by the type of corporate decision. For example, CEOs are more likely to dominate merger and acquisition decisions than they are other investment and financing decisions. In contrast, they are more likely to delegate at least part of the decision process to others when it comes to their company's capital structure, payouts, investments, and capital allocation. They're also more likely to delegate when their companies are large or complex, but less likely when they have special knowledge of a project, an MBA degree, long tenure as CEO, or pay that's more performance-based than at the average corporation.

This study incorporates responses from 950 CEOs and 525 CFOs in U.S.-based companies - as well as a smaller sample of Asian and European senior executives - and it also offers a rare opportunity to study the decision processes of private companies. Nearly 88 percent of the firms are private; the companies' overall mean sales revenue is $551 million. Nearly half of the CEOs (46.5 percent) surveyed said they made M&A decisions without any input or with very little input from others. About four-in-ten (39.5 percent) did the same for capital-structure decisions. Other areas were less dominated by CEOs: payout (38.7 percent), capital allocation (38.1 percent), and investment (36.3 percent).

In companies that have made at least two acquisitions in the past two years, CEOs are more likely to share decision authority on capital structure and capital allocation decisions. "This [sharing decision authority] result is consistent with the common view that executives of acquiring firms spend a disproportionate amount of their time integrating new business units into their firms," the authors write. But "CEOs are not inclined to share the merger and acquisition decision itself, even when their firm has recently made multiple acquisitions."

As for what tools CEOs use to allocate capital within their firms, nearly 79 percent say that net present value (NPV) rankings are important or very important. More than 71 percent of U.S. CEOs pointed to the reputation of divisional managers. Approximately half of CEOs listed their "gut feel" as being important in deciding how to allocate capital across divisions. "We find this [gut feel] response to be very interesting because it highlights the subjective nature of corporate investment and (perhaps) of decision making more generally," the authors write. "[S]ignificantly more CEOs of small firms rely on their gut feel to make decisions (49 percent of small firm CEOs rely on gut feel versus 38 percent of large firms)."

The authors also look at a smaller sample of European and Asian companies and note two differences. A significantly higher proportion of foreign executives (18 percent of CEOs and 36 percent of CFOs, compared with 10 percent of CEOs and about 25 percent of CFOs for American firms) acknowledged that corporate politics affect capital allocation. Also, nearly one in seven foreign CEOs -- roughly double the share of U.S. CEOs -- said that their company tries to balance capital allocation evenly across divisions.

--Laurent Belsie