But in the real world, that's often not what they're praised and paid for. Buffett, of course, is a legendary value investor, and value investors assume that the market eventually recognizes and rewards companies that build real economic value. Analysts don't clamor for value, but rather for acquisitions at almost any cost and earnings growth seemingly regardless of quality. But once the investment has been made, the managers are evaluated by some other yardstick, such as earnings or sales growth, and the cost of capital no longer factors in to their performance review. The head office knows this, so it installs hurdle rates.
Managers respond by raising their assumptions.
The whole process of capital budgeting is characterized by mutual deception. Managers wind up thinking like owners, making decisions that are in the enterprise's long-term economic best interests, almost reflexively allocating capital to its most productive use. It makes so much sense that it shouldn't take guts. But it often does, as the following profiles show. All Rights Reserved.