The job of a CEO is very often lonely within a company. He has to cater to the masses ( the employees ) and talk to investors, customers and prospects to ensure the company grows and does a healthy business. But a third and often most important skill of a CEO is Capital Allocation.
It is a forgotten skill, but it makes all the difference in a company being a successful one.
A CEO can delegate certain responsibilities depending on the status of the company.
- In a startup, the CEO’s role is mostly raising more money and ensuring that money is spent prudently. Any dollar spent in a start up should bring in more than a dollar in value. Taking care of employees is not a necessary thing in startups. In small companies, employees need to be very much self-motivated on a daily basis, if not, they are not fit to be working in a startup. Capital Allocation skills play very essential role in the success of a startup. To raise more money, the CEO should have a great salesmanship and be able to articulate why his business has better potential than others. Expenditures when done optimally, can ensure that the money raised gives a very long run way. A company that grows without much of a revenue in a long run will cease to exist eventually.
- In mid sized companies, the CEO cannot afford to have a COO, but he certainly can afford a HR person to ensure employees are motivated. Increase in sales, solely falls on the lap of the CEO, but the more important thing of Capital Allocation i.e) funding new projects to expand growth, lies within the CEO. The mid-sized company will remain a mid-sized company without growth and eventually a smarter competitor will take it down. Again, as you see here, the CEO needs to have two skills and can effectively outsource the third to a HR person.
- Today, in public companies, it is very common to have a COO, i.e) the Chief Operating Officer. He can take care of regular company operations and do much of the sales. Of course, there will be a full fledged HR department whose goal is to keep happy and motivated employees. The CEO would time-time work on sales for big accounts but the biggest ever responsibility of a CEO is to ensure Capital Allocation is done correctly. Without it, he will have very unhappy shareholders. Unhappy shareholders will yield to an unhappy board, which will replace the CEO eventually. Capital Allocation in a public company doesn’t end at right amount of money is spent on building new products and acquiring new customers. It also involves in analyzing/ acquiring other companies, spinning off divisions, closing divisions if they are underperforming and even sale of the company if somebody is willing to provide a very higher price than what you think the company is worth. A public company CEO has a fiduciary duty towards the shareholders.
As we have seen above, Capital Allocation is the most important skill any CEO will need to be successful.