McKinsey on Finance: 25th Anniversary edition

Since the first issue of McKinsey on Finance went to press in the summer of 2001, markets have evolved, technologies have advanced, and new sources of value have emerged. And yet, what has not changed are the fundamentals of corporate finance—a set of bedrock principles that CFOs and finance teams can turn to again and again as everything shifts around them.

This special 25th-anniversary edition delves into this duality—the constants and constant change—that makes corporate finance both fascinating and challenging for its practitioners. In a series of essays and curated classic articles, we explore why it’s as important as ever to commit to the long term, identify what really matters for value creation, lead through uncertainty, and understand how to deal with tech disruptions.

We hope you enjoy this celebratory edition and look forward to the next 25 years of offering you the best of McKinsey’s perspectives for CFOs and other finance leaders.

McKinsey has long recommended that companies put more emphasis on long-term value creation than on boosting short-term profits. This was an important theme in our first published work on value creation, Valuation: Measuring and Managing the Value of Companies (Wiley, May 2025), which first came out in 1990.

And it has remained equally important: In the current edition of the book, we say, “Making long-term value-creating decisions requires courage and often a mindset that extends beyond one’s own time in a specific role. But the fundamental task of management and the board is to demonstrate that courage, despite the possibility of short-term consequences.”

In McKinsey on Finance, McKinsey Quarterly, and other publications, we have continued to present accumulated evidence and examples that show the benefits of a long-term orientation and the pitfalls of focusing on short-term earnings. For this 25th anniversary issue, we’ve selected three articles that highlight some of our findings.

Our first article, “How to build an alliance against corporate short-termism,” makes the case that corporate leaders often overstate the pressure from short-term investors and underestimate their own ability to focus on long-term value creation. While short-term traders and sell side analysts are highly visible, they represent a minority of shareholders. About 75 percent of shares in the typical company are owned by long-term investors—either retail investors, index funds, or, most importantly, long-term institutional investors (whom we refer to as “intrinsic investors”). Over time, leadership that prioritizes long-term value creation will benefit the majority of investors.

In this article, we recommend that executives cultivate deep relationships with long-term investors; avoid artificial tactics to meet short-term earnings expectations; and communicate transparently about strategies, successes, and failures. We also suggest that they rethink how they conduct quarterly earnings calls to place more emphasis on what they are doing to create long-term value.

In “Avoiding the consensus-earnings trap,” we examine one of the most persistent sources of perceived short-term pressure and demonstrate that its importance is widely overstated. The evidence shows that missing earnings estimates is common and that, 40 percent of the time, the share price moves in the opposite direction of the earnings surprise. These results suggest that investors look beyond whether estimates were met and instead focus on the underlying drivers of performance, including revenue growth, margins, and long-term prospects. Consistently beating earnings estimates does not lead to higher valuations once a company’s actual performance is considered; only repeated misses over time have a negative effect.

This article reinforces the point that the pressure to deliver short-term earnings is not only less dominant than many leaders assume but also a poor guide to what truly drives value. Therefore, executives should avoid short-term actions, such as deferring product development or marketing, that might harm long-term value creation.

Finally, “The voice of experience: Public versus private equity” examines the differences between the behaviors of private equity (PE) company boards and those of listed-company boards. PE is often perceived as having a short-term orientation, given its traditional ownership period of about five to seven years. However, PE owners typically concentrate on how to build a company’s total value over the life of the investment. By contrast, because public companies can overly prioritize quarterly results, they often place greater emphasis on short-term performance.

The focus on building total value is reflected in how PE boards operate, offering lessons for public-company boards. A survey of British board members who have served on both types of boards shows that, on average, PE board members spent nearly three times as many days on their roles as those at public companies (54 versus 19). In both models of ownership, board members spend around 15 to 20 days a year on formal sessions, such as board and committee meetings. However, PE board members devote an additional 35 to 40 days to hands-on, informal interactions—including field visits and phone calls—compared with only three to five days a year for directors at public companies.

Interviews with these board members showed that PE boards take a more hands-on role in shaping strategy and monitoring performance and maintain an intense focus on value creation. By contrast, public boards tend to play a more passive role in strategy, focusing more on oversight, governance, and meeting short-term market expectations. While public boards may not be able to fully replicate the PE model, they can improve effectiveness by becoming more engaged, focusing more on long-term value creation, and balancing governance responsibilities with a stronger role in strategy and performance oversight.

Over my 25 years working on McKinsey on Finance and nearly four decades in McKinsey’s corporate finance practice, I—and my fellow authors and colleagues—have consistently observed a pattern: Companies that prioritize long-term performance create more value than those that focus on short-term results. Leading for the long term requires a willingness to make decisions that may run counter to pressure from short-term investors but strengthen a company’s position over time. Companies that do this well create lasting value.

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Tim Koller is a partner emeritus and senior adviser in McKinsey’s Denver office and cofounder of McKinsey on Finance.

Much has changed in the world since we started publishing McKinsey on Finance, but the basic approach to estimating the value of a company has not.

The idea that a company’s value reflects the present value of its future cash flows has been around for nearly 200 years¹ and remains the foundation of modern valuation. Practitioners today continue to discount cash flows at a rate that accounts for the opportunity cost and risk faced by a well-diversified investor. The cash flows themselves reflect a company’s future return on capital and growth, which investors estimate based on factors such as past performance, market outlook, and competitive advantage. This relationship is borne out in empirical research: Companies with stronger returns and higher growth tend to outperform their peers over the long run.

These fundamental drivers of value creation have remarkable staying power. Even geopolitical and economic uncertainty—such as high inflation (as in the 1970s), artificially low interest rates that may not reflect a true risk-free rate (as in the 2010s), uncertain prospects for some businesses, and inflated expectations for others—has not shaken them. These same principles, combined with scenario analysis, can be used to value even highly uncertain investments, such as start-ups.

Our goal at McKinsey on Finance has always been to use the tools of finance to help companies make better decisions. While the fundamental principles of value creation are well established, the challenge lies in understanding and applying them in practice. We have published extensively on technical issues such as the cost of capital, but the majority of our articles focus on improving how companies assess, interpret, and forecast the underlying drivers of sustainable long-term cash flow generation. After all, strategy is ultimately about creating sustainable value over time, not meeting short-term targets at the expense of long-term performance. The benefits of this approach extend beyond financial metrics. For example, in research showcased in a 2020 article titled “The value of value creation,” we found that companies that create long-term shareholder value also tend to generate the strongest employment growth.

In this chapter, we present three articles spanning nearly two decades that examine the strategic trade-offs involved in creating this long-term value. Together, they explore how those trade-offs depend on a company’s starting position, why such decisions often need to be made at a relatively granular level, and how seemingly sensible shortcuts can easily mislead decision-makers. These findings remain relevant today—and will be relevant in the future—and can be particularly valuable in periods of market and economic volatility. Even as new technologies reshape industries and expectations about the future evolve, the fundamentals of value creation remain consistent because they are based on enduring principles, not the latest hype.

The first article, “How to choose between growth and ROIC,” examines how companies should balance improving returns with investing in growth. Building on earlier analytical work, it shows that the right trade-off depends on a company’s starting position. Companies with high returns on invested capital typically create more value by investing in growth, even if those investments modestly reduce returns. Companies with very low ROIC, by contrast, create more value by focusing first on improving margins and capital efficiency. The article demonstrates empirically that companies that align their strategy with their starting position generate stronger long-term shareholder returns.

The second article, “The granularity of growth,” examines where companies should pursue growth within their portfolios. Many companies operate across multiple business lines, products, and geographies that display different economics, making high-level decisions about growth and investment not meaningful. Instead, companies need to determine where to invest and where to improve returns at a much more granular level—often below the level of a traditional business segment. Our research has shown that highly diversified companies often underperform more focused peers, in part because broad portfolio views can obscure where the real growth opportunities lie. The article demonstrates that corporate growth is largely the result of specific choices about which products, markets, and geographies to invest in.

The third article, “The times for multiples: Why value creation always comes first,” examines how misleading it can be to rely on valuation multiples when making strategic or M&A decisions. Multiples are the result of growth and returns on capital—not the cause—and focusing on them alone can lead companies to favor choices that seem attractive but fail to create long-term value. Instead, strategy should focus on the underlying drivers of value creation: sustainable growth, strong returns on invested capital, and cash flow generation.

All in all, if the past 25 years have taught us and our readers anything, it’s this: Executives should focus on ROIC and organic growth as the basics of value creation. These metrics drive cash and intrinsic value, and ultimately jobs, and are the ones that have held true throughout the span of time and industries.

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Werner Rehm is a senior adviser and a former McKinsey partner.

_{¹ Susie Brackenborough, Tom McLean, and David Oldroyd, “The emergence of discounted cash flow analysis in the Tyneside coal industry c.1700–1820,” British Accounting Review, 2001, Volume 33, Number 2.}

If there is one theme that has run through a quarter century of McKinsey on Finance, it is that the world does not sit still—and neither should the leaders who steward the world’s corporations. The pace of economic change has accelerated. Cycles have compressed. New industries have emerged, and old ones have been remade. And through it all, the companies that have thrived are those whose leaders have treated uncertainty not as an obstacle to be endured but as a condition to be managed.

The articles in this section represent some of the most enduring thinking on that challenge. Read together, they tell a story that demands urgency: Uncertainty requires action—inward and outward—and the greatest risk is almost always standing still.

We begin where any honest conversation about uncertainty must: with the recognition that corporations are not naturally built for it. An excerpt from the book Creative Destruction (Currency/Doubleday, 2001), which we also published in the very first issue of McKinsey on Finance, draws on decades of research to show that markets systematically outperform corporations over time, precisely because markets assume discontinuity while corporations assume continuity. The cultural lock-in described—the mental models, the defensive routines, the fear of cannibalization—remains as relevant today as it was in 2001. It is the foundational diagnosis that makes the rest of this section necessary: If corporations are wired for continuity in a world defined by discontinuity, then leaders must consciously and continually work against that wiring.

What does that work look like in practice? We believe it requires looking in two directions at once.

The first is inward. “Unearthing the sources of value hiding in your corporate portfolio” makes the case that averages are the enemy of good strategy. When executives manage at the level of a few divisions using high-level metrics, they inevitably miss the performance disparities—and the opportunities—hiding beneath the surface. One company discovered that two-thirds of its 150 business segments were falling so far short of their economic-profit targets that they alone would have caused the company to miss its targets by 40 percent. The rest were outperforming by enough to mask the problem. Getting granular about where value is actually created and destroyed within your own portfolio is one of the most powerful moves a leader can make under uncertainty, precisely because it does not depend on predicting what comes next. It is the “control what you can control” discipline that makes everything else possible.

The second direction is outward. “Why you’ve got to put your portfolio on the move” provides empirical proof that portfolio stasis is the riskiest strategy of all. An analysis of more than 1,000 companies across a full business cycle finds that roughly half barely changed their business mix over a decade, and those companies barely moved the needle on shareholder returns. The winners rotated their portfolios at a steady, measured pace, moved into faster-growing industries, and used programmatic M&A to get there. The message is clear: The external environment will shift whether you act or not, and the companies that shift with it—or ahead of it—are rewarded.

Together, these two articles present complementary playbooks for the same underlying challenge. Looking inward reveals the value already latent in your portfolio and ensures that resources flow to where they can do the most good. Looking outward ensures that the portfolio itself is pointed toward value creation, rather than anchored to yesterday’s business mix by inertia or attachment. Neither is sufficient on its own. The leader who reallocates brilliantly within a declining portfolio is optimizing a shrinking pie. The leader who transforms the portfolio without understanding what drives its performance is flying blind.

Then comes the test. In “Bubbles pop, downturns stop,” the authors examine how companies perform when the storm arrives. Their finding is both reassuring and sobering: Roughly 10 percent of companies emerge from downturns materially stronger than their peers. What distinguishes these “resilients” is not better forecasting—they are no better at predicting the cycle than anyone else. What sets them apart is that they move early. They clean up their balance sheets, cut costs ahead of the curve, and build the operational flexibility to go on offense when competitors are retrenching. The resilients, in other words, do the inward and outward work before it’s urgent. In the study cited, that early action compounded into a cumulative total shareholder returns lead of more than 150 percentage points over the next decade.

The world in which these articles were written has changed enormously since we began publishing McKinsey on Finance in 2001. The world in which you are reading them will change again. But the core insight that connects all four pieces has not changed: Uncertainty is not a temporary condition to be waited out. It is an increasingly permanent condition—and the best opportunity to create value. The leaders who accept that and act on it early across multiple fronts are the ones who will be here for the next 25 years.

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Whitney Zimmerman is a distinguished expert in strategy in McKinsey’s London office.

Over the past 25 years, McKinsey on Finance has shared perspectives on how tech disruptions change competitive advantage and the nature of value creation, and how the market can sometimes misread the moment.

While economic cycles tend to follow familiar patterns, technological disruptions often feel unique because change comes from something that is truly new to the world. The steam engine, electricity, and the internet, though underpinned by different technologies, were each era-changing disruptions. They created and redistributed economic value and changed the economics of competition in ways that are similar to what is occurring now (though the AI revolution is happening at a much faster pace). Past disruptions suggest that the majority of the cost benefits of AI are likely to be passed through to end customers. Sustainable growth will come from the new offerings and business models that AI unlocks—but only where AI delivers a real advantage that can be captured.

This chapter’s first article, “Why ‘digital’ is no different when it comes to valuation,” shares two valuable insights particularly relevant to the current AI disruption. The first is that tech-enabled projects and initiatives need to be assessed according to the profits or cash flows they actually generate, just as nontech moves are. In past disruptions, overvaluations and negative-ROI investments occurred when companies lost sight of the fundamentals. Similar dynamics are emerging in AI, where the majority of investment has yet to yield results.

On the flip side, standing still during times of disruption has a price. The base case of “doing nothing” often means losing ground rather than standing still. What might feel like a safe move ends up being quite risky.

AI is already creating pressure in industries such as banking and consulting, as some core offerings and competitive advantages are at risk of becoming commoditized or switching costs for customers decline. While AI might yield productivity gains, only companies able to move quickly, before margin compression sets in across their industry, will be able to capture value before it is competed away. Companies that act late may, at best, end up paying for the transformation while any value created immediately bleeds out into the marketplace. At worst, these companies may fail to remain economically viable.

In the second article, “Why digital strategies fail,” the authors call out common pitfalls to avoid when evaluating strategy during times of digital disruption. Originally published in 2018, the article highlights challenges companies faced during that era’s wave of digitization. These include leaders with only a fuzzy grasp of technologies, their capabilities, and their economic implications. As leaders now grapple with AI, it’s worth reviewing these pitfalls and recommendations for overcoming them—most of which map well to current challenges.

The third article, “Memo to the CFO: Get in front of digital finance or get left back,” notes how CEOs and boards increasingly look to CFOs to transform the finance function in times of tech disruption. Their twofold mandate has not changed since the article was originally published. The first requirement is to make decisions at a pace that matches the rate of change of their business environment, which accelerates with each wave of tech disruption. The second is to understand the business value of new technologies so that CFOs can make informed decisions about how to allocate resources to keep pace with them and where to take the funding from.

The fourth article, “Do fundamentals or emotions drive the stock market?,” explores how to recognize bubbles and interpret high valuation multiples. These topics are highly relevant to today’s debate about AI. As with past tech disruptions, many companies seek to accelerate their AI transformations through acquisitions. But high valuation multiples of targets can make these moves dilutive, forcing organizations to weigh the benefits of speed against the cost of paying a premium. And, as with previous tech disruptions, market opinion is divided: Some see signs of a potential AI bubble, while others view current valuations as justified by a new economic paradigm. Looking back at how similar episodes have played out in the past provides a useful lens for interpreting today’s market signals.

Even as the AI disruption is framed as unprecedented, many of the questions it raises about value creation, competition, and strategy echo earlier transformations. These historical patterns can help leaders make clearer judgments about what comes next.

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Laura LaBerge is a senior expert in McKinsey’s Connecticut office.

Investors, analysts, and executives often hold high expectations for artificial intelligence’s economic impact. The language used around AI—such as “step changes in productivity,” “labor substitution,” and “new growth regimes”—echoes how earlier technologies were discussed in their days: computing in the 1960s and 1980s, biotechnology in the 1990s, the internet in the late 1990s, and digital platforms in the 2010s.

In each case, the technologies did in fact reshape operations, markets, and firm rankings. However, those shifts did not translate into higher revenue growth for all companies. From 1965 to 2023, some new industries grew faster, while some older ones grew slower, with the median company growing slightly slower in recent decades. The faster-growing industries tended to be more capital efficient and have higher returns on capital (excluding goodwill), leading to higher median ROIC in recent decades. Much of that improvement, however, was offset by the premiums paid for acquisitions, leading to a flat median ROIC including goodwill trend line. This historical pattern provides useful context for evaluating current expectations, even as the specific trajectory of AI remains uncertain.

The exhibit is reproduced from Exhibit 8.15 in “Return on invested capital,” chapter 8 in Valuation, 8th edition (Wiley, 2025).

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Marc Goedhart is a senior expert in McKinsey’s Amsterdam office, and Tim Koller is a partner emeritus and senior adviser in McKinsey’s Denver office.

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McKinsey on Finance is guided by its editorial board members, who are: Antoine Montard, Christian Grube, David Kohn, Ezra Greenberg, Laura LaBerge, Marc Goedhart, Matthew Maloney, Peter Stumpner, Roberta Fusaro, Rodrigo Slelatt, Rosen Kotsev, Tim Koller, Vartika Gupta, Werner Rehm, and Whitney Zimmerman. In addition to the authors of the prefaces and articles, several McKinsey Global Publishing contributors collaborated to produce this special edition, including Cary Shoda, Diane Rice, Heather Byer, Jonathon Rivait, Katie Shearer, Katy McLaughlin, Matt Perry, Matthew Baumer, Sarah Thuerk, and Stephen Landau.