In this edition of Author Talks, McKinsey Global Publishing’s Roberta Fusaro speaks with McKinsey Partner Tim Koller about the latest edition of the seminal practitioner guide, Valuation: Measuring and Managing the Value of Companies (Wiley, May 2025), coauthored with Marc Goedhart and David Wessels. Now in its eighth edition, Valuation has been a trusted resource for executives, financial professionals, and others seeking a deeper understanding of the valuation process and how they can help their companies create and maximize economic value. But, as Koller explains in this interview, Valuation is more than just a textbook—it’s a window into potential market shifts, deals, and strategic discussions of the future. An edited version of the conversation follows, and you can watch the full video at the end of this page.
Roberta Fusaro: Why did you and your coauthors want to write this book initially?
Tim Koller: Actually, we never set out to write a book. We had in the late 1980s just started McKinsey’s Corporate Finance Practice, and we wanted to make sure all the McKinsey consultants around the world were doing high-quality, rigorous financial analysis the same way. We wrote a manual for McKinsey consultants on how to do evaluations. It’s in a three-ring binder—I still have a copy of it! That’s how it all started. Then someone suggested that we show it to some publishers, and a couple of publishers were interested. It’s become a textbook for leading business schools. It’s gone from about 300 pages to about 900 pages. We keep adding more and more content as we learn more and more things. That’s how it all started out. And we’ve been growing ever since.
Roberta Fusaro: The principles of valuation are timeless—but the world keeps changing. How does this book help leaders deal with that change?
Tim Koller: We’ve been at this for 35 years, and a number of things have happened in that time—the dot-com bubble, the financial crisis, the COVID-19 pandemic. What we have found is that when people are overly focused on what’s going on in the world and forget about the principles, they make poor decisions. Around the time of the dot-com bubble—say 1999—people were talking about a new economy. They were saying the principles of not just valuation but also economics didn’t apply anymore. There was a belief at that time that if you got big fast, you eventually made big profits, almost regardless of the industry. We saw electric utilities that were buying power plants around the world, with no apparent synergies. Almost all of them went out of business because there was no economic logic to any of them. Size did not bring any benefits. It does bring some benefits sometimes, but not always. Sometimes size just leads to complexity.
Whenever we’ve been in those kinds of situations, I find that looking back to the core principles helps me to better understand what’s going on and where the future may lead us. For example, right now—and this is more specifically related to valuation—we have a handful of companies with enormous valuations, well over $1 trillion. And one of the things I’ve learned over the years is to ask, “What would I have to believe in order for those values to be justified?” I can then analyze and ask myself whether the numbers seem reasonable, what factors might be driving up valuations, and whether those factors are sustainable.
What we have found is that when people are overly focused on what’s going on in the world and forget about the principles, they make poor decisions.
Roberta Fusaro: What is the most misunderstood concept of valuation?
Tim Koller: What business leaders most often get wrong—today and 35 years ago when we wrote the first edition—is they believe the stock market is only focused on short-term earnings, and leaders are particularly focused on earnings per share as a primary metric for making strategic decisions. They are often too short-term oriented because they believe the market financed them. Meanwhile, our research has shown that there are lots of long-term investors out there. In fact, if you got together the index funds, retail investors, and the long-term institutional investors, that probably accounts for 75 percent of the market. And yet it’s the short-term investors who are very noisy and get all the attention. They ask lots of questions; they’re looking for what’s going to move the share price in the very short term. Executives and boards of directors often think these short-term investors are the ones who matter, that they’re the ones who drive the market, even though the evidence shows that’s not the case.
Instead, we encourage companies to have the courage to be more long-term oriented—to focus more on growth and innovation, for example, rather than just increasing profits by cutting costs. Cutting costs is never a way to succeed. I’ve never seen a company in all my years that has successfully cut costs. They may be able to do it four, five, six times, but eventually it comes back to haunt them. They find that their growth is below their market, and then they end up scrambling to figure out how to fix it—and sometimes they find that they can’t fix it. The focus on earnings, particularly short-term earnings, is still the biggest misconception we battle all the time.
Executives and boards of directors often think these short-term investors are the ones who matter, that they’re the ones who drive the market, even though the evidence shows that’s not the case.
Roberta Fusaro: What are the top two or three issues facing business leaders today?
Tim Koller: The right way to think about this question is: If I’m an executive, what is out there that’s going to affect my company and over what time frame? For example, a few years ago, I was talking to a senior executive of a large retail grocery chain. There was a lot of concern about a recession, and they were considering cutting back capital expenditures. We went back to the research and found that it typically takes two to three years to build a new store, and yet the typical recession lasts only 12 months or less. It’s typically true that the time span of many investments is longer than the length of most recessions. If you don’t make that investment today, two or three years from now, you may be behind. All the research we’ve done says that often recessions are the best time to make investments.
Another question—one that applied in the case of the grocery chain—is do we think about an issue in the aggregate, or do we think about it at a more micromarket level? For example, even if the US or the rest of the world is in a recession, there are always places that need grocery stores. I live outside of Denver, and there are new communities popping up all over the place. They need grocery stores, regardless of what’s happening to the macroeconomy.
A big issue for both the US and other countries in Europe and Asia is the growth of the federal debt. It keeps growing. We’ve almost reached the point where we’re spending more on interest expense than on defense, and eventually that’s not sustainable. We don’t know how long that can go on—and I don’t know what companies can do about it yet, other than keep an eye on it. The typical solution most countries have resorted to is to print money, which leads to inflation as a way of reducing the value of the debt. So thinking about how to deal with inflation is certainly one of the issues I would be concerned about if I were a senior executive.
Sustainability is another concern for executives—but, once again, it’s a matter of how it affects my company and my industry. Some companies are big emitters of carbon; they have more direct concerns, while others have indirect concerns related to carbon. Other companies may have other types of concerns: For a beverage company, water consumption is probably more of an issue than greenhouse gas emissions, for example. The key is to figure out what really matters and what the magnitude is for you, and not try to do the same thing everyone else is doing.
Roberta Fusaro: How should executives think about bias and its effect on their decisions?
Tim Koller: There’s a massive body of literature on cognitive biases and decision-making. Almost all of it deals with individual decision-making, not organizational decision-making. But I had the opportunity to have dinner with Daniel Kahneman, who, with Amos Tversky, pioneered this whole area. I asked Daniel how we can address biases, and he said that he didn’t have any confidence in the ability to change people’s biases. But he did observe that organizations can put rules and processes in place to overcome biases, which I found sort of striking. That’s the way we’ve been thinking about overcoming biases. For example, one of the biases companies have—large companies in particular—is loss aversion. They weigh losses much more than gains, and, as a result, they’re often unwilling to undertake investments that are risky but that may have massive payouts. One of the countering techniques is to look at investments as part of a portfolio, rather than as a risk with an individual investment. When you look at your portfolio of projects, the overall risk is a lot lower.
Another trap companies fall into is confirmation bias, which is looking for data that confirms what you want to believe, as opposed to countering it.
Another example of bias is groupthink. A lot of companies don’t have a very strong debate culture, and because of that, they need to almost force a debate. For example, you can assign someone to be the devil’s advocate. You can ask people to have a secret ballot at the beginning of a meeting to get a sense of where people are leaning. If other people are leaning in my direction, that will give me confidence to speak up. Another trap companies fall into is confirmation bias, which is looking for data that confirms what you want to believe, as opposed to countering it. One technique for overcoming that bias is a premortem, which is just, at the outset of a project, forcing yourself to analyze all the things that could go wrong.
Roberta Fusaro: How can technology help or hurt executives’ ability to overcome biases?
Tim Koller: I was recently having a conversation with some experts about whether AI could help us with this problem of overcoming biases. Of course, there can be biases built into gen AI models, which is its own problem, but these experts were saying, yes, there are ways AI could help address bias in organizations. It would take some work, but you could have AI listening in on a meeting and identifying biases. For example, maybe the head of the meeting is dominating the conversation and not getting input from others. Or maybe AI could identify incidences of confirmation bias in real time. I don’t know how long it would take, but I do expect that we can use technology to help us overcome biases in decision-making. The biggest roadblock is whether companies—or really, their executives—are willing to let a technology tool tell them they are doing something wrong, for example.
Roberta Fusaro: Can geopolitical concerns affect valuations, and if so, how?
Tim Koller: Geopolitical issues do enter into valuations, but investors are smart enough to figure out how material those issues are to a specific company or industry. If a company is particularly vulnerable to, let’s say, constraints on their supply chain in China, the market does reflect that, and investors will put pressure on managers to diversify their supply chain, for example. Investors know what’s going on, but I think they try to be as specific as possible in understanding what the risks are and how they will affect individual companies—and what those companies might do to better prepare for those risks. There isn’t a massive discount in the market because of geopolitical concerns. You may find it in specific industries, but not everywhere.
Roberta Fusaro: This is a perennial question addressed in the book—how can companies balance shareholder versus stakeholder expectations?
Tim Koller: It is a challenging question to articulate the balance between the interests of shareholders and the interests of other stakeholders. Once again, it’s a question of short-term versus long-term value creation. I can do things to pump up my share price in the short term. Suppose I cut costs; I fire a bunch of employees who maybe are important in the long term, but firing them allows me to boost profits right now. Our research shows that if you make cuts that affect the health of your workforce, or if you make cuts that customers will notice—say, if you reduce the quality of the product or the quality of the service—you may boost your short-term profits, but everybody will eventually lose. Customers will be unhappy. Employees will be unhappy. And shareholders will be unhappy a couple of years down the road.
We need to shift the conversation away from the short-term share price to say instead, “OK, how do I balance the needs of different stakeholders over the long term. Typically, we don’t find that many circumstances where there is a disconnect between the interests of long-term shareholders and other stakeholders. If you don’t provide a good product at a reasonable price, customers will eventually go somewhere else. There’s evidence that more satisfied employees are more productive, and lower turnover leads to more productivity. So treating your employees badly is usually not a good thing for the long term. And when it comes to community—if you’re a mining company, for example, in Africa—if you don’t treat the locals well, the government won’t allow you to operate there.
Roberta Fusaro: Would a great CEO from 1990, when the first edition of Valuation was published, be a great CEO today?
Tim Koller: First off, I’m not convinced that the uncertainty level today is that much higher than it’s always been. We’ve always thought that wherever we were was the highest level of uncertainty. And if I look back over my career, I think the highest level of uncertainty I have experienced was before my career, in the mid-1970s, when we had both inflation and unemployment in the US. There was tremendous uncertainty, and that was very painful, probably more painful than anything we’re experiencing right now. That said, going back to the question, I don’t think the characteristics of a great CEO have changed. There’s plenty of people who can support them on the technical things, right? They don’t have to understand all the technology behind their information systems, right? They do have to be good strategists, which means understanding in detail the economics of the businesses they’re in and being able to make courageous long-term decisions about what to do. If a business is declining, should I shut it down? Should I sell it? If there’s a new opportunity, should I invest in it? How much do I invest in it?
Being a good strategist, being able to reallocate resources—I think these have always been important to CEOs. And to some extent, [it requires] being confident enough to be a contrarian at times. If you look at Warren Buffett—he’s successful because he’s been a contrarian. If I look at the banks that survived more successfully than others during the financial crisis, they didn’t jump on the mortgage-backed-securities bandwagon. They pulled back because they said, “This doesn’t make sense.” They were courageous enough to go against conventional wisdom. I think the essence of a good CEO is pretty much the same today as it was in 1990.
Roberta Fusaro: What’s been most surprising about your work on Valuation after all these years?
Tim Koller: The surprise about Valuation is just how successful the book has become. It’s used in all major business schools around the world, something we never imagined. I think it’s been successful because it fills a niche that no one else has gone after. Most practitioner books aren’t grounded in solid, rigorous theory. We’re a bit unique in that we bring together finance concepts, economic concepts, accounting, and strategy. I’ve heard stories where both sides of an M&A transaction opened the book to try to figure out how to handle some accounting issue.
For me, personally, a surprising lesson over these years has been that the markets are not as perfect as I thought they were, coming out of the University of Chicago with an MBA in 1981. I was a firm believer in market efficiency, that the stock market couldn’t do any wrong. And what I’ve learned is that the stock market is very good at valuing companies, for the most part. But there are times when the stock market gets it wrong—and now I know why it gets it wrong. The reason is because when you learn about the theory, you think that people can buy just as easily as they sell, and that buyers and sellers balance each other out.
What we find in real life is that there are times, in certain stocks, where a group of investors might be buying without doing any of the calculations. They do this because they’re excited. The company’s in the news, which pushes up the share price. Then you’ve got professional traders who trade on the momentum pushing up the share price. Then you’ve got big funds now concerned that they don’t have these hot spots in their portfolio, so they buy the shares. All these things keep pushing up the share price, and it’s very expensive and risky to be a short seller and move in the opposite direction. So that’s how we end up with bubbles in stocks from time to time. They always go away. But now I understand at least why they come about.
Watch the full interview
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