In theory, companies create value for stakeholders by making risky investments. In practice, however, managers in large corporations routinely quash risky ideas in favor of marginal improvements, cost-cutting, and "safe" investments. Why are managers in large, hierarchical organizations so risk-averse? Corporate incentives and control processes actively discourage managers from taking risks. Whereas CEOs consider each investment in the context of a greater portfolio, managers essentially bet their careers on every investment they make--even if outcomes are negligible to the corporation as a whole. This article explains how loss aversion works, presents an analysis of just how much value manager attitudes toward investment risk leave on the table, and offers suggestions for changes in practices and systems.

Since 1980 global corporate profits have grown at an unprecedented pace, increasing their share of global GDP by 30%. North American and Western European multinationals have been the biggest beneficiaries, capturing more than half of corporate profits by leveraging their scale and exploiting unprecedented opportunities for reducing costs. This remarkable era is now coming to an end. Growth is slowing, costs are rising, and new rivals from emerging economies and from the technology sector are changing the rules. In the decade ahead, the authors forecast, profits will continue to increase in absolute terms, but they will fall to 7.9% of global GDP--around what they were when the boom began. To maintain their lead, executives in Western multinationals must consider the following responses. (1) Be paranoid. Instead of focusing internally, executives in Western firms need to understand their new rivals. (2) Seek out patient capital. Emerging-market firms and technology companies often take a long view, building their market share over years at the expense of short-term profits. (3) Radically self-disrupt. Companies must overcome strategic inertia by reallocating capital as conditions change. (4) Build new intellectual assets. The most profitable businesses are in idea-intensive industries, so intellectual capital, such as data and algorithms, is a prime asset. (5) Go to war for talent. As populations age and talent becomes scarce, now is the time for human capital management to become a strategic priority.

Boards of directors represent the shareholders of publicly-traded companies, validating financial results, protecting their assets, and counseling the CEO. It's a demanding responsibility, requiring directors to learn as much as they can about a company so that their insights stand up alongside those of executives. That, at least, is the ideal; but is it anywhere close to being the reality? Sadly, no, argues veteran director and educator David R. Beatty. In a wide-ranging interview with two McKinsey authors, he describes where many boards are lacking; the importance of focusing on the 3Ts (talent, time and tone), and why adding the CFO to every board is an idea worth considering. In a sidebar, the merits of family-run firms' governance models are discussed.

Although most companies dedicate considerable time and attention to acquiring and creating businesses, few devote much effort to divestitures. But regularly divesting businesses--even good, healthy ones--ensures that remaining units reach their potential and that the overall company grows stronger. Drawing on extensive research into corporate performance over the last decade, McKinsey consultants Lee Dranikoff, Tim Koller, and Antoon Schneider show that an active divestiture strategy is essential to a corporation's long-term health and profitability. In particular, they say that companies that actively manage their businesses through acquisitions and divestitures create substantially more shareholder value than those that passively hold on to their businesses. Therefore, companies should avoid making divestitures only in response to pressure and instead make them part of a well-thought-out strategy. This article presents a five-step process for doing just that: prepare the organization, identify the best candidates for divestiture, execute the best deal, communicate the decision, and create new businesses. As the fifth step suggests, divestiture is not an end in itself. Rather, it is a means to a larger end: building a company that can grow and prosper over the long haul.