Buffett explains why CEOs must learn to be excellent capital allocators: (1) Profitable companies generate cash that must be deployed, and (2) seeking outside assistance generally makes matter worse. From a 1987 letter to shareholders:
The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.
CEOs who recognize their lack of capital-allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants, or investment bankers. Charlie and I have frequently observed the consequences of such “help.” On balance, we feel it is more likely to accentuate the capital allocation problem than to solve it.