This delusion is based on viewing investment approval as the most important part of the capital budgeting process, and ignores the rest of the investment cycle. In fact, there are three key steps in the investment cycle:

Step 1: Formulating the capital budget

A company has a large number of possible strategies, and an almost infinite number of ways of pursuing any strategy. Management's role is to formulate the best strategy for the company, and the best way of achieving its strategic goals.

This presents innumerable investment alternatives, and ways of configuring each alternative based on the company's evolving capabilities and ever-shifting competitive landscape. Only management can create these plans, and make judgments about the best investments needed to implement them. The board can only trust that the most value creating alternatives are the ones presented for approval.

Step 2: Approving the capital budget

This is where the board has ultimate authority. However, by this point the board can only poke at the alternative presented to them, or cursorily inquire into other alternatives that may have been considered.

There is no way for them to judge the quality of the capital budget before them versus other variants that might have been proposed, let alone all other possible strategic alternatives, and the investments they may have required. The board can only decide what is before them, or venture outside of the proposal within very limited parameters, or simply send management back to the drawing board.

Step 3: Implementing the capital budget

The value of a company's investment is highly dependent on the company's overall capabilities and its competitive landscape, both of which are constantly changing. A capital budget takes a snapshot of those parameters for the time of its approval.

But the world keeps changing. After the dollars have been approved, and its time to put the money into the ground, it is always beneficial to continually re-evaluate the investment as the dollars are flowing out, and adapt to that new information with more, less, or different ways of spending.

In some case, additional opportunities may make a higher-than-approved investment worthwhile. Ideally, the company would make the additional investment, but the constraints of Step 2 may make it easier for management to simply forego the marginal benefits by sticking to the approved spending limit. In other cases, new developments may enable management to achieve substantially all of its strategic goals with far less than the approved amounts. But management may be lax in realizing those savings if the actual investment is not part of their evaluation or overall performance measurement.

Conclusion

Ideally, management would be directly accountable for all capital that is actually used via a measure that incorporates capital efficiency, such as a return measure on economic profit/EVA measure. Then, Step 2 in the process becomes much less critical for achieving optimal capital efficiency, and the brunt of that responsibility will rest squarely on the shoulders of those best able to bear it--i.e., company management.

The board can then focus on what it can do best, i.e., providing guidance and oversight on matters upon which it is better suited to advise and consent, e.g., the quality of management, the quality of the company's strategy, the mechanisms that align the interests of management and the owners, and the overall tone at the top with respect to integrity, teamwork, and performance.